Non-Competition and Non-Solicitation clauses are among the most scrutinized and contentious parts of Arizona contracts. Both Non-Competition clauses and Non-Solicitation clauses face major obstacles. Non-Competition clauses in particular are disfavored by the courts because enforcement tends to deprive people from finding suitable employment. Non-Competition clauses are enforceable to the extent they are reasonable, which occurs when the restraint is no greater than to further a legitimate business interest. When the restraint exceeds a legitimate business interest, Non-Competition clauses begin to take on a punitive and retribution function, and will be unenforceable.
Although Courts decide enforceability of Non-Competition clauses and Non-Solicitation clauses on a case-by-case basis, there are some general guidelines as to what Courts analyze when making this determination. Courts first look to the language that is used. Broad language generally leads to a restraint that exceeds a legitimate business interest. Businesses looking to include Non-Competition clauses are best advised to narrowly tailor the language to further an identified and legitimate business interest. Legitimate business interests include protecting valuable trade information and customer relationships. But protection against future competition in and of itself is not typically a legitimate business interest.
Further, both the duration and geographic scope need to be reasonable as well. The duration of Non-Competition clauses or Non-Solicitation clauses should be no longer than the time it takes the employer to train up a replacement to establish rapport and relationships with customers. Likewise, the geographic scope must be no greater than affording the employer the opportunity to retain the customer or clients. There is no tried and true formula for enforceability since Non-Competition clauses and Non-Solicitation clauses are decided on a case-by-case basis, and each situation is unique.
Two situations where Non-Competition clauses with clear, unambiguous and narrowly tailored language have a greater likelihood of being enforced are sales professionals and in business sales. First, sales professionals are compensated for acquiring customers for his or her employer. The employer invests heavily in the employee to procure these relationships, so the employer has a legitimate business interest in protecting these relationships through a non-competition clause. But again the threshold of enforceability is how long it’ll take the employer to hire, train up a replacement for the opportunity to establish these customer relationships.
Non-Competition clauses are often included in purchase agreements of an ongoing business. The acquiring owner typically invests a lot of money to purchase a business that has a solid foundation of customer goodwill and relationships. So there is a legitimate business interest to protect this investment. And if the selling owner was able to transfer ownership for a handsome profit, and then turn around and start a new business and begin immediately competing for those same customers, it’ll create an unfair advantage.
Courts analyze the enforceability of Non-Solicitation clauses similarly to Non-Competition clauses. But courts are more receptive to enforcing Non-Solicitation clauses. Primarily because the restraint doesn’t prevent a departing employee from earning a living. But problems arise when Non-Solicitation clauses contain broad language. For example, Non-Solicitation clauses that cover potential customers or former customers go beyond protecting a legitimate business interest because there is no business relationship with either category. A mere expectancy is insufficient legitimate business interest under most circumstances.
A common issue that is often litigated concerning Non-Solicitation clauses is whether the departing employee actually solicited or not. Just because customers decided to go with the departing employee does not necessarily mean they were solicited to do so. One Arizona case draws a line between advising customers that the employee is leaving, and communication that includes new contact information. The former situation does not involve solicitation while the latter situation does.
Contact Paul Ticen if you’re looking for legal assistance in evaluating a non-competition or non-solicitation clause for your particular situation, or need legal representation for a dispute or lawsuit involving one.