Is Your Non-Compete Agreement Enforceable?

Spider-Man vs. Batman by JD Hancock, Non-compete Agreements

Spider-Man vs. Batman by JD Hancock

When you started your job, did you read your employment agreement before you signed it? What about the employee handbook – did you read it or just sign the form that says you read it? There’s a good chance one of those documents contained a non-compete agreement (NCA).

NCAs are a necessary evil, especially in this day when employees are less likely to stay at a company for their entire careers. These are contracts that restrict your ability to work in a similar position for a specified amount of time and geographic area if you leave the company.

When someone’s thinking of leaving their job, they often review their NCA and ask if it’s valid. A lot of companies won’t hire you if it would violate your NCA. If you think your NCA is invalid, you can go to court and ask a judge to invalidate it.

The court will have a hearing and weigh your interests against your employer’s. On one hand your employer doesn’t want to train someone and give them access to company information to lose them to their direct competition.  On the other hand, you have a right to choose where you work and you shouldn’t become unemployable because of a NCA.

The validity of a NCA is governed by state laws and decisions from previous court cases. There was a great article in the September edition of Arizona Attorney Magazine by David Bray and David Ferrucci about the enforceability of NCAs. Here are some of the highlights.

Courts generally want NCAs to have clear and reasonable provisions. If your NCA can interpreted in two ways – one that narrow and enforceable one that is overly broad and unenforceable and in the ex-employee’s favor – the court will usually rule in that it’s too broad and thus unenforceable. The court will look at whether you negotiated your NCA. Many new hires are given a nonnegotiable NCA as part of their employee handbook and they can either accept it as written or work somewhere else. If the NCA was negotiated, the court will be more likely to try to determine the parties’ intent when they wrote the contract.

There’s also something called the blue-pencil rule in Arizona. This allows a court to excise “grammatically severable” and unreasonable provisions from a contract but keep the reasonable provisions. This keeps the whole contract from being invalid because of one invalid provision.

You can also have step-down provisions in the contract.  An example of this would be, “This non-compete agreement will be in place for 12 months after the employee leaves the company. If a court finds this duration to be invalid, then the duration will be 9 months. If a court finds this duration to be invalid, then the duration will be 6 months.”

A valid step-down provision will only have 2 or 3 choices and be written in good faith. A 2006 Arizona case said that good faith step-down provisions must be:

  1. Definite,
  2. Consistent with the underlying provision,
  3. Easily severable from unreasonable provisions,
  4. Have a narrow duration range, and
  5. Have a reasonable geographic scope.

A valid NCA might result in you not being able to work for a direct competitor or in the physical vicinity of your previous employment, but your skills are likely transferable to other jobs or you can do the same job if you’re willing to do it far enough away from your previous employer.

Read your employment contract carefully. If you’re an employee, get a copy of it before your first day on the job so you can review it and possibly have a business lawyer review it. If you’re an employer, hire a lawyer to write your NCA for you so a court will be less likely to rule that it’s overly broad or otherwise invalid.

One word of caution: In contract cases, Arizona is a “loser pays” state. If you go to court to dispute a NCA and you lose, you’ll be paying for your attorney and the other side’s attorney.

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Comments

  1. Shame you can’t just resolve things sanely, civilly and practically in this arena.

    • That would be nice, but people who are angry with each other tend not to be rational. That’s why it’s so important to create sane, civil, and legally enforceable documents upfront so everyone knows what will happen if things don’t work out.

  2. I had signed a non compete 4 years ago with a company. Since then investors purchased the company and recently it went in bankruptcy . I decided to leave and go to work at another company doing the same thing. The new owners which did not purchase any nc in the purchase agreement is trying to sew me. Would the old up in court

    • Ruth Carter says:

      Non-compete agreements are governed by state law. I suggest you have your prospective employer’s attorney review it.

  3. Mark Stutsman says:

    I have a noncompete in AZ for one year, and a nondisclousure for two years. My former employer is upholding the noncompete. I was curious if I could go to California and work. Both my new company and former company work in multiple states. My noncompete was origininated in Pennslyvania. All the business I will be trying to solicit my former company does not work with currently. Can you answer this for me? Thanks

    • Ruth Carter says:

      Noncompetes can vary widely based on the applicable state laws and the specifics of your situation. It sounds like a situation where you need clarification either from a lawyer or your former employer, and if you work for a company now, you should give them a copy of the NDA for their records too.

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