Restrictive Covenants in Arizona Employment Agreements
To stand up in Arizona courts, restrictive covenants must be reasonable, narrowly tailored, and allow a former employee to work in their chosen field.
A restrictive covenant is an agreement whereby an
employee agrees to forego engaging in certain competitive conduct with the
company for a specified period of time and within a set location. Restrictive
covenants are used to protect the company’s legitimate business interests and
prevent unfair competition.
In a 2013 decision, the Arizona Court of Appeals made
clear that companies who overreach, with overly broad restrictions, may be
unable to enforce their restrictive covenants. In
Orca Communications Unlimited,
LLC v. Noder, the Court ruled that, to be enforceable, restrictive
covenants must be precisely drafted, and that failure to do so will have
significant consequences for the company.
Orca v. Noder involved the departing president
(Ms. Noder) of a public relations firm (Orca Communications). During her
employment, Ms. Noder signed a confidentiality, non-solicitation and
non-competition agreement. The agreement prohibited her from:
• using Orca’s confidential information or disclosing
it to third parties;
• providing conflicting services;
• soliciting any of Orca’s clients or potential
• hiring Orca employees after she left her
Before leaving Orca, Ms. Noder informed potential
clients that she was planning to start her own firm. After she left, Orca sued
her for, among other things, breaching their agreement. In her defense, she
argued that the restrictive covenants were overly broad and should not be
enforced against her.
The trial court agreed with Ms. Noder and dismissed Orca’s complaint. The
Arizona Court of Appeals upheld the ruling, finding that the restrictive
covenants were unenforceable because they were overly broad.
Guidelines for Employers
Orca v. Noder offers useful guidelines and limitations for employers in trying
to restrict their employees’ competitive activities.
Confidentiality. With regard to the confidentiality covenant, the Court’s ruling
reiterated the long-established principle that confidentiality agreements can
protect information that is “truly confidential” and not generally known to the
public. Orca’s agreement, however, was found to be not limited to “truly
confidential” information; rather, Orca sought to limit Ms. Noder’s ability to
disclose information that was available publicly but only through “substantial
searching of published literature” or had to be “pieced together” from public
Also, Orca had defined as “confidential” any information that Ms. Noder came
across during her employment and was not generally known and was “substantially
inaccessible.” The Court found that this overly broad definition made the
confidentiality covenant unenforceable. Because its covenant included
information that was not generally confidential, Orca could not enforce the
confidentiality restriction at all.
Competition. Orca’s non-competition and client non-solicitation covenants also
were found to be overly broad under Arizona law, which holds that such
provisions are enforceable only when they are narrowly drawn to protect the
company’s legitimate business interests.
The Court found that Orca’s non-competition covenant did not meet the statutory
requirement because it prohibited Ms. Noder from pursuing any type of work in
the field and did not limit its reach only to Orca’s protectable interest –
i.e., confidential information and client relationships.
The client non-solicitation provision was also found unenforceable because it
sought to protect not only actual client relationships but also “potential”
relationships and those with Orca’s former clients.
It is important for employers to understand that Orca v. Noder does not prohibit
them from enforcing properly drawn confidentiality, non-competition or
non-solicitation provisions in employment agreements.
Rather, it reaffirms that restrictions on post-employment activities must:
• be reasonable;
• be narrowly tailored as to time and place; and
• not bar a former employee from making a living in their chosen field.
Orca v. Noder underscores the need for Arizona
companies to review their particular facts before drafting a restrictive
covenant in their employment agreements, to ensure that any covenants are
narrowly tailored and will survive legal challenges in protecting the company’s