Employment Law

September 2019

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.

Denis Fitzgibbons

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 clients; and

• hiring Orca employees after she left her employment.

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 sources.

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.

Enforceable Provisions

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 legitimate interests.