CONTRACT DISPUTES: BE CAREFUL ABOUT IMPOSING A COVENANT NOT TO COMPETE

You have a business, say a paint store, which is like all others in most respects, but you have one particular painter who is generally acknowledged to be the best in the county.  Someone wants to buy your business, but not unless the agreement includes a provision preventing that painter from working in the area.  Or you have an insurance agency, and your most valuable asset is your client list.  You want to prevent your agents from leaving with the list in hand.

 

Or your agent does not take the client list, but you still want to prevent him from setting up a competing agency too close to yours.

 

What are your rights?  What are the rights of the agent/employee?

 

Employer-employee relationships in Arizona are generally at will, which means that the employer can terminate or the employee leave at any time with no cause.  However, when the employee is of particular value to the employer, the employer is likely to want a written contract to make it difficult for the employee to leave and to limit his ability to hurt the company if he does leave.  The employee is generally willing to enter a contract limiting his at will status in return for additional income or security.

 

The manner in which the employer protects its interests is to insert either a covenant not to compete or a piracy agreement or both.  What’s the difference?  The covenant sets up an area (say, five miles from the employer’s place of business) in which the employee cannot compete with the employer for a designated period of time after leaving.  The piracy agreement, on the other hand, has no geographical limitations but prohibits the former employee from taking the employer’s customers.

 

Understand, and this is important, that both covenants not to compete and piracy agreements have been and still are the subject of frequent and substantial litigation.  In one instance, two separate Arizona appellate courts went in opposite directions in the same year.  So this is an area where you absolutely need the assistance of an Arizona contract lawyer or business littigation attorney.

 

But with that qualification, we can say that the courts tend to be reluctant to enforce covenants not to compete because of the general bias in this country that people should be free to pursue their chosen profession (and in the case of, say, doctors, the public should have the right to go to whomever they want). However, if the covenant was reasonable at the time the parties agreed to it, and the employee was given something in return (called “consideration” in contract language), and the restricted area is not too great, and the period of restriction not too long, the covenant may be enforced. The litigation arises over such things as what area is too great and what time period too long.  (I have seen 3 miles/5years upheld and 50 miles stricken, but there is no bright line rule.)

 

Because piracy agreements do not restrict the former employee’s right to practice his profession even though that profession is the same as the employer’s, they are upheld by the courts far more often.  There, the issue which is litigated is more often whether the employer can reasonably claim that the information taken belonged to it exclusively.

 

Finally, if the covenant is part of an agreement purchasing the business, the courts are far more likely to uphold it because they recognize that the new business owner is entitled to some leeway in order to get his business going.

 

At any rate, don’t draft your own covenant or agreement.  Get help from an Arizona contract attorney or business litigation lawyer.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *