To Stand Up In Court, Restrictive Covenants Must Be Reasonable, Narrowly Tailored, And Allow Former Employees To Work In Their Chosen Field
by Denis Fitzgibbons, Fitzgibbons Law Offices
In my previous article, “Is Your Customer List a Trade Secret?” (Golden Corridor LIVING, Late Summer 2019), we discussed how companies can achieve trade secret protection of their customer lists. In this article, we discuss another form of protection, a restrictive covenant, that is often included in employment agreements.
A restrictive covenant is an agreement in which an employee agrees to forego engaging in certain competitive conduct with the company for a specified period of time 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 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, nonsolicitation and noncompetition 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
- hiring Orca employees
Before leaving Orca, Ms. Noder informed potential clients she was planning to start her own firm. After she left, Orca sued her for breaching their agreement. She argued that the restrictive covenants were overly broad.
The trial court agreed and dismissed Orca’s complaint. The Arizona Court of Appeals upheld the ruling, finding that the covenants were overly broad and should not be enforced.
Orca v. Noder offers useful guidelines and limitations for employers trying to restrict employees’ competitive activities.
Confidentiality. 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 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.
Competition. Orca’s noncompetition and client nonsolicitation 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 noncompetition 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 nonsolicitation 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.
Orca v. Noder does not prohibit employers from enforcing properly drawn confidentiality, noncompetition or nonsolicitation provisions in employment agreements.
Rather, it reaffirms that restrictions on post-employment activities must:
- be reasonable
- be narrowly tailored as to time and place
- not bar a former employee from making a living in their chosen field
Orca v. Noder underscores the need for Arizona companies to ensure that covenants are narrowly tailored and will survive legal challenges in protecting the company’s legitimate interests.
Denis Fitzgibbons is a partner at Fitzgibbons Law Offices in Casa Grande, 520-426-3824, and president-elect of the State Bar of Arizona.