Often employers require new employees to sign a “non-compete” agreement as a condition of employment. A non-compete agreement prohibits the employee from competing with the employer for a period of time after the employee ceases to be employed by the employer, whether the termination was voluntary or involuntary. There are many considerations for an employer to keep in mind when drafting non-compete agreements. Here are just a few.
- Regardless of the type of work the employee performed, a non-compete will rarely be upheld if its temporal scope is more than one year. Despite its name, a non-compete agreement is against public policy if its sole purpose is to stifle competition. The only proper purpose of a non-compete is to give the employer time to find a replacement employee and train that new employee. If the job duties are more complex, one-year may be a reasonable non-compete period. If the duties are less complex, a court may find that only a few months are reasonable.
- Arizona courts cannot re-write non-compete agreements found to be overly broad and thus, unenforceable. Consider a non-compete agreement that prohibits the employee for competing in the entire United States for two years after leaving the employer. If a court determines the agreement to overly broad in geographic and temporal scope, it cannot write in new terms to render the agreement reasonable and enforceable. It can, however, “cross out” unenforceable terms and leave the remaining agreement in place. As such, the drafter should include stepped down terms. For example: “The temporal scope of this non-compete agreement is one year. If a court finds that one year is too long, the temporal scope is eleven months. If a court finds that eleven months is too long, the temporal scope is ten months ….” The same should be done regarding the geographic scope.
- Be reasonable about choice of law provisions. Choice of law provisions are easily challenged if an employee has had no contact with the chosen state, such as for training or the interview or work travel. So, if the company’s primary place of business and its domicile is New York, do not draft a non-compete agreement for an Arizona-based employee providing that the agreement is subject to New York law unless the employee has some connection to New York.
- Include a term whereby the employee acknowledges in advance that the temporal and geographic scope are reasonable. It may help win the argument someday in front of a court assuming that the stated scope reflects the general state of the law and a genuine effort to be reasonable. A five-year non-compete agreement in the employment context will never be upheld no matter what the employee acknowledges in advance.
Patrick J. Van Zanen
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.