Arizona Non-competition Agreement Law

posted by Neil Klingshirn  |  Jan 1, 2010 2:17 PM [EST]  |  applies to Ohio

Historically, Arizona courts viewed covenants not to compete unlawful restraints of trade.  Eventually, Arizona courts began to enforce ancillary restraints on competition, such as those incident to employment or partnership agreements, under the rule of reason. The rule of reason states that a limited restraint on competition is valid when the restraint is reasonable. A restraint is reasonable if it is necessary to protect an employer's legitimate interest.  

Arizona courts thus enforce non-competition agreements, but only if they are ancillary to another agreement, the employer has a protectable business interest and the restriction against competition is no greater than that necessary to protect the employer's legitimate business interest.

Ancillary to Another Agreement

Arizona courts will not enforce a stand alone non-competition agreement. Instead, Arizona courts only enforce restriction against competition if they are a part of or ancillary to another agreement, such as an:

Arizona courts review non-competition agreements in an employment agreement with "strict" scrutiny, but take a more lenient approach to restrictions contained in a contract for the sale of a business.

Legitimate Employer Business Interests

Arizona courts recognize the following employer business interests as legitimate:

Arizona courts will not enforce non-competition agreements whose only purpose is to eliminate ordinary competition.

Reasonable Restrictions

Non-compete covenants are reasonable if the restrictions are limited by:

Reasonableness is a fact-intensive inquiry that depends on the totality of the circumstances.  Arizona courts balance the employer's need to protect its business interest against hardship to the employee and the likely injury to the public.

Non-competition agreements that restrict physicians and lawyers from accepting patients or clients could injure the public or the public's right to choose their medical or legal professional.  Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281-1282 (Ariz. 1999). Arizona courts will not enforce such restrictions if the injury to the public outweighs the employer's business interest. In addition, by Arizona statute, "broadcast employers" cannot require a current or prospective employee to agree to a non-compete clause. Ariz. Rev. Stat. 23-494.

Judicial Modifications of Arizona Non-competition Agreements

Arizona courts will "blue pencil" overly broad restrictions, but only if the agreement is divisible, as evident from the terms of the agreement. If the agreement is divisible, an Arizona court can sever the unreasonable restriction. Arizona courts will not rewrite the parties' agreement to remove an offensive restriction and replace it with a less restrictive one.

Although Arizona courts will not rewrite the parties' agreement, a federal court applying Arizona law upheld the parties prior agreement to abide by lesser, or "step down," restrictions.  Compass Bank v. Hartley, 430 F. Supp. 2d 973 (D. Ariz. 2006).

Consequence of Breaching an Enforceable Non-Competition Agreement

An employer who proves that an employee breached an enforceable non-competition clause can:

Attorneys Fees

Arizona revised statute section 12-341 allows a court in "any contested action arising out of a contract" to award the successful party reasonable attorney fees to mitigate the burden of the expense of litigation to establish a just claim or a just defense. The attorney fee award must be made by the court and not the jury and need not equal or relate to the attorney fees actually paid. However, the award cannot exceed the amount that the prevailing party actually paid or agreed to pay.

If a party to an Arizona non-competition case proves with clear and convincing evidence that:
In making the award, the court may consider any evidence it deems appropriate and shall receive this evidence during a trial on the merits of the cause, or separately, regarding the amount of fees that are in the best interest of the litigating parties. 

Key Cases

• Valley Med. Specialists v. Farber, 982 P.2d 1277, 1281-1282 (Ariz. 1999)
• Amex Distrib. Co. v. Mascari, 150 Ariz. 510 (Ariz. Ct. App. 1986)
• Mattison v. Johnston, 152 Ariz. 109 (Ariz. Ct. App. 1986)

posted by Neil Klingshirn  |  Jan 1, 2010 2:17 PM [EST]  |  applies to Ohio