Drafting an Effective Non-Compete Agreement

Non-compete agreements can be valuable tools for businesses to protect their confidential information and customer relationships. These agreements may be required as a condition of employment. However, if a non-compete is challenged after an employee leaves a company, enforceability may hinge on how carefully the agreement was constructed. 

The most important aspect of a non-compete agreement is its scope — namely, what activities are prohibited and where and when. A non-compete will typically include the following restrictions:

• Scope of activity — The employee may not work for, manage, operate, own or finance any business venture that competes with the company.
• Geography — The agreement applies to the area where the employee had customer contacts or access to confidential information.
• Duration — The agreement is in force for a specified time period, such as one year beginning on the date of the employee’s separation from the company. 

In general, a non-compete is enforceable as long as it is only as broad as needed to protect the employer’s legitimate business interests. That is a subjective standard, and the employer has the legal burden to prove the interests are legitimate and the scope is reasonable.

With that in mind, here are some hints for crafting a non-compete agreement that will hold up under judicial scrutiny:

• Focus on key employees — Limit non-competes to employees with access to critical information or client relationships. A non-compete agreement for an executive with knowledge of trade secrets would be enforceable, while one for a clerical or administrative employee is less likely to hold up.
• Tailor the agreement to the employee — In setting time and place restrictions, consider the employee’s job level and their access to sensitive information. A two-year restriction for a senior engineer might be justified, while one year for a salesperson might be enough.
• Provide value in exchange — Compensating employees for the limits placed on them can make a court more inclined to enforce the agreement. A non-compete should offer value beyond mere employment, such as a signing bonus, higher salary or additional severance pay.
• Transparency and timing — Present the non-compete agreement during the onboarding process, allowing the job applicant ample time to review the terms at leisure before accepting employment. This can defeat employees’ claims that they misunderstood the obligations.
• Include alternative provisions — Arizona courts take a corrective approach known as the “blue pencil” rule in resolving challenges to non-competes. A judge may cross out overbroad or unreasonable provisions while keeping others in place. Careful drafters of non-competes make sure to include alternative clauses that take effect in case a primary clause is stricken. 

A lawyer experienced in Arizona non-compete agreements can ensure your agreement complies with state law, maximizing the chances of enforceability. They can also draft the document in clear, concise language that avoids ambiguity, a common pitfall.

Law Offices of Donald W. Hudspeth P.C. in Phoenix assists Arizona businesses with the development and enforcement of restrictive covenants, including non-competes. To schedule a consultation, call our firm today at 866-696-2033 or contact us online.