State of Non-competes: Utah and Arizona

Business owners spend a lot of blood, sweat, and tears growing their dreams and serving the community. Training staff and investing in the growth of employees usually brings great satisfaction to those very same owners. However, nothing can be more hurtful to a business than for its employees to take the training, the contacts, the trade secrets, and then directly compete with the business. Both Arizona and Utah law allows post-employment restrictive covenants—also known as non-competes. The requirements to make them enforceable are similar.

Utah law states that an employer and an employee may not enter into a non-compete agreement that restricts employment longer than one year from the day on which the employee is no longer employed by the employer.[1] It also provides four other requirements that must be fulfilled for a Utah court to enforce the non-compete agreement.  First, the agreement must be supported by consideration; second, it must be shown that the contract was negotiated in good faith; third, it must be shown that the contract is necessary to protect the good will of the business; and, fourth, it must be reasonable in its restrictions as to time and area.

First, when referring to consideration related to a contract, we not talking about careful thought over a period of time (although that would be good too when entering into a contract). The consideration is instead a something that is given or promised in exchange for the agreement or contract. It can be real or personal property, an act, forbearing to act, or a return promise. Where there is only the pretense of a promise, like when a statement is made in such vague or conditional terms that a person commits him or herself to nothing, there is no consideration. When there is no consideration, neither party is then bound by the promise or contract.

So, consideration is needed for a non-compete contract to be enforceable. The easiest way to have a non-compete contract with consideration is to include it in the initial contract that an employee signs when they are hired. This allows the employment to be consideration for the contract. However, if the non-compete contract was not part of the hiring contract, the employer has two options based upon the work status of the employee. If the employee is an at-will employee, the employer must make clear to the employee that to continue to work for the company, the employee will need to sign the contract. In this situation, the continued employment is the consideration for the non-compete contract. However, if the employee is not employed at-will (meaning the employee can only be fired for cause), the employee will need to be given some sort of consideration in return for signing. A check for 50 dollars would be adequate consideration, and record of a check provides good evidence that there was consideration if the non-compete were to be challenged.

Second, a contract negotiated in good faith means a contract that was not created with the intent to defraud or take advantage of the other party. In Allen v. Rose Park Pharmacy, the court explained that if a contract were offered by the employer to the employee with the intent to only provide employment to the extent it would bind the employee to the non-compete contract, then the contract was one offered in bad faith. This ties in with the third issue, that the non-compete must also be necessary to protect the good will of the business. Good will refers to the client base of the employer that the employee may have interacted with or contributed to while working with the company. In Allen v. Rose Park Pharmacy, the employee was a pharmacist who had worked for his employer for quite some time, building good will for the company as he brought friends and neighbors to it as customers.

When considering what it means to create a contract with good faith and the intent to protect good will, an employer should remember that the focus of the non-compete should be to protect the proprietary information of the company as well as the client base. The focus and intent of the contract should not be to prevent the employee from ever obtaining work again.

Fourth, the restrictions of a non-compete should also be reasonable with regard to time and area. In System Concepts v. Dixon, it was determined the reasonableness of the restriction is determined by the location and nature of the employer’s clientele. If an employer’s clientele is of a local nature, the area protected by the non-compete cannot be unlimited. As an employer, this means that the location restriction in the non-compete can only be one that protects the area where the clients are located. Because of the statute mentioned in the beginning of this article, a reasonable time restriction is maximum of one year.

Arizona also allows non-competes between employers and employees.[2] In Arizona, a non-compete is enforceable if the employer can prove the contract is no broader than necessary to protect the employer’s legitimate business interest, is not unreasonably restrictive, and is not contrary to public policy.

A business interest is one that is current and ongoing, and a non-compete agreement cannot protect a former relationship with a client.  In Hilb, Rogal & Hamilton Co. v. McKinney, the court held that a protectable business interest when it comes to clients refers only to current relationships.[3] So, a former employee starting a business relationship with a former client is not a violation of a non-compete, so long as the former employee was not the reason that the client ended the relationship with the employer.

A reasonable restriction is one that doesn’t keep the former employee from ever working again or penalizes them for doing so. In Olliver/Pilcher Ins. v. Daniels,[4] the non-compete was unreasonably restrictive because of its statewide scope accompanied with the penalty for insuring former clients, even if the former employee did not pull them away from the employer. This was too much of a restriction on the former employee’s ability to work.

In Valley Med. Specialists v. Farber,[5] the court explained that non-competes with former physicians would be more scrutinized for reasonableness. Because of the nature of a physician’s work, the interests of the employer, employee, patients, and public in general must be considered. So, a non-compete that for three years, prevented a physician from working within a five-mile radius of three offices that were pretty close together was reasonable. The physician was still able to find work in the area, but, the former employer was still able to protect their client base. However, precluding a doctor from practicing any type of medicine in the area was too restrictive. So, when a non-compete is made with a physician, the employer must make sure not to attempt to prevent the physician from ever working again, but rather focus on protecting the client base

When considering whether a non-compete goes against public policy, the employer must at least making sure there isn’t any harm to third parties. This is most important when considering physician contracts, as the employer must be sure that the restrictions placed upon the physician are not so restrictive that patients will pay the price for the termination of the relationship between the employer and the physician.

 Non-compete can be a boon for your business as long as it is done correctly. Contact us at Irvine Legal if you have any other questions.

[1] Utah Code §34-51-201(1)

[2] The only exception deals with employers that are televisions stations, television networks, radio stations, and radio networks. Ariz. Rev. Stat. § 23-494.

[3] Hilb, Rogal & Hamilton Co. v. McKinney, 946 P.2d 464

[4] Olliver/Pilcher Ins. v. Daniels, 148 Ariz. 530

[5] Valley Med. Specialists v. Farber, 194 Ariz. 363