Restrictive Covenants in Employment Agreement Found to Be Too Broad
The Orca decision reaffirms that any restrictive covenants in an employer’s agreement with an employee must be narrowly tailored to protect only the company’s legitimate business interests.
Under Arizona law, restrictive covenants may be enforceable, but there are pitfalls in trying to go too far to restrict employee conduct. In Orca Communications Unlimited, LLC v. Noder, the ruling by the Arizona Court of Appeals included a confirmation that employers who overreach may be unable to enforce their agreements. As the Orca decision makes clear, employee “restrictive covenants” must be precisely drafted, and failing to do so can have significant consequences.
The case involved the departing president of a public relations firm, Orca Communications Unlimited. As many employers do, the firm had required its employee, Ms. Noder, to sign a Confidentiality, Non-Solicitation and Non-Competition Agreement. The agreement (a) prohibited Ms. Noder from using Orca’s confidential information or disclosing it to third parties; (b) prevented her from providing conflicting services; (c) prohibited her from soliciting any of Orca’s customers or potential customers; and (d) prevented her from hiring Orca’s employees.
When Ms. Noder planned to leave her employment and set up a competing firm, she contacted potential customers, notifying them that she would be leaving Orca and opening her own public relations firm. She asked them to delay engaging her services until her new firm was open for business.
When Orca sued Ms. Noder to enforce its agreement with her, she argued that the restrictive covenants in the agreement were overbroad. The Arizona Court of Appeals agreed, finding that four separate covenants were overbroad and unenforceable.
The Court first addressed the confidentiality covenant. It reiterated the long-established principle that confidentiality agreements can protect information that is “truly confidential” and not generally known to the public. Orca’s agreement, however, was found to be overbroad because it was not limited to “truly confidential” information. Rather, Orca sought to limit Ms. Noder’s ability to disclose information that was available publicly but only through “substantial searching of public literature” or that had to be “pieced together” from public sources. This was not genuinely confidential information, and, as a result, Orca was unable to enforce the confidentiality restriction at all.
NON-COMPETITION AND NON-SOLICITATION
The Court of Appeals also addressed Orca’s non-competition and customer non-solicitation provisions. These were also found to be overbroad under Arizona law, which holds that such provisions are enforceable only where they are narrowly drawn to protect the company’s legitimate business interests. The Court found that Orca’s non-competition covenant did not meet this requirement because it prohibited the employee from pursuing any type of work in the field, and it did not limit its reach to only Orca’s protectable interest in confidential information and its customer relationships.
The customer non-solicitation provision was found unenforceable because it sought to protect not only actual customer relationships but also “potential” relationships and those with Orca’s former customers. Again, Orca was barred from enforcing any part of the non-competition or customer non-solicitation provisions.
Although it could not enforce the restrictive covenants, not all was lost for Orca. The Court did hold that Orca could proceed on its claims that stemmed from the employee establishing a competing business and working on that business while still employed by Orca.
The Orca decision makes clear that Arizona courts carefully scrutinize restrictive covenants in employment agreements. Although it has been well established that these provisions are enforceable only if they are narrowly tailored, the Orca decision is the most recent decision that explicitly strikes down a confidentiality covenant.
Orca underscores the need for Arizona employers to ensure that any restrictive covenants in their employment agreements are narrowly tailored to protect the company’s legitimate business interests.