Non-compete agreements can serve a vital role in an employee-employer relationship. That is why one of the number one non-compete-related questions we get asked is: are non-compete agreements enforceable in Arizona?
As outlined more thoroughly in other articles we have written (click here), in order for a non-compete agreement to be valid and enforceable, it must pass muster against a variety of factors including: it does not exceed what is reasonably necessary to protect the employer’s business; it is not unreasonably restrictive of the employee’s rights; it does not go against public policy; and it is reasonable as to time and space, i.e. the number of months it is in effect and the geographic bounds. See Bed Mart, Inc. v. Kelley, 202 Ariz. 370, 372 (Ct. App. 2002) (quoting Phoenix Orthopaedic Surgeons, Ltd. v.Peairs, 164 Ariz. 54, 57 (App. 1989).
However, because an agreement not to compete is a contract basic contract law principles also apply to the interpretation and enforcement of non-compete agreements. With this, even if a non-compete agreement meets the stringent standards placed on them by the Arizona Courts, they still may be deemed unenforceable based on one specific standard defense to the enforcement of any contract: namely, a material prior breach by the party seeking to enforce the non-compete agreement.
When dealing with a breach of contract, there are either minor or partial breaches and material or total breaches. A partial breach is a breach that fails to completely honor the contract, but still preserves the overall value of the contract. A material breach, however, is a breach of an obligation that is essential to the whole contract. Said another way, the determination of whether a breach is material or not depends on whether the breaching party failed to perform a substantial part of the contract or its essential terms or fails to do something which is so important to the contract that the breach defeats the purpose of the contract. See Ry-Tan Const., Inc. v. Washington Elementary School Dist. No. 6, 208 Ariz. 379, 400 (Ariz. Ct. App. 2004) (vacated on other grounds, 210 Ariz. 419 (Ariz. 2005)).
Arizona cases have followed or suggested that a material breach on the part of the employer would suspend the employee’s obligation under non-compete agreements. For example, one Arizona Court of Appeals agreed that an employee’s termination was a breach of the employment contract, making the non-compete covenant invalid. See E&M Services, LLC v. A&N Services, LLC, 2020 WL 1026496, ¶43, case # 1 CA-CV 18-0616 (Ariz. Ct. of Apps., Div. One, 3-3-20). The Court specifically stated that it affirmed the lower court’s finding that the employee was justified in seeking new, and allegedly competing, employment following the employer’s breach.
In another example, the Arizona Court of Appeals stated that an uncured material breach of an agreement relieves the non-breaching party from the duty to perform under the contract, ultimately resulting in a discharge of any obligations existing under the contract for the non-breaching party and can be discharged from the contract.
In discussing the issue of breach, the Court stated that the relevant inquiry includes whether the employee, by allegedly competing, committed the first material breach, or the employer, by refusing to continue to pay the employee per their agreement, committed the first material breach. See Shufeldt v.Nextcare, INC., No. 1 CA-CV 15-0327, 2016 WL 6647740 (Ariz. Ct. App. Nov. 10, 2016).
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We know how impactful non-compete agreements can be for both employers and employees. If you need help understanding if a material breach may have voided a non-compete agreement that you are a party to, then please contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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