Glendale Lock & Key (“GLK”), a small business that’s been operating for 25 years, prides itself on the quality of its locksmiths and its excellent customer service. The company hires Jake for its highly competitive two-year apprenticeship program, which will ultimately result in Jake being able to obtain a Certified Registered Locksmith designation. The company invests a great deal of time and money in training Jake and believes that he will become a long-term and valued company employee.
Two years after completing the apprenticeship and obtaining his professional certification, Jake decides to leave Glendale Lock & Key and open his own locksmith business five miles down the road. He also has secretly been compiling customer information and intends to send marketing postcards to GLK’s customers, offering them 20% off their first purchase or service from Jake’s new locksmith business.
What can GLK do? Luckily for the company, Jake signed an Employment Agreement that contains both a non-compete provision and a non-solicitation provision, prohibiting him from competing with the company for two years within a ten-mile radius and “raiding” the company’s customer lists.
Employment Agreements
In most cases, it’s a good business practice to have your employees sign an Employment Agreement before they start work with your company. An Employment Agreement is a legal document that sets forth the respective rights and responsibilities of the employer and the employee. Typical terms include the length of employment, specific duties of the employee, performance requirements, employee benefits, employee absences, employee termination, and restrictive covenants.
For certain categories of employees—higher-level employees, those in whom you’ve invested a lot of resources in training and education, and those with access to sensitive or proprietary company information—an Employment Agreement is imperative.
Generally, disputes that arise under an Employment Agreement are worked out informally between the employer and the employee without litigation. The exception, however, is restrictive covenants. Often, the threat of damage to an employer’s business is so great when an employee violates a restrictive covenant that the employer has no choice but to sue.
What Is a Restrictive Covenant?
Arizona recognizes two kinds of restrictive covenants: non-compete agreements and non-solicitation agreements. Hilb, Rogal & Hamilton Co. v. McKinney, 190 Ariz. 213, 216 (Ct. App. 1977).
A non-compete agreement is a representation by an employee that he will not compete with the employer’s business in a restricted geographic area for a certain time period. Whether the non-compete will be upheld by the Arizona courts depends upon the reasonableness of the restriction.
A restrictive covenant will be considered reasonable when the restraint: (1) does not exceed that necessary to protect the employer’s legitimate interest, (2) would not cause undue hardship to the employee, and (3) would not cause harm to the public interest. Phoenix Orthopedic Surgeons, Ltd. v. Peairs, 164 Ariz. 54, 60 (Ct. App. 1989).
For example, one Arizona federal court determined that a one-year duration of a covenant not to compete within a twenty-five-mile radius of the employer was reasonable where a wealth management employee left his employer, a bank, to start his own firm. See Compass Bank v. Hartley, 430 F. Supp. 2d 973, 981 (D. Ariz. 2006).
But the Arizona courts have also found a variety of non-compete agreements to be unreasonable and unenforceable. The court’s inquiry is highly fact-specific and seeks to balance an employer’s rights with an employee’s ability to be gainfully employed.
A non-solicitation agreement is a representation by an employee that if he goes to work for himself or a competitor, he won’t solicit any of the former employer’s business clients or employees, or use any confidential information he learned as an employee.
Through a long line of cases, Arizona courts recognize that an employer’s customers, employees, and trade secrets are assets of value that have been acquired by virtue of efforts and financial expenditures, and should be protected as a form of property. If limitations on the non-solicitation provision are reasonable, it will generally be upheld by Arizona courts.
So What Should Glendale Lock and Key Do?
So back to Jake. Thankfully, Glendale Lock and Key had the foresight to include reasonable restrictive covenants in Jake’s Employment Agreement, specifically both a non-compete provision and a non-solicitation provision. Jake’s about to violate both.
What should the company do? Jake is highly competent as a locksmith, well-liked by the customers, and is planning to charge lower fees than GLK, so it’s probable that many of GLK’s customers will try out Jake’s services. If the company cannot convince Jake to change his plans, it’s likely that Glendale Lock and Key will suffer irreparable injury to its business.
In a case like this, GLK’s employment attorney would likely counsel the company to file for a Temporary Restraining Order, Preliminary Injunction, or assert a claim for damages to obtain quick relief to forestall injury to the company’s business.
It’s unfortunate when employees don’t live up to their legal obligations, but happily, there are effective legal remedies available. In this case, an Employment Agreement with well-drafted restrictive covenants saved the day for GLK.
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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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