Written By Dan Zebelman, Roscoe Mutz & Robert Garcia
Employers invest substantial time, money, and effort in training new employees and developing confidential trade secrets, business processes, and customer relationships. To properly protect that investment, prudent business owners require employees to sign agreements containing covenants restricting competition, solicitation of customers, and disclosure of confidential information.
In Orca Communications Unlimited, LLC v. Noder, 1 CA-CV 12-0183, 2013 WL 5655898 (Ariz. Ct. App. Oct. 17, 2013), the Arizona Court of Appeals recently invalidated an employer's restrictive covenants as overbroad, and thus found them unenforceable. Employers should review their existing employment agreements and consider modifying them to align with the Court's guidance and increase the likelihood of enforcement.
The Pertinent Facts
Plaintiff Orca Communications Unlimited, LLC, a public relations (“PR”) firm, employed Defendant Ann J. Noder as Orca's president from 2002 to 2009. Noder had no professional experience in PR before joining Orca, and she received extensive on-the-job training to eventually become a PR professional. After a failed attempt to purchase the company in 2009, Noder resigned and formed a competing PR firm.
Noder did not have a formal employment agreement, but Orca sought to protect its investment in her by entering into a written “Confidentiality, Non-Solicitation, and Non-Competition Agreement,” which included the following restrictive covenants:
Confidentiality Covenant, which sought to prevent disclosure or use of “confidential information.” The agreement defined confidential information as including information not generally known to the public, information gained by Noder as a result of her Orca employment, and information gleaned/collected from public sources.
Non–Competition Covenant, which sought to prevent Noder from providing “conflicting services” within a restricted territory and for a limited time.
Customer Non-Solicitation Covenant, which sought to prevent solicitation of any existing, potential, and/or former customers for a limited time.
The Holding and Applicable Law
The Court examined each of the restrictive covenants and found them all to be unenforceable.
The law provides that information constituting a “trade secret” is entitled to protection from use by former employees. Customer information, if truly confidential, also may be protected from use.
However, information available in trade journals, reference books, or published materials is considered public knowledge and not confidential, even if the information resulted from substantial research or compilation of public records. So, Orca's attempt to include public information in the definition of “confidential information” rendered the entire covenant unenforceable.
By including in the definition of “confidential information” any information Noder learned during her employment, coupled with the restriction on any use of that confidential information, Orca created an unlimited restriction on competition. In other words, Noder could not use any of her training or knowledge she gained while employed by Orca, essentially preventing Noder from PR employment anywhere in the world. This transformed the confidentiality provision into a non-competition provision, and it was failed to meet the requirements for an enforceable non-competition provision.
A restriction on a former employee's right to compete against a former employer has generally been enforceable, but only if the restriction is limited in time and in geography and only if the restriction is also limited to protecting legitimate interests of the employer.
An employer does have a legitimate interest in restraining a former employee from appropriating valuable trade information and customer relationships acquired during employment.
However, employers cannot eliminate all competition, so restrictions on competition that go beyond protecting legitimate business interests and prevent a former employee from using skills and talents learned on the former job are unenforceable. Because the non-compete covenant in Orca prevented Noder from pursuing any type of work in the PR industry and was not limited to protecting Orca's legitimate confidential or trade secret business interests, the Court viewed the non-competition provision as too broad.
An employer has a protectable interest in customer relationships when an employee leaves, but an employer has no protectable interest when the employer has no current business ties to customers. In other words, the employer has no protectable interest in former or potential customers.
Because the non-solicitation in Orca prevented Noder from soliciting former and potential clients with no current relationship with Orca, the restriction was too broad and unenforceable.
Lessons from Orca
The Orca decision may have already rendered existing agreements obsolete and unenforceable. Businesses should review their existing agreements in light of Orca and make any necessary amendments.
Does your confidentiality covenant include what may be deemed “public information” and thus is unenforceable? Employers must narrowly tailor confidentiality provisions to only apply to truly confidential information not available to the public. Additionally, trying to define any knowledge learned on the job as “confidential” will transform an enforceable confidentiality agreement into an unenforceable non-competition covenant.
Is your existing non-competition covenant too broad? A non-competition covenant must be tailored to protect trade secret and confidential information. The traditional attempt to bar competing employment for a reasonable time and in a reasonable geographic area may no longer be viable. Non-competition covenants must now be limited to protection of “legitimate business interests.”
Does your non-solicitation covenant include customers or contacts for which you have no legitimate protectable interest? Non-solicitation agreements cannot bar contact with potential or former clients of the employer, but instead only those with legitimate, current business ties to the employer.
We encourage employers to review their existing agreements to verify compliance with the changing Arizona law. Please contact us with any questions on what Orca means for your business.