Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On October 17, 2013, in Orca Communications Unlimited v. Noder, Pitch Public Relations, the Arizona Court of Appeals held the confidentiality, non-solicitation, and non-competition provisions of an employment agreement between an employer and its former president were overly broad and unenforceable. Arizona employers should review their employment agreements to ensure language is narrowly tailored to only protect the legitimate business interests of the employer.
In Orca, the former employer brought a lawsuit against its former president and her new company for breach of contract and various tort claims. The breach of contract claim was based on the confidentiality, non-solicitation, and non-competition provisions contained in the employee’s employment agreement with her former employer. The defendants filed a motion to dismiss all claims, which the trial court granted, dismissing all of the plaintiff’s claims. Specifically, the trial court held the restrictive covenants contained in the employment agreement were overly broad and unenforceable. The trial court also held that the tort claims were preempted by the Arizona Uniform Trade Secrets Act (AUTSA). The appellate court upheld the trial court’s dismissal of the breach of contract claim. Additionally, the court upheld the dismissal of the tort claims that were based on misuse of trade secret information as defined under the AUTSA, but reversed and remanded with regard to the other tort claims.
The employment agreement’s confidentiality provision prohibited the employee from using or disclosing confidential information. The appellate court recognized that information constituting a trade secret is entitled to protection from misappropriation; however, the court held that the information defined as “Confidential Information” in the employment agreement extended far beyond truly confidential information. Specifically, the definition of confidential information contained in the employment agreement was overbroad in two respects. First, it improperly deemed public information, even information that requires substantial searching, as confidential. Second, the agreement deemed any information the employee learned during her employment as confidential, regardless of whether the information was truly confidential.
Due to its overly broad nature, the appellate court determined the confidentiality provision constituted an unlimited restriction against competition. In Arizona, in order for a non-competition provision to be enforceable, it must be reasonable in time and in geography. Here, the confidentiality provision did not contain any temporal or geographic restrictions. Therefore, the appellate court held the trial court did not err in finding the confidentiality covenant was unenforceable.
Non-Compete and Non-Solicitation Provisions
The appellate court also held the employment agreement’s non-compete and non-solicitation provisions were overbroad because they protected more than the employer’s legitimate interests.
The court found that the non-compete provision eliminated competition per se because it prevented the former employee from using skills and talents learned at her former job. Specifically, it prevented the employee from pursuing any type of work in the public relations industry, even work that would be based on her skills and experience, and not merely on confidential information or customer relationships. Therefore, it went beyond protecting a legitimate business interest.
The non-solicitation provision was overly broad because it applied not only to actual customers, but also to “potential” customers. “Potential” customers were those persons or entities the company is planning to solicit. The court held this definition was so broad that anyone could be included as a potential customer. Further, the court held that the non-solicitation provision also included former customers. Because the company had no protectable interest in former or potential customers, the non-solicitation provision was unenforceable.
Preemption Under the AUTSA
The appellate court also reviewed whether the AUTSA preempted claims based on the misuse of “confidential information” that does not rise to the level of trade secret information. The court held that if tort claims are based on the misuse of trade secret information, the AUTSA preempts these claims. However, if the tort claims are solely based on the misuse of “confidential information,” that does not rise to the level of trade secret information and the AUTSA does not preempt these claims.
What This Means for Employers
Employers should review their employment agreements to ensure that any restrictive covenants are narrowly tailored to only protect the legitimate business interests of the employer. For confidentiality provisions, employers may want to consider including a geographic and temporal restriction in case a reviewing court determines the agreement is, in reality, a non-competition agreement. For non-solicitation provisions, employers should review any restrictions on the solicitation of “potential” customers to ensure it is not so broad that anyone could be included as a potential customer. Further, employers should ensure their non-solicitation provisions do not include former customers. Finally, for non-competition provisions, employers should ensure the restrictive covenant does not prevent the former employee from performing any type of work in the industry, even work that would be based on the employee’s skills and talents.