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Building Codes: A Primer for Contractors and Owners in Arizona

Part 2. The Vested Rights Doctrine

In the first blog post, found HERE, I highlighted that errors in judgment are bound to happen.   The question for owners and builders then becomes who is responsible when these errors occur?     Who is ultimately responsible may involve whether a construction project is financially viable or not. As usually happens in disputes where a government entity revoked a permit issued in error, Arizona Courts will heavily rely on the vested rights doctrine, which will be discussed in detail in this post.

The Vested Rights Doctrine

The vested rights doctrine is often utilized by a developer or owner of improvements as the primary defense against a government entity revoking a permit or not permitting a variance in the code. As a basic definition, vested rights are triggered when a building or special use permit is legitimately issued by the appropriate government entity and the permittee (i.e., an owner or developer), in reliance on that permit, incurs considerable expenses. The right to continue construction becomes a vested property right that a government entity cannot revoke without good cause or proof that a public necessity exists that justifies a revocation.[1]

Although the idea of vested rights has been used to protect property owners, one should remember that it is not a guarantee of success. Courts have been reluctant to extend this doctrine Per court opinions, vested rights are evaluated on a case-by-case, fact-intensive basis, each taking into account what would be the appropriate decision in light of the facts while balancing what the Court considers to be the will of the public on the issue. Since the vested rights doctrine is examined in almost every court case involving building codes, permits, and actions by government entities, additional examination of this doctrine with individual case examples will help to explain this doctrine in greater detail.

The Arizona opinion often cited by the courts involving vested rights doctrine and other property rights is Town of Paradise Valley v. Gulf Leisure Corporation.[2] In Gulf Leisure, an investment group obtained and was issued a special use permit authorizing development of a property as a resort.[3] The investment group then spent considerable amounts of money both planning and developing the resort. However, because of a downturn in the economy and issues between members of the investment group, construction proceeded more slowly than expected, and extensions in the permits were pursued in order to complete the project.[4] After legal and political wrangling between the Town and other individuals, the Town of Paradise Valley decided not to extend the development group’s permits, essentially halting the project.

The Gulf Leisure Court examined the Town’s decision and initially determined that the actions taken by the Town were both arbitrary and capricious.[5] In addition to this determination of the actions by the Town, the Court also examined whether or not vested rights had accrued. The Court concluded that they had.[6] The Gulf Leisure Court highlighted that there was definitive proof that the company had spent considerable funds in order to prepare the property for the development. The Court emphasized that the general rule concerning vested rights is that any substantial change of position, expenditures, or occurrences of obligations under a building permit entitles the permittee to complete the construction and use the premises for the purpose it was originally authorized–irrespective of the subsequent changes in zoning.[7] Since these changes were consistent with the initial permits issued and had only been revoked after the time had expired, the Gulf Leisure Court ruled that vested rights had occurred and the developers could continue developing their project.[8]

The Gulf Leisure opinion became the foundation for subsequent court decisions illustrating a few of the nuances within the vested rights doctrine. Some examples of these distinctions are summarized below.

Burroughs v. Town of Paradise Valley.[9] A landowner inherited a parcel of land that, at the time of purchase in the 1950’s, was located in an unincorporated area by the Town of Paradise Valley. The new owner wished to use the also inherited plans designed by Frank Lloyd Wright, created shortly before the architect’s death, to build a home on the property. However, in the decades since the property and home design were obtained, various Town zoning, planning, and other ordinances prevented the landowner from completing the Frank Lloyd Wright design. Several years later, the proposed design was also rejected by the Town’s Board of Adjustment for code violations and subsequently enacted building regulations.[10] The landowner claimed, citing Gulf Leisure, a vested right to build on the property as originally designed by Frank Lloyd Wright.

The Burroughs Court determined that the landowner did not have a vested right to build as originally designed. The original landowners who had acquired the Frank Lloyd Wright design had never taken the crucial step of obtaining a building permit (nor was an application for one ever filed) during the years the property was on unincorporated land before the new government regulations were enacted. Since a key prerequisite of establishing a vested right is proof of prior issuance of a permit, the landowners could not claim that protection.[11] In addition, the landowner could not prove that she had expended money on the reliance of a building permit. The improvements of the property (leveling of a hill and adding basic utilities) were expended by the previous owner, along with the money paid for the Frank Lloyd Wright design, had not been incurred in reliance of receiving a building permit.[12]

Neil v. City of Kingman.[13] In Neil, the Zoning Administrator for the City of Kingman found that a highway sign advertising a McDonald’s restaurant did not comply with local codes and ordinances and ordered the sign removed. The owner appealed the decision to the Kingman Board of Adjustment, which affirmed the original determination. The owner filed a special action with the Mohave County Superior Court, which determined that the sign did not comply with the local codes, but also independently held that the owner had a vested right to maintain the sign as erected. The Court of Appeals affirmed the trial court’s decision, which was appealed to the Arizona Supreme Court.[14]

In its review of the dispute, the Arizona Supreme Court focused its attention on the establishment of a vested right for the owner to keep the sign and noted that the issue of vested rights was never raised by the owner before the City of Kingman Board of Adjustments.[15] The Neil Court emphasized the legal concept of waiver and the previous precedent that a failure to raise an issue at an administrative hearing that the administrative tribunal is competent to hear waives that issue.[16] Since the owner had failed to assert a vested rights issue in his notice of appeal to the Board or Superior Court, the owner had waived the issue, the trial court should have solely examined the questions of abuse of discretion of the Board, and did not have the authority to raise the vested rights issue.[17]

It should also be remembered that a municipality is free to enact an ordinance that terminates a vested right if the rights are abandoned or there is a cessation of the nonconforming use for a specified period of time. Often times, the building code contains provisions whereby building permits expire if construction ceases or is abandoned for more than 180 days absent an extension by the municipality. In these circumstances, the code often makes it possible for a vested right to be lost over time.

      As an example, loss of vested rights situation arose in City of Glendale v. Aldabbagh,[18] In that case, a business owner lost a preexisting right to a nonconforming use because the business had been shut down by court order for more than one year as a result of separate liquor law violations. The City had an ordinance stating that if a nonconforming use terminated for one year, the vested right to the nonconforming use was lost. The Aldabbagh court held that abandonment of a nonconforming use requires a subjective intent by the owner to give up the nonconforming use.[19] However, the court ruled that an ordinance stating that a “cessation” of use did not require an intent to abandon. The Court ruled that:

[a] nonconforming use may be lost through negligence or inadvertence. A use may also be lost if a person engages in civil or criminal misconduct that the property owner knows or should know could lead to involuntary closure and indeed does lead to closure.[20]

Therefore, in order to preserve a right to a non-conforming use, the owner/developer will want to make certain that other actions do not either interfere with the right or act as a waiver.

            As outlined in the cases above, the use of the vested rights doctrine may be the best course of action when loss of a permit stops construction prior to project completion.   However, it will involve a fact intensive analysis.   As such, the owner, contractor or developer will want to constantly document what has occurred during the construction and permitting process and, if a dispute develops, make certain that no actions are taken that may waive the right to assert this doctrine.   The foundation of the vested rights doctrine, the concept of estoppel, will be discussed in a future post.

[1] Rivera, 186 Ariz. at 602; citing Town of Paradise Valley v. Gulf Leisure Corp., 27 Ariz. App. 600, 608, 557 P.2d 532, 540 (Ariz. Ct. App. 1976); Phoenix City Counsel v. Canyon Ford, Inc., 12 Ariz. App. 595, 599-600, 473 P.2d 797, 801-02 (Ariz. Ct. App. 1970).

[2] 27 Ariz. App. 600, 557 P.2d 532 (1976).

[3] Id. at 535.

[4] Id. at 536-38.

[5] Id. at 539-40.

[6] Id. at 540.

[7] Id. at 540-41.

[8] Id. at 541-43.

[9] 150 Ariz. 570, 724 P.2d 1239 (Ariz. Ct. App. 1986).

[10] Id. at 571.

[11] Id. at 571.

[12] Id. at 572.

[13] 169 Ariz. 133, 817 P.2d 937 (Ariz. 1991).

[14] Id. at 133-34.

[15] Id. at 136.

[16] Id. at 136-37; citing Rouse v. Scottsdale Unified School Dist., 156 Ariz. 369, 371, 752 P.2d 22, 24 (Ariz. Ct. App. 1987); De Groot v. Arizona Racing Commission, 141 Ariz. 331, 340, 686 P.2d 22, 24 (Ariz. Ct. App. 1987); Calixto v. Industrial Commission, 126 Ariz. 400, 402, 616 P.2d 75, 77 (Ariz. Ct. App. 1980).

[17] Id. at 137; citing, City of Phoenix v. Superior Court, 110 Ariz. 155, 158, 515 P.2d 1175, 1178 (1973); Sevilla v. Sweat, 9 Ariz. App. 183, 185-86, 450 P.2d 424, 426-27 (Ariz. Ct. App. 1969).

[18] 189 Ariz. 140, 939 P.2d 418 (1997).

[19] Id. at 142, 189 Ariz. At 420.

[20] Id. at 144, 939 P.2d at 422.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Building Codes: A Primer for Contractors and Owners in Arizona

Part 1. When Errors Occur

When I consider the collaborative effort necessary to successfully complete a construction project, I often think of the barn raisings of years past.   A barn raising was often held in a small farming community where the local residents would come together and build a barn for a neighbor farmer in only one day.   This task was accomplished by many experienced hands who had been involved in the construction of a barn several times before. The days of an old-fashioned barn raising have disappeared. It has now been replaced by a mountain of rules, regulations, and other variables provided by building codes which make for a challenging labyrinth a contractor and owner must navigate in order to see a construction project successfully through to completion.

As with any matter that involves interaction with government entities, a contractor and owner must keep certain questions in mind. What are the consequences if a construction project is issued a building permit in error? What rights does a property owner have to complete a project if a problem is discovered at some point before a building project is completed, and when do these rights vest? How does the law of estoppel figure into legal proceedings regarding construction issues, and when does a construction dispute cease to be an administrative issue and become a legal one?   These questions will be addressed in our multi-part discussion on building codes.

What Occurs if a Government Entity Issues a Permit in Error?

In the State of Arizona the Phoenix Metropolitan Area alone includes several cities each with their own local rules and procedures adjacent to each other. With close territorial quarters such as these and the large volume of construction, errors in the building permit process are bound to happen. These building permit issuing errors cover a wide spectrum of scenarios. At one end of the spectrum, the error could be a clerical oversight caught by neither the permit’s issuing entity nor the project’s developer, contractor, or architect who submitted the application. Another possibility occurs when a developer, contractor, or architect provides misleading or false information to secure a permit. What can be done when these situations arise? Arizona law has multiple cases on this subject either when the permit is issued because of misleading information or after errors in judgment.

In general terms, when a permit is issued in error because of misleading information provided by an individual, contractor, or architect requesting the permit, Arizona law allows the government entity to stop construction and request the improvement(s) be removed. Truthful and accurate information on a permit application is necessary to avoid the possible future revocation of a secured permit.

This general rule is based on the Arizona Court of Appeals opinion Rivera v. City of Phoenix.[1] In Rivera, the homeowners owned property that was subject to a zoning restriction that limited the total square footage of the residence to 25% of the area of the lot.[2] The homeowners submitted and obtained a permit from the City of Phoenix for an addition to their residence. However, the plans submitted to the City were not accurate in indicating that the square footage of this addition would exceed the 25% rule because the drawings submitted with the permit application did not accurately reflect the lot area covered by the addition.[3]

Believing that the application and plans submitted were in accordance with city planning, zoning regulations, and other local requirements, the City approved the permit. The homeowners quickly began construction of their addition. During the construction, the City inspected the premises and discovered that the addition actually covered 40% of the lot and was an obvious violation of the zoning limitations and building codes.[4] The City notified the homeowners of the violation and delivered a stop work notice. The homeowners requested a zoning variance, which was denied by both the city zoning board and the board of adjustment. The City Council later affirmed the denial of the variance.[5] The homeowners then filed a special action in Maricopa County Superior Court where the trial judge found for the City and ordered the removal of the addition.

The homeowners appealed the Superior Court’s decision and the Court of Appeals upheld the trial court’s finding for the City of Phoenix. The Court of Appeals’ decision emphasized that the original building permit was based upon plans submitted by the homeowners that indicated, erroneously, that the modified residence would not cover more than 25% of the lot. Since this permit application did not reveal the true nature of the addition, the Rivera Court determined that this permit was not legitimately secured and did not give rise to additional legal rights. The opinion emphasized “when a building permit application contains incorrect information which results in the issuance of a building permit allowing construction of a structure in violation of the zoning code, a subsequent revocation of the permit due to the zoning violation is with good cause … so that the revocation does not violate due process.”[6]

What Occurs if a Government Entity Issues a Permit but no Error Occurred?

As described in the Rivera opinion, a government entity does have the ability to revoke a permit under the foundation that it was issued in error. The next question that arises is whether the government’s authority would be extended by the courts in relation to a situation where it is not as obvious that the permit was issued in error. Does permit revocation authority extend to circumstances where correct information was provided by an individual or entity wishing to secure a permit, but an error was committed by a government entity? What if the error is minor? When do the rights of the owner trump the authority of the government entity to issue or correct an error?

A case example of this scenario is found in the Arizona Court of Appeals decision Goodman v. City of Tucson.[7] In this unpublished Court of Appeals opinion, Mr. Goodman applied to the City of Tucson for a reconfiguration of a property that he was planning to develop into individual parcels of land.[8] The City of Tucson authorized the reconfiguration of the property, including the individual development plans for each of the parcels and issued Mr. Goodman building permits for six of the parcels. More than two years later, Mr. Goodman returned to the City with a request to amend the development plans to allow access to several of the parcels through an existing City easement through the property. There was an issue whether Mr. Goodman had fulfilled other obligations required on the property, which eventually led to a deficiency notice and a civil violation.[9] The City of Tucson issued a stop work order on the project because of inconsistencies between the improved individual site plans and the maps submitted pursuant to the City hearing on the recent request for adjustments.[10] Mr. Goodman appealed through the government city zoning department and eventually filed suit. Mr. Goodman had spent a substantial amount of money to improve these properties before his permits (now allegedly issued in error by the City of Tucson) were revoked.

In the Goodman opinion, the Court of Appeals determined there was no dispute that the City of Tucson approved the development plans and issued the building permits to Mr. Goodman and at least some of these permits were still valid at the time the City of Tucson Zoning Administrator ruled that the permits previously issued were in error.[11] The Court of Appeals then examined the actual issuance of these permits, highlighting that Mr. Goodman had originally provided correct information to the City of Tucson at the time his initial requests were approved. In addition, Mr. Goodman had relied significantly upon these approvals, including incurring substantial expenses in order to develop this property and comply with the permits.[12] The Court of Appeals concluded that the “error” discovered by the City of Tucson after the fact, which led to the voiding of these permits cannot preclude Mr. Goodman from going forward and developing the property.[13] The Goodman Court directed that the City of Tucson Board of Adjustment reevaluate its decision denying Mr. Goodman’s requests for issuance of these permits and variances.[14]

As both case examples highlight that most of the issues regarding permitting occur not when one party or another is being purposely deceptive.   However, the problems occur when both sides are well-intentioned in their efforts, but facts and circumstances fall through the cracks because of negligence or error in the evaluation process.

As often happens in disputes where the government entity revoked a permit issued in error, the Goodman v. City of Tucson opinion heavily relies on the vested rights doctrine, which will be discussed in detail in a subsequent post.

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[1] 186 Ariz. 600, 925 P.2d 741 (Ariz.Ct.App. 1996).

[2] Id. at 601-602.

[3] Id. at 602.

[4] Id.

[5] Id.

[6] Id.

[7] 2007 WL 5613515 (Ariz. Ct. App. 2007).

[8] Id. at *1. Since this is an unpublished opinion it does not create legal precedent and is being used for illustrative purposes only.

[9] Id.

[10] Id. at *2.

[11] Id.

[12] Id. at *3.

[13] Id. at *3-5.

[14] Id. at *6.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

The Importance of Details: How Brown M&M’S can be Essential to a Contract

 

One might wonder how a popular candy, a certain color, and a successful hard rock band are connected with an essential concept in contract law and often a key to business success.   However, when you dig a little deeper, an important connection does exist.

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 The rock band at the center of this article is Van Halen.   When they arrived on the music scene in the late 1970’s they were different than the trendy disco and punk rock bands of the time.   Their musicianship and stage presence set them apart from their contemporaries, which led to album sales totaling almost one hundred million, high-grossing concert tours, and eventually the Rock & Roll Hall of Fame.   Often cited is their famous concert rider.

In basic terms, a concert rider details the terms of the contract between the band and the local concert promoter. The rider contains the technical and personal specifications that the band requires to play at the specific venue. As an example, these riders contain information about construction of the stage, lights, and speakers to be utilized, down to the most basic of matters such as the food and personal amenities that are to be in provided in the backstage area.   Because of their large arena-style concerts, Van Halen’s rider was extremely detailed as it outlined the important elements of staging, electrical, lighting, sound, and venue requirements.   In fact, as a large production, Van Halen’s concert rider was over 200 pages long.

Van Halen placed within the multi-page rider a clause that required the concert promotor to supply several pounds of M&M’s to the band as part of backstage catering.   However, all the brown colored M&M’s were required to be removed from the bowls.   Failure to do so would allow the band to cancel the concert at the full expense of the concert promotor.

At first glance the “no brown M&M’s” requirement appears to be just another case of rock star excess and arrogance.   However, this was not the situation.   The clause served another purpose altogether and is a valuable lesson in drafting contracts.   As discussed above, a concert production is a multi-million dollar endeavor requiring the coordination of hundreds of individuals and large amounts of equipment.   If improperly set-up, a concert event could be delayed, experience technical problems and cost the band hundreds of thousands of dollars.   In addition, an improperly constructed concert venue posed a health and safety concern for not only the band, but its crew, and concert goers as well.   Almost every year there are stories of a stage collapsing and participants injured at a concert venue.   Van Halen did not want this to happen at one of their events.

In order to guarantee that the concert promoter had read the entire contract in detail and had complied with its terms, the “no brown M&M’s” clause was inserted in the rider.   It became the band’s warning flag. It demonstrated that if the concert promoter had not paid attention to the trivial detail concerning brown M&M’s that same promoter had usually not paid attention to the more essential parts of the rider.   Whenever Van Halen first arrived at a venue, they would check the bowls of M&M’s for brown ones.   If they were found (or no M&M’s were provided at all), the band would then conduct a complete line check and inspect every detail of the staging, lighting, electrical, safety and sound.   In the process, they often found significant items that needed to be corrected. Van Halen drafted what appeared to be a very trivial contract clause that served a very important purpose. So important that it involved issues of health and safety for both the band and their fans.

I often repeat the mantra “the devil is in the details” when I present in front of business people or discuss contract matters with my clients.   Being aware of the details of the contract is often the key to compliance.   Complying with even the smallest detail provides you the best protection if a dispute arises. It is also the one party’s failure to comply with the details that commercial litigation attorneys (such as myself) use to their advantage.

On occasion, some business owners request a “simple” contract with “no boilerplate language.”   I then need to remind them that simple is not always better—especially in written contracts where the court or arbitrator will only concentrate on the language on the contract and not what the other parties believe they agreed to.   A business needs detail for protection.

Also, when my firm negotiates or assists in the drafting of various contracts, I often place and refer to certain terms and conditions as my “no brown M&M’s” clauses.   These clauses often involve trivial information and requirements.   However, the failure of a party to follow these basic terms is a big red flag that more important terms and conditions will not be complied with.

With this in mind, a business owner may want to review their contractual obligations to see whether their contracts already contain these “no brown M&M’s” type clauses.   An evaluation whether the business is in full compliance before a dispute happens can prevent a lot of future issues.   Also, an evaluation as to whether the other party is complying with the trivial terms may necessitate a more detailed review of compliance if they are not.   Preventing a problem before it becomes a crisis is often the better approach.

As an end note and to show the potential long-term impact of these trivial clauses, Van Halen has been on tour this summer.   Even though it is no longer in Van Halen’s rider, concert promotors will still leave a large bowl of M&M’s in the dressing room with all of the brown M&M’s removed. It remains a statement that the promotors still show that they have complied with all of the terms of their contract with Van Halen.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Sometimes You Have to Shoot the Mules

 

The classic Academy Award winning film for Best Picture, Patton, follows the exploits of the famous U.S. Army General George S. Patton during World War II.   General Patton was an extremely driven, successful, and sometimes controversial figure during his military career.   However, even most of General Patton’s  critics agree that his successes during key times and battles during World War II were a catalyst for the Allies victory against the Axis Powers in Europe.

Gen. Patton’s exploits during World War II depicted in the film range from accurate to somewhat apocryphal. One incident depicted in the film occurred during Patton’s successful campaign across Sicily. General Patton’s troops drove the Axis Powers from the island and set the stage for the invasion of Italy.     During the campaign he encountered a column of U.S. Army soldiers, vehicles and equipment that was at a standstill on the road.   The stationary soldiers were an easy target as German fighter planes began to strafe the column causing considerable damage and casualties.   Upset by the fact that the column was vulnerable to the fighters, he raced to the front of the column.   Once there, he found two mules pulling a cart who had sat down and refused to move in the middle of a bridge spanning a river gorge.   Surrounding the stubborn and immovable mules were several servicemen and their  owner.  All were engaged in unsuccessful attempts to coax these mules to their feet to move them across to the other side of the bridge thus ending the stoppage.

General Patton was incensed with the fact that these two stubborn mules had caused the Army column to stall, be exposed to enemy fire, and incur damage and casualties as a result.   He quickly assessed the situation, pulled out his revolver, shot both mules dead (to the surprise of all those around him), and ordered the troops to throw the mules’ carcasses into the river.   Thereby, allowing the military column to move forward.

What does this have to do with business, success, and legal issues?   It comes down to the concept that decisions need to be made.   As outlined in previous posts, we have highlighted examples where indecision is just as damaging (if not more so) than making the incorrect decision to begin with.   Certain decisions by nature will be difficult, but they still need to quickly and efficiently made.

A question a business will often want to ask is are there “mules” blocking your company’s road to success.   These “mules” may be an area/aspect of the business that you just cannot get off the ground to be successful, or a client that your employees spend an inordinate amount of time handling, but who does not constitute a large amount of profit.   The “mules” can also include company personnel that are just not working out no matter what you do or a marketing plan that you have invested resources into but have seen very few results.   Like the troops at the front of the column trying to coax the stubborn mules to their feet and not realizing the destruction occurring in the stalled column behind them, businesses often become too fixated on attempting to fix the problem or “make it work” and neglect to realize the actual long-term damage this continued focus is causing to the business.

Instead, the business and owner(s) should just “shoot the mules” and move on.      “Shooting the mules” in a business setting may involve ending unproductive business relationships, eliminating marketing and other strategies that are ineffective, or terminating those employees who are not part of the company’s future.     In order to be a successful business decisions need to be quickly and efficiently made. Failure to do so can have disastrous results.

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

Hands-Off and Anti-Piracy Provisions in Employment Contracts

 

Hands-Off and Anti-Piracy Clauses: Narrowly-Tailored Restrictive Covenants

Most business owners are familiar with non-compete agreements which restrict an employee from competing with a former employer after the employee leaves the company. Non-compete agreements vary and can include language that prohibits an employee from working in the same industry for a specific period of time or within a certain geographical area. However, many businesses are unaware that non-competes or “covenants not to compete” are actually just one of several “restrictive covenants” available in the employment law context.

“Hands-off” or “anti-piracy” provisions are one type of restrictive covenant that prohibits a former employee from contacting customers or using proprietary information gained as a result of his or her position. Properly drafted, this type of restrictive covenant allows employers to hold onto their customers without compromising employees’ rights.

Carefully crafted anti-piracy or hands-off provisions can be very helpful for Arizona employers, who occasionally run afoul of state law by including overly broad non-compete provisions in their employment contracts. Instead of attempting to completely curtail a former employee’s activities, employers can draft narrowly-construed provisions that protect valuable customer relationships and information.

Arizona Case Examples

In practice, hands-off and anti-piracy provisions are aimed at preventing former employees from stealing customers from their former employers. This becomes especially relevant in service industries and sales-based companies, where employees tend to interact one-on-one with clients, building relationships, trust, and familiarity. When these personnel move on, there is always a risk that the client – reluctant to start over with someone new – will follow. Employers are also aware that salespeople and customer service managers often leverage their customer contacts to obtain more lucrative employment offers elsewhere. Hands-off restrictive covenants aim to stop this behavior without prohibiting past employees from earning a living.

One of the most often-cited cases in the realm of hands-off restrictive covenants is Olliver/Pilcher Insurance, Inc. v. Daniels, a 1986 decision by the Arizona Supreme Court. The defendant, Robert Daniels, was sued by his former employer, an insurance company, for allegedly violating the terms of his employment agreement. The Supreme Court ruled that the applicable provision was not a standard non-compete agreement; rather, it was a hands-off provision that prohibited Daniels from soliciting business from his former group of clients. When Daniels left his old insurance firm, 19 clients went with him, prompting the lawsuit and perhaps justifying the company’s position. The Arizona Supreme Court ruled that the hands-off provision would have been enforceable by itself. Unfortunately for the employer, it also contained language that imposed a 67 percent commission penalty on Daniels for each former customer that signed on with his new employer, regardless of whether Daniels had directly worked with them in the past. The provision also applied to the entire state of Arizona, even though Daniels’s business had been almost exclusively concentrated in the northern region of the state. Because of these overly-broad and punitive restrictions, the Court ruled the hands-off provision completely invalid.

In contrast, the Arizona appellate court upheld a hands-off provision in Alpha Tax Services, Inc. v. Stuart (1988). In this case, two former employees, tax preparers, broke off from Alpha Tax to form their own tax preparation service. Shortly after opening their own business, they mailed hundreds of fliers and coupons to their former customers. They also, utilizing the information acquired from their past employer, contacted and solicited former customers directly by phone. Citing Olliver/Pilcher, the court held:

“This type of agreement, which has been called an antipiracy or hands-off agreement, is less restrictive than a covenant not to compete and is designed to prevent former employees from using information learned during their employment to divert or to steal customers from the former employer. Such an agreement, statewide in scope, is not considered unreasonable or oppressive and is valid.”

-In a more recent opinion, Orca Communications Unlimited, LLC v. Ann J. Noder et al. (2013), the Court of Appeals ruled that a company’s hands-off provision was invalid because it was too broad in scope. The employment agreement attempted to restrict Ann Noder, Orca’s former president, from drawing prospective as well as former clients away from Orca. The court ruled that, although Orca had a right to protect its interests in any current clients, it could not claim any interest in former or future clients.

Drafting Effective Hands-Off and Anti-Piracy Provisions

As the case law demonstrates, employers must be careful when including hands-off provisions in employment agreements. As with non-compete clauses, provisions that prohibit an employee from interacting with former clients or using information gained during their employment must always balance the employer’s legitimate business interests against the employee’s right to earn a living in his or her chosen field. Because the law in this area is complex and the costs of making the incorrect decision are high, it is imperative to work with an experienced employment and business law attorney who can help you get it right.  

© 2015 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website has been prepared by Harrison Law, PLLC. for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.