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Category: Business

The Ins and Outs of Non-Compete Agreements

 

Use and Popularity of Employee Non-compete Agreements

Employee non-compete agreements are popular tools utilized by many types of employers when hiring new employees. It is easy to understand why. Employees today are considerably more mobile than in past generations. When a new job opportunity arises, an employee is more likely to move on than his or her predecessors were. The days of spending one’s entire working career with a single employer are a thing of the past. With such a fluid workforce, understandably, employers need to protect their information, including accounts, relationships, and access to customers. In many situations, an employer accomplishes this by requiring a new employee to sign a non-compete agreement.

Arizona courts have held that these covenants not to compete must be narrowly tailored to protect an employer’s legitimate business interests. A non-compete agreement cannot be overly restrictive when it comes to duration or to geographic scope. In other words, businesses cannot handcuff a former employee’s job prospects for the sake of their bottom line.

How can a business draft a non-compete agreement that holds up in court? If one provision within the agreement is found to be invalid, is the entire agreement found to be invalid? To examine these circumstances, one must look to the “blue pencil rule.”

Why You Want “Severable Portions” in Your Non-Competes

If you are an Arizona employer, “severable portions” should be part of your evolving business vocabulary. Also known as step-down clauses, these provisions in an employer’s non-compete agreement refer to either a specific alternative time or a territorial provision that creates the restrictions in the covenant agreement. To be enforceable, the non-compete agreement must provide a clearly stated alternative as to either time or geographic location in its restrictions.

The blue pencil rule allows a court to strike out restrictions that conflict with each other within an agreement. However, it is not acceptable for the employer to include both provisions in their agreement and to simply give the Court “revision authority” so as to attempt to be more restrictive in its agreement language. Doing so risks the validity of the entire agreement.

The Arizona Supreme Court addressed this very issue in Varsity Gold, Inc. v. Porzio. In this case, the drafting party included a reformation clause that granted the Court authority to revise the non-compete agreement in question to conform to acceptable standards in lieu of a step-down provision. The Court held that granting it revision authority to modify the non-compete agreement was not a valid step-down provision and as such, deemed the entire agreement unenforceable. The court stated, “Although we will tolerate ignoring severable portions of a covenant to make it more reasonable, we will not permit Courts to add terms or rewrite provisions.”

Covenants not to compete are complex documents that can be easily invalidated by Arizona courts. Laws favor employees as the non-drafting parties. It takes a carefully crafted agreement to ensure that the parties on both sides of a non-compete agreement are protected and understand their rights and obligations.

©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.

Let’s Be Reasonable: Geographic and Time Limitations in Non-compete Clauses

 

When employees move on to other pursuits, they take their knowledge of the former employer with them. If you are a business owner, a well-drafted non-compete agreement can ensure that former employees do not directly compete with your business. Because many employees leave to work for competing firms (or start their own), a non-compete agreement is essential to protect, at least for a time, what you have worked so hard to build A business must draft its non-compete agreement in such a way that it will protect itself to the greatest extent possible, but remain legally enforceable. Creating such an agreement often involves a delicate balancing act that a business must constantly keep in mind.

In general, non-compete agreements “are disfavored and thus are strictly construed against employers.” Hilb, Rogal and Hamilton Co. of Ariz., Inc. v. McKinney. For example, to be enforceable, non-compete agreements must include reasonable time and geographical limits. What courts consider “reasonable” is generally determined on a case-by-case basis, but certain guidelines have been established. Arizona courts have held that these limitations must be specifically tailored to protect an employer’s legitimate business interests. In Valley Med. Specialists v. Farber, the Arizona Supreme Court held that non-compete agreements will be enforced as long as they are “no broader than necessary to protect the employer’s interest.”

Non-compete agreements that attempt to impose lengthy time restrictions and overly broad geographical limitations will not be enforceable. As an example, no court in Arizona has ever upheld a non-compete agreement that imposed a statewide geographical limitation. In Liss v. Exel Transportation Services, Inc., the court ruled that a non-compete agreement essentially banished an employee from his chosen industry. The agreement prohibited the employee, a truck driver, from “directly or indirectly engaging in any work associated with motor freight transportation services for three years, regardless of where the business is located.” Unsurprisingly, the court held that the agreement was overly broad. Therefore, employers must carefully draft these agreements to balance their business interests against their employees’ right to earn a living.

Reasonableness Factors

Arizona courts will consider a number of additional factors when examining the scope of time and geographical limitations. Among these other factors, the court will examine the type of business, the employee’s specialized knowledge, and how long it will take an employer to train the employee’s replacement.

For example, in Amex Distributing Co., Inc. v. Mascari, the court held that a 36-month blanket restriction that prohibited the employee from working with any competitor was unreasonable. The court stated: “When the restraint is for the purpose of protecting customer relationships, its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness.”

In Bryceland v. Northey, the court also refused to enforce a non-compete that included overly broad time and geographical limitations. Not only did the agreement prohibit a disc jockey from providing professional services to any client within a 50-mile radius of Phoenix or any of his other job sites, it did so for two years. Similarly, in Lessner Dental Labs v. Kinney, the court held that a non-compete was unenforceable because it prevented the employee, a dental technician, from working with any competitors within the entire county for two years.

Conversely, in Bed Mart, Inc. v. Kelley, the court held that a non-compete agreement was enforceable. The agreement imposed a six-month, 10-mile restriction on the employee working for any company whose business was comprised of more than 50 percent mattress sales.

Contrasting Bed Mart with case examples where the non-compete agreement was deemed un-enforceable, it is easy to see the differences in how the geographical and time restraints were drafted. Because the non-compete provisions in the Bed Mart agreement were specifically and narrowly tailored to protect the employer – without being unduly burdensome to the employee – the court determined them enforceable.

Conclusion

Often employers attempt to utilize a “one size fits all” non-compete agreement that fails to focus on the unique nature of their business, the specific knowledge and skill set of certain employees, and whether the geographic and time limitations within these boilerplate agreements would be considered reasonable. This is an area where a “one size fits all” approach can be detrimental to an employer’s ability to enforce an agreement and emphasizes the need to specifically draft a non-compete agreement to an employee’s skill set.  

©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.

Prenuptial Agreements for Business Owners

 

Premarital Agreements in Arizona 

Although prenuptial – or premarital agreements, as they are called in Arizona – are not viewed as the most romantic documents in the world, they are an essential business protection tool for business owners contemplating marriage.  Carefully drafted and properly executed in accordance with Arizona law, a premarital agreement can save a business owner time and money in the courtroom litigating ownership of business interests in the event of a divorce.

Requirements for a Valid Premarital Agreement in Arizona

To be enforceable, a premarital agreement must satisfy every requirement under Section 25-202 of the Arizona Revised Statutes. These requirements include:

• The agreement must be made in writing and signed by both parties (the agreement does not require consideration)

• Signed voluntarily by both parties

• Each party must make a fair and reasonable disclosure of all personal property and debts

• Neither party can waive in any way his or her right to the other party’s disclosure of all personal property and debts

• A properly executed agreement is unenforceable if it is later discovered that one of the parties did not have, or could not reasonably have had, adequate knowledge of the other party’s property or debts

The Importance of Disclosure In Premarital Agreements 

When a premarital agreement has been properly drafted, both sides have made a full disclosure of their assets and debts, and it has been signed, the agreement will override the community property rules of Arizona by preventing one spouse from receiving half of the other spouse’s business in the event of a divorce.

Although making a full disclosure of assets and obligations may seem straightforward, it is a common area of attack in the context of premarital agreements.  A spouse who seeks to invalidate a premarital agreement is likely to claim that the opposing spouse did not make a full disclosure of all assets.  Alternatively, he or she might claim that the opposing spouse concealed debts. This scenario is especially common when one spouse is a business owner.  Thus, business owners who wish to protect their assets through the use of a premarital agreement should strongly consider including a list of their own assets and obligations – along with a list of their spouse’s property and debts – as part of the agreement itself.  Additionally, both spouses should sign and date each page of the agreement, along with the lists of assets and debts.

© 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 Dangers of Online Business Incorporation

 

Because starting a business is generally expensive, many new business owners are tempted to incorporate by using an online do-it-yourself service. They believe they will save money by bypassing an attorney in favor of using the Internet. The popular television commercials make it look easy, and the price seems right. In reality, this type of “representation by search engine” contains numerous pitfalls.

It Is Not a Cost-Savings

Many of the online incorporation services advertise a deceptively low up-front rate, only to upsell or over-charge business owners for unnecessary services later on in the process. A new business owner who is unfamiliar with the laws in Arizona may not be aware of what is mandatory and what is optional. In many cases, an attorney is actually a more economical option.

Revolving Charges

If the Internet incorporation service requires the user to select the service as the user’s registered agent, the service will charge the user an ongoing annual fee. This fee might be much higher than the fee a business owner would pay by using a local attorney. These types of hidden charges are typically where Internet incorporation services make the bulk of their money.

Liability Risk

In their finished state, the forms offered by these websites have not been reviewed by licensed attorneys who practice in Arizona. Moreover, they are not even reviewed by an attorney licensed to practice in any state. The user submits information through a series of questions, which populates a pre-made form. The disclaimer page of one of the most popular form websites states that it “is not a substitute for the advice of an attorney” and “is prohibited from providing any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms or strategies.” It goes on to state that it “can only provide self-help services at [the user’s] specific direction.” There is no guarantee that the forms provided will comply with the laws of Arizona.

© 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.

Construction Delays and Damages

 

Founding father, Benjamin Franklin, is credited with a number of sayings that still resonate today. One of his most famous – “time is money” – is especially relevant in the world of construction. The construction industry is acutely aware that time delays will cost you. In commercial construction projects with large price tags, these costs can be enormous.

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Construction delays usually end up costing not only the contractor but the owner as well. Contractors pay as workers and equipment sit idle waiting to complete a phase of a project. Owners’ businesses suffer when they are unable to take possession of their property. With large sums of money at stake, it is no surprise that these construction delay disputes often end up in court, where the costs of litigation add even more to the final tab.

To guard against liability for construction delays, both owners and contractors frequently address delays in their bids and contracts. The majority of commercial construction contracts include liquidated damages clauses that assign a penalty for each day a project goes over its target completion date. Without careful drafting, however, even delay provisions and “no liability” clauses can fail to hold up in court.

Technology Construction, Inc. v. City of Kingman

In an Arizona case decided in June 2012, the Arizona Court of Appeals granted delay damages to the contractor, Technology Construction, Inc. (TCI), against the City of Kingman. The Court of Appeals upheld the trial court’s award of $324,933 plus prejudgment interest of $117,785 and post-judgment interest of 10 percent per year even though the City’s contract included a “no liability” provision and lacked a materials escalation clause.

The case, Technology Construction, Inc. (TCI) v. City of Kingman, 229 Ariz. 564, involved construction of a $5.2 million railroad underpass for the City of Kingman. The project was split into two phases, with the first phase slated to begin June 1, 2005. Work was delayed, however, when the City failed to present TCI with a contract until July 7, 2005. The project was pushed back even further when the City did not give TCI a notice to proceed until November 3, 2005. The court determined that TCI was not responsible for any of these delays.

During this time, Mother Nature threw the project another curveball when Hurricane Katrina hit the Gulf Coast in August 2005. The disaster caused the price of oil to skyrocket, which impacted construction projects all over the country – including the City of Kingman’s railroad underpass. Resulting from the increase in oil prices, TCI ended up paying more for asphalt, a material which was utilized prominently in the project. TCI’s initial asphalt bid priced asphalt at $54.10 per ton. However, the company had to pay $85.40 per ton for asphalt by the time the project got underway. This resulted in an overall cost increase of $324,933.

When TCI submitted its request for payment to the City of Kingman, the City refused to pay for the increased costs. As a result, TCI filed a lawsuit for breach of contract under the Arizona Prompt Payment Act. At trial, the court held that the City of Kingman was solely responsible for the construction delays and that the increased materials costs were in no way attributable to TCI.

On appeal, the Court of Appeals found conflicting provisions within the City’s construction contract which further established their liability under that contract. Although the contract contained a “no liability” provision, it also permitted delay damages in the event the owner requested changes or created project delays – both scenarios were supported by the facts in this case. The TCI Court further stated that there was no way TCI could have anticipated the increased cost of materials due to a natural event such as Hurricane Katrina.

Careful Drafting: Anticipating Delays

Any number of events can create both foreseeable and unforeseeable construction delays. The lessons to take away from TCI are twofold. First, courts always construe conflicting contractual provisions in favor of the non-drafting party. The City of Kingman’s contract included both a “no liability” clause and language providing for delay damages. In the presence of a delay damages clause, the Court invalidated the “no liability” clause. Secondly, the City failed to include a force majeure clause in its contract, which could have protected it from increased materials costs related to Hurricane Katrina. Without it, the City was stuck with a substantial increase in construction expenses. Careful contract preparation cannot completely absolve a party from all construction delay liability, but it is a good start.

©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.