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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.