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Non-compete agreements with step-down provisions: will courts in "blue-pencil" states enforce them?
Both parties should be encouraged to talk to an attorney before signing an employment contract containing a covenant not to compete. If the covenant has a step-down provision providing alternative time and area restrictions, a cautious attorney's advice must be equivocal. Under current law in many states, a court may cross out overbroad, unreasonable provisions in the agreement, while keeping in place less onerous provisions. There is no definitive test to determine which provisions are enforceable. Indeed, a court could find the entire covenant void. Public policy favors definite contract obligations.
This article discusses the use of non-compete step-down provisions in the employer/employee context. A federal district court in Arizona recently upheld the enforceability of a "carefully crafted" step-down provision. (1)
What Do Step-Down Provisions Look Like?
A hypothetical step-down provision might provide:
1. NONCOMPETITION. For the TIME PERIOD set forth in paragraph 2, Employee shall not, directly or indirectly, own, manage, operate, participate in or finance any business venture that competes with the Company within the AREA, set forth in paragraph 3.
2. TIME PERIOD. TIME PERIOD for purposes of paragraph 1 shall mean the period beginning as of the date of Employee's employment with the Company and ending on the date of death of the employee; provided, however, that if a court determines that such period is unenforceable, TIME PERIOD shall end five (5) years after the date of termination; provided, however, that if a court determines that such period is unenforceable, TIME PERIOD shall end six (6) months after the date of termination.
3. AREA. AREA for purposes of paragraph 1 shall mean: the planet Earth; provided, however, if a court determines such a geographic scope is unenforceable, AREA shall mean the United States; provided, however, if a court determines such a geographic scope is unenforceable, AREA shall mean the City of Tucson. (2)
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