|
COPYRIGHT 2006 Aspen Publishers, Inc.
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)
4. In the event any term of the Agreement is deemed unenforceable it shall be severed and the balance of the Agreement shall be enforced.
Enforcing Non-Compete Agreements: The "Blue-Pencil" Rule
The state courts have taken very different approaches to non-compete agreements. In some states, the courts may decline to enforce such agreements altogether or may re-write unreasonable provisions. (3) Still other courts decline to rewrite unenforceable restrictive covenants to make them reasonable; instead, these courts will blue-pencil, or cross out, restrictive covenants, eliminating grammatically severable, unreasonable provisions, thereby preserving the valid portions of the agreement. Arizona provides an example of the blue-pencil type of judicial approach to non-compete agreements.
In Valley Medical Specialists v. Farber, (4) the Arizona Supreme Court addressed the enforceability of a non-compete clause in the context of medical specialists. The clause at issue prohibited the departing physician from practicing medicine within a five-mile radius of any of three specific clinic locations for a period of three years. (5) The contract also had a clause that, if necessary, allowed a court to reform and amend the non-compete provision in order to make it enforceable. (6)
The Arizona Supreme Court held the non-competition provision unenforceable because both the geographic scope and duration provisions were unreasonable. (7) The court further held that the appellate court had erred by employing the contracts' severability clause (8) to rewrite the non-compete provision "in an attempt to make it enforceable." (9) The court explained that, under Arizona law, courts may blue-pencil a restrictive covenant by eliminating grammatically severable, unreasonable provisions, but are prohibited from adding or rewriting provisions. (10)
In Varsity Gold, Inc. v. Porzio, (11) the non-competition clause prohibited the employee from "competing with Varsity in 'the state of Pennsylvania or any contiguous state.'" (12) The subject agreement also contained a provision permitting the court to "reform the geographic and time restrictions if it finds them to be unreasonable and unenforceable." (13) The trial court had found the non-competition provision unenforceable and had amended the geographic scope to the south Pittsburgh area for the duration of one year. (14) The trial court had ruled that the Farber decision allowed it to reform the restrictive covenant as long as it was not "significantly different from that created by the parties." The Arizona Court of Appeals rejected this reasoning. (15)
Relying on Farber, the Varsity Gold court stated that any judicial reformation of a restrictive covenant beyond implementation of the blue-pencil rule "is a 'significant' modification of that provision that cannot be tolerated." (16) The court further held that, "[a]lthough 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." (17)
Recently, the federal district court in Arizona relied on Farber and Varsity Gold to apply the blue-pencil rule in granting a preliminary injunction enforcing non-compete and non-solicitation covenants containing step-down provisions. (18) The non-compete agreement applied "within 50 miles (and if 50 miles is determined to be overly broad, then 25 miles) of any city where employee engaged in business ... for the Company." (19) Both restrictive covenants contained a term stepping down the duration from two years to 18 months to 12 months.
The Compass Bank court held that a two-year duration was unreasonable (20) and found that "one year is long enough for the new portfolio manager to gain the requisite confidence of clients." (21) Deciding the enforceability of the step-down provision as an issue of first impression, the court exercised the blue-pencil rule to "cross out some unreasonable sections in favor of more reasonable ones without rewriting them."
The step-down provision includes a narrow duration range of 1 to 2 years and a reasonable geographic scope of 25-50 miles. The agreement was drafted in good faith and is an acceptable application of Arizona's blue-pencil law. Based on the foregoing, the covenant is saved by the step-down provisions allowing the Court...
Read the full article for free courtesy of your local library.
|
Bookmark this article
Print this article
Link to this article
Email this article
Digg It!
Add to del.icio.us
RSS
