The Time And Scope of Non-compete Agreements

There are two basic categories of non-compete agreements: those pertaining to the sale of a business and those specifically targeting an individual or employee. Fortunately, when it comes to the enforceability of either type of non-compete, there is one broad legal principal that applies to both. In general, for any non-compete to be enforceable it must be reasonable in time and geographical scope. The “time” aspect deals with the duration of the non-compete period. The “scope” aspect relates to the “non-compete radius,” or rather the geographic area in which there can be no competition. However, the real question is what is “reasonable” when it comes to time and geographic scope. Unfortunately, there is no definitive answer that applies in every situation. How the courts define “reasonable” is entirely dependent on the facts and circumstances of each case. What may be reasonable in one situation could be unreasonable in another. Nevertheless, there are a few basic principles that, if carefully reviewed and applied beforehand, will help ward off issues later down the road.

The Balancing Act of Non-compete Agreements

With any non-compete agreement, when determining its enforceability, the court undergoes a balancing act of weighing the need to enforce the agreement as written while at the same time bearing in mind the public policy issues behind not enforcing the agreement. Typically, when it comes to the sale of a business, the need to enforce the agreement and thereby protect the buyer is outweighed by the public policy aspect of allowing the seller to carry on his/her trade in another location. Most businesses are built upon goodwill and client loyalty. Because such goodwill and loyalty was likely built up by the seller well before the sale of the business, a non-compete is an essential tool necessary to give the new business owner an opportunity to take over the business and establish a relationship with and thereby retain existing clients. If the seller was permitted to go across the street and open a competing business, clients would simply follow the seller and the buyer would not get the chance to earn those clients’ business. For this reason, the courts agree that the seller can be restrained from opening a competing business within a specified geographic area and for a specified period of time.

Again, what is “reasonable” with regards to the geographic scope and non-compete period is entirely dependent on the nature of the business and the facts and circumstances surrounding the business. If the business is heavily dependent on existing clients and has been around for a long time, the courts are more likely to enforce a non-compete which has a greater duration and broader geographic radius. If a business is located in a densely populated area which already contains lots of other competitors, the courts may limit the time and scope. At the end of the day, the courts will analyze the legitimate business interest to be protected verses the public policy interest of allowing the seller to carry on his/her business in a location, and at such time, as will avoid doing harm to the buyer.

When it comes to non-competes for specific employees, the rules change a bit. The general rule of reasonable time and scope still applies. However, it is how the courts apply the general rule that changes. Typically, when dealing with the enforceability of a non-compete against a specific employee, courts are much more hesitant to enforce the non-compete agreement. More often than not, courts severely limit the enforceability of non-competes against employees or throw the agreement out entirely. Under such circumstances, the courts will give much credence to the employee’s right to work and earn a living. The courts recognize the employer’s interest in preventing an employee from taking clients or other assets obtained during the employ; however, more and more the courts are leaning toward the belief that losing one employee is not going to sink the ship. Thus, under the mindset that an employer is better suited than the individual employee to “take the hit,” courts liberally toss out what would otherwise be enforceable agreements.

More and more these days courts are favoring the rights of employees over the employer’s legitimate business interest to be protected. When it comes to the duration of the non-compete, the courts generally focus on what amount of time it will take the employer to hire and train a like employee. Rarely do you find enforceable employee based non-competes which exceed one (1) year in duration. As for the scope, courts focus on the burden placed upon the employee. If the employee has to leave town or take on a different type of employment in order to continue to make a living, the scope will likely be found to be unenforceable.

The enforceability of non-compete agreements is a conundrum for both buyers and sellers and employers and employees. Both sides have legitimate and valuable interests to be protected. Therefore, I always recommend to my clients that prior to drafting or signing any agreement which contains a non-compete clause, consult with an attorney. Doing your homework at the start will help you to protect your interests, whatever they may be, and save you much time and money in the long run.

D Rob Burris

D. Rob Burris, a partner at Monroe McDonough Goldschmidt & Molla, graduated from the University of Arizona with an undergraduate degree in business management and organizations including an emphasis on international business. He earned his law degree at the California Western School of Law and clerked for several civil litigation firms in San Diego, Phoenix and Tucson, serving as a Judicial Extern under the Honorable John Roll. While working with Judge Roll, Mr. Burris assisted in the preparation and drafting of bench memoranda, opinions and proposed orders for both federal criminal and civil litigation matters.

He has had substantial experience in civil litigation with a focus on real estate and business disputes as well as complex real estate, contracts, defective construction, business transactional law and commercial litigation.

Conversationally fluent in Spanish, Mr. Burris serves as American Co-Counsel for cross-border US/Mexico business and is very active in the Southern Arizona and Sonora, Mexico business communities.

He also serves on the Board of Directors for the Arizona Business Brokers Association, Southern Chapter and The Business Association of Tucson.

Practice Areas:

Business Law and Entity Formation
Civil and Commercial Litigation
Construction Defect
Contracts
Motor Vehicle Warranty
Product Liability
Real Estate Law
Transactional Law

Richard D Burris

Richard D. Burris, Of Counsel to MMG&M, has over 38 years of commercial litigation experience in both State and Federal courts.  He has successfully represented private investors, including over 100 Mexican Nationals, in complex litigation against international brokerage houses and insurance companies.

Since graduating from the University of Arizona Law School in 1971, Mr. Burris has represented numerous business clients including home owner groups, contractors, developers and Mexican Producers of Agricultural and other products for distribution in the United States.

Main areas of practice include:

The representation of Mexican farmers with their business interests in the U.S.A.

The representation of Mexican citizens with their personal and business investments in the U.S. and in other countries.

Practice Areas:

Business Law and Entity Formation

Monica L. Derrick

Associate

Monica L. Derrick was born and raised in Tucson and is a graduate of the University of Denver Sturm College of Law.

Her practice at Monroe McDonough Goldschmidt & Molla focuses on all facets of real estate, HOA, contract litigation and business law. She is also experienced in domestic relations issues as related to real estate.

Prior to attending law school, she worked for the State House of Representatives in Denver, Colorado, interacting on a daily basis with lawmakers and lobbyists.

Ms. Derrick is a member of the Arizona Women Lawyers Association and serves on the board of the Jim Himelic Foundation, a local organization funding efforts to find a cure for ALS.

Practice Areas:

Business Law and Entity Formation
Civil and Commercial Litigation
Construction Defect
Contracts
Family Law
Homeowner Association (HOA) Law
Motor Vehicle Warranty
Product Liability
Real Estate Law

Carolyn Goldschmidt

Partner

Carolyn Goldschmidt, a graduate of the University of Arizona law school, began her practice in Tucson in 1987. She is a partner at Monroe McDonough Goldschmidt & Molla and specializes in the area of community association law (homeowners associations), offering practical and knowledgeable advice and counsel to approximately 400 community associations (HOAs) in Southern Arizona.

Ms. Goldschmidt is certified as a real estate specialist by the State Bar of Arizona, and her practice addresses all areas of HOA governance, including Covenant Enforcement, Architectural Control, Assessment Collection, Transition from Developer Control, Legal Opinions on Association Issues and drafting and review of governing documents.

Ms. Goldschmidt is a member of the Community Associations Institute and the Arizona Association of Community Managers (AACM). She is experienced in alternative dispute resolution as a mediator and communication facilitator and teaches courses on all aspects of Community Association Law in many different venues.

Practice Areas:

Arbitration and Mediation Services
Contracts
Homeowner Association (HOA) Law
Real Estate Law

Articles

Alternative Dispute Resolution for the Community Association  
AZ Condominium Act  
AZ House Bill 2334 – Recovery of Legal Document Prep Fees  
AZ House Bill 2345 – Flag display; For sale signs; Political petitions  
AZ House Bill 2768 – Prohibitions on Transfer Fees; Exceptions; Definitions  
AZ Non-Profit Corporations Act  
AZ Planned Communities Act  
HOA Legislative Update 2010  
How Arizona Courts Decide HOA Enforcement Issues  
New Federal Pool and Spa Safety Requirements  

Gerald Hirsch

Of Counsel

Gerald Hirsch is Of Counsel to Monroe McDonough Goldschmidt & Molla with over 57 years of real estate law practice in Tucson. He has represented lending institutions, developers and title companies and handles contracts and residential and commercial real estate transactional matters.

Although primarily in private practice since 1953, Mr. Hirsch served one year as the Assistant City Attorney for the City of Tucson and was on the Administrative Committee for the State Bar of Arizona as well as teaching Transactional Real Estate Law at the University of Arizona Law School.

Mr. Hirsch is listed in multiple editions of the Best Lawyers of America (Real Estate Section).

Practice Areas:

Contracts
Real Estate Law

Karl MacOmber

Partner

Karl MacOmber, a partner at Monroe McDonough Goldschmidt & Molla, is a University of Arizona law school graduate with over 30 years of trial experience. He has expertise in all phases of civil litigation, jury trials and appeals.

His practice has concentrated on commercial litigation including real estate contracts, quiet title actions, construction defects, residential and commercial evictions, mortgage foreclosures, receiverships and covenants not to compete.

His administrative law practice includes representation of contractors and owners before the Registrar of Contractors, and representations of taxpayers before the IRS. His experience also includes practice in bankruptcy, family law and personal injury law. Mr. MacOmber has had over 20 court case opinions, the most cited being in re Baird, 114 B.R. 198 (9th Cir. BAP 1990) which made new case law substantially impacting corporate officer liability.

Practice Areas:

Appeals
Civil and Commercial Litigation
Construction Defect
Contracts
Personal Injury
Real Estate Law

Lawrence McDonough

Partner

Larry McDonough earned his undergraduate degree at Wichita University and his law degree at Washburn University of Topeka, Kansas.  He engaged in a general civil trial practice in the U.S. and Kansas Courts before accepting a position with Gates Learjet Corporation as General Counsel.  He moved to Arizona with Learjet and was admitted to practice before the U.S. and Arizona courts.

Larry eventually resigned his position with Learjet to reenter the private practice of law.  His  practice is focused on corporate and business structuring and transactions, commercial and real estate transactions, commercial litigation and probate, though he has significant civil trial and appellate court experience including complex litigation.

He is admitted to the state courts of Arizona, the United States District Court for the District of Arizona, and the Ninth and Tenth Circuit Courts of Appeals.   Larry is a member of the State Bar of Arizona, the Pima County Bar Association and was formerly a member of the Arizona Association of Defense Counsel and the Tucson Defense Bar.

He has served the community as a member of the Board of Directors of the Tucson Symphony Society, the Southern Arizona Division of the American Heart Association, a divisional campaign director for the United Way of Tucson, as Counsel to the largest private secondary school in Southern Arizona and as a member of the Diocesan Finance Council of the Catholic Diocese of Tucson. He served a seven-year term as a member of the Arizona Supreme Court’s Committee on Character and Fitness and subsequently represented that Committee in hearings before the Court.

Practice Areas:

Business Law and Entity Formation
Contracts
Estate Planning
Probate Law
Real Estate Law
Transactional Law

Negatu Molla

Partner

Negatu Molla, a partner at Monroe McDonough Goldschmidt & Molla, earned his undergraduate degree at the Haile Selassie 1st College of Agriculture in Ethiopia and his law degree at the University of Wisconsin.

Mr. Molla is a former Assistant United States Attorney and defends products liability and warranty cases for automobile manufacturers primarily in Arizona and Nevada. His practice is devoted to mediation and litigation in the areas of appellate and trial support, the automotive industry, fire litigation, motor vehicle warranty, product liability and property damage.

Mr. Molla was named a Super Lawyer® by the Southwest Super Lawyers Magazine in 2008-2009 and has represented many of the major automobile manufacturers in the United States.

Practice Areas:

Motor Vehicle Warranty Defense
Product Liability

Michael J. Monroe

Partner

Michael J. Monroe, a partner at Monroe McDonough Goldschmidt & Molla, is a University of Arizona law school graduate and is certified by the Arizona Bar Association as an Arizona Real Estate Specialist.

Practicing in Tucson for over 40 years, Mr. Monroe has represented numerous real estate and business clients including various Associations of REALTORS®, real estate brokerage firms, contractors, developers, banks, a hospital, mortgage, title and escrow companies and many other business organizations and their principals.

For over 30 years, Mr. Monroe has represented the Tucson Association of REALTORS® Board, providing counsel to REALTOR® members concerning all aspects of their real estate needs. He is admitted to practice before the United States Supreme Court as well as all state and federal courts in Arizona.

Practice Areas:

Arbitration and Mediation Services
Business Law and Entity Formation
Contracts
Real Estate Law