§ 1.5.4 INTRODUCTION AND ELEMENTS - RESTRICTIVE COVENANTS.

• Jurisdiction: Arizona

§ 1.5.4 Introduction and Elements - Restrictive Covenants. Since the early English common law, there exists a strong judicial disfavor towards a bond or covenant that prevents employees from pursuing their profession or trade after termination of employment.¹³ Historically, covenants not to compete were viewed as restraints of trade and were invalid at common law.¹⁴ Eventually, ancillary restraints, such as those incident to employment or partnership agreements, were enforced under the rule of reason.¹⁵ As early as 1932, the Restatement of Contracts¹⁶ provided that such a covenant would constitute an impermissible restraint of trade or an improper restriction on the pursuit of gainful employment or occupation unless the covenant was "reasonable." Arizona follows this reasonable requirement test.¹⁷

Restrictive covenants that tend to prevent an employee from pursuing a similar vocation after termination are looked upon with disfavor and are strictly construed against the employer.¹⁸ Covenants given in connection with the sale of a business are viewed with greater favor because courts recognize the need to protect business goodwill, which is usually an integral component in the sale of a business.¹⁹ A restrictive covenant in connection with a shareholder agreement or partnership agreement will not be as strictly construed against a business as a restrictive covenant involving the employer-employee relationship; but, courts will not be as lenient in allowing them in comparison to covenants given in connection with the sale/purchase of a business.²⁰

An additional factor to be considered is the likelihood of injury to the public if the restraint is allowed (especially in cases involving physicians, dentists, lawyers, and similarly situated professionals).

As a general rule, under the general principle of at-will employment, employees are free to quit their jobs and go to work for or become a competitor—providing they do not breach a contract with their former employer (such as an employment contract for a set term, covenant not to compete or solicit the employer's customers, or a covenant not to disclose trade secrets or other confidential information), and so long as the employees do not breach their fiduciary duties to their former employer.²¹

To enforce a restrictive covenant, the employer has the burden of establishing the restraint does not exceed that which is reasonably necessary to protect the employer's legitimate business interest, is not unreasonably restrictive of the rights of the employee, does not contravene public policy, and is reasonable as to time and space. To be reasonable and enforceable, a restrictive covenant must protect some legitimate interest of the employer beyond the mere interest in protecting itself from competition—such as preventing competitive use, for a time, of information or relationships which pertain peculiarly to the employer and access to which the employee acquired in the course of the employment. An employer may also have a legitimate interest in having a reasonable amount of time to overcome the loss of the former employee, usually by hiring a replacement and giving that replacement time to establish a working relationship.²²

While it is not possible to cover all these areas in detail, below is a brief overview of covenants not to compete and confidentiality or trade secrets agreements.

§ 1.5.5 Need For Legitimate (Reasonable) Employer Protection. Because an employee generally may quit and join a competitor or begin a competitive business, many employers require their employees to sign some form of a covenant or agreement not to compete against their employer during employment or following...