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Non-Compete Overbroad, Business Tort Claims Preempted by Arizona Trade Secrets Act, Federal Court Rules

Non-Compete Overbroad, Business Tort Claims Preempted by Arizona Trade Secrets Act, Federal Court Rules
  • November 1, 2013

An employer’s non-competition agreement with its employees was overbroad, unenforceable on its facts and could not be saved by the “blue pencil” rule, Judge Neil V. Wake of the U.S. District Court for the District of Arizona has ruled in an action for alleged violations of restrictive covenants and business torts. Unisource Worldwide, Inc. v. Swope, No. No. CV-12-02036-PHX-NVW, 2013 WL 4029170 (D. Ariz. Aug. 8, 2013). Noting that “Arizona law does not look kindly upon restrictive covenants,” the court, however, permitted the employer’s breach of customer and employee non-solicitation claims to proceed because additional facts were required to determine whether they were reasonable. 

The court also ruled the Arizona Uniform Trade Secrets Act (“AUTSA”) preempted claims for tortious interference with customer and employment relationships, inducement to violate contracts, and conspiracy and dismissed the claims, but it permitted the employer to file an amended complaint to clarify its claims.

Background

As a condition of their employment with Unisource Worldwide, Inc., the employee-defendants agreed to maintain the confidentiality of Unisource’s confidential information and trade secrets, entering into non-competition and non-solicitation agreements. The agreements prohibited the employees, for a period of 12 months after cessation of their employment, from soliciting any of Unisource’s customers, suppliers, or employees with whom they had “material contact” during the last year of their employment. “Material contact” includes “personal contact with other Unisource employees or the supervision of the work of other employees through subordinate managers in the chain of command.” The employees also were prohibited from competing with Unisource within the counties in which they solicited or conducted business for the company during their last year of their employment.

The employees resigned from Unisource and allegedly went to work for a competitor in violation of their agreements. Unisource sued them for breach of the restrictive covenants, breach of the duty of loyalty and fiduciary duty, violation of the Arizona Uniform Trade Secrets Act, tortious interference with contractual and business relations, and civil conspiracy. The employees asked the court to dismiss the claims, arguing that the restrictive covenants were unenforceable and the business torts were preempted by the AUTSA.

Applicable Law

Under Arizona law, restrictive covenants that “tend to prevent an employee from pursuing a similar vocation after termination of employment are particularly disfavored” and are strictly construed against the employer. Amex Distrib. Co., Inc. v. Mascari, 150 Ariz. 510, 514, 724 P.2d 596, 600 (App. 1986). To be enforceable, the covenant must be reasonable with respect to its duration, its geographic scope, and the range of employee’s activities affected. Valley Med. Specialist v. Farber, 194 Ariz. 363, 370-71, 982 P.2d 1277, 1284-85 (1999). A covenant cannot be used to preclude a former employee from employing at a new job the skills he developed while working for the employer. Bryceland v. Northey, 160 Ariz. 213, 217, 772 P.2d 36, 40 (Ct. App. 1989). When a covenant is deemed unreasonable, a court may “blue pencil” the covenant (strike out grammatically severable, unreasonable provisions) in order to save the covenant, if the contract so directs. However, a court cannot rewrite the covenant or its provisions in order to render it enforceable.

Non-Compete Overbroad, but Non-Solicitation Covenants can Proceed

The court found the non-compete agreement served “no purpose, save stifling fair competition and crippling Defendants’ ability to obtain employment elsewhere.” It ruled that the non-competition covenant was unreasonable because Unisource already had protected “all of [its] conceivably legitimate interests” through its confidentiality and customer and employee non-solicitation covenants. In addition, the non-competition covenant’s geographic scope, which applied in any county where the employees “solicited or did business” for Unisource in their final year of employment, was overbroad, the court ruled, stating the employees could comply only if they had tracked each Arizona county where they conducted business for Unisource. The covenant’s range of activities also was overbroad because it prevented the employees from performing any work they performed while at Unisource, not only for a competitor, but also within the geographically restricted area, the court ruled. Accordingly, the court found the non-competition covenant was unreasonable, could not be saved by the blue-pencil rule, and dismissed the claim.

Examining the non-solicitation covenants, the court found that, although they contained a durational limit, the language appeared vague and expansive. The court stated, “Ambiguity and excessive breadth in such covenants are especially disfavored because of their in terrorem effect on employees, who have little sense of which provisions of a particular covenant will in fact be enforceable and who therefore cannot determine what conduct is precluded.” In particular, the court questioned use of “material contact,” finding the term could ban employees from soliciting a customer, supplier or employee with whom they had no direct contact during their employment. However, the court noted that whether a covenant is reasonable is a “fact-focused” inquiry and that, based on the allegations in the complaint, it was premature to determine whether the non-solicitation covenants were reasonable. Therefore, it denied the motion to dismiss the claims for breach of the customer and employee non-solicitation covenants.

AUTSA Preempts Business Tort Claims

The AUTSA (A.R.S. §§ 44-401 to 44-407) codifies the common-law protection of trade secrets and outlines available relief for misappropriation of a trade secret. Its preemption clause states that the law “displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret.” Because the Arizona Supreme Court has not decided the scope of preemption under the AUTSA, the court looked to other jurisdictions’ interpretations of the Uniform Trade Secrets Act’s preemption provision. The court determined the “UTSA preempts all common law tort claims based on misappropriation of information, whether or not it meets the statutory definition of a trade secret.” It took the broad view that a “claim is ‘based on’ misappropriation when that misappropriation underlies the claim — when misappropriation is a building block of the claim.” 

Applying these standards, the court concluded that, to the extent Unisource’s claims were based on the employees’ use of confidential information, they were preempted; to the extent those claims did not involve the use of confidential information, they were not preempted. The civil conspiracy claim was preempted, the court ruled, because it was entirely based on the employees’ alleged misuse of trade secrets. Accordingly, the court granted the employees’ motion to dismiss, but allowed Unisource to amend its complaint to clarify the precise nature of its claims.

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Judge Neil V. Wake’s caution, “Arizona law does not look kindly upon restrictive covenants,” emphasizes the need for Arizona employers to draft restrictive covenants narrowly to protect an employer’s legitimate interests. 

Jackson Lewis attorneys are available to answer questions on this and other workplace developments. 

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