Covenants not to compete are used in various situations in attempts to ensure fairness and protect parties to a contract by limiting competition. Such covenants are sometimes held by courts to be unenforceable because they are overbroad in terms of geographical and time restrictions. However, these restrictive covenants can be written in a way so as to allow a court the discretion to alter such restrictions if a court finds that a covenant contains restrictions that are overbroad.
The "Blue Pencil"
Arizona courts “may ‘blue pencil’ a restrictive covenant by eliminating grammatically severable, unreasonable terms, [but] the court cannot add covenants or rewrite them.” Varsity Gold v. Porzio. 45 P.3d 352 at 355. In other words, Arizona courts are permitted to strike unreasonable restrictions in non-compete covenants so as to make such covenants reasonable; however, such courts are not permitted to rewrite or add to non-compete covenants to make them reasonable.
One method used to write non-compete covenants, known as the “step-down” method, specifically recognizes and accounts for a court's power to “blue pencil” unreasonable restrictions. At least one opinion in Arizona’s Federal District courts has approved of such method. Compass Bank v. Hartley. 430 F. Supp. 2d 973 at 980.
The "step-down" method allows the drafters of non-compete covenants to add a series of terms that progressively become less and less restrictive, so that if a court finds a term unreasonable, it can strike the term while still giving effect to the remaining, less-restrictive alternate covenant.
For example, a covenant restricting geographical and chronological scope can be written something along the lines of the following:
Employee shall not be permitted to offer services in the “Geographical Area” during the “Time Period”.
Geographical Area means the United State of America. If a court, arbitrator, or other tribunal of competent jurisdiction determines such a restriction is overbroad, Geographical Area means the State of Arizona. If a court, arbitrator, or other tribunal of competent jurisdiction determines such a restriction is overbroad, Geographical Area means Maricopa County. If a court, arbitrator, or other tribunal of competent jurisdiction determines such a restriction is overbroad, Geographical Area means the immediate area in which Employee offered services on behalf of Employer.
A similar “step-down” can also be used for “Time Period” or duration of the covenant.
Although courts may “blue pencil” covenants not to compete, courts are not compelled to do so. Indeed, a court can still find a covenant not to compete unenforceable even if the covenant implements such a “step-down” strategy. So it bears repeating that covenants not to compete should be written carefully and fairly.
This brief overview of some important considerations associated with covenants not to compete in Arizona is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.