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AZ Court of Appeals Finds Employee Confidentiality, Non-Competition, and Non-Solicitation Provisions Unenforceable

Labor & Employment Law Alert Eric B. Johnson

On October 17, 2013, the Arizona Court of Appeals upheld the dismissal of a breach of contract claim based upon overbroad provisions in a Confidentiality, Non-Competition and Non-Solicitation Agreement (“Agreement”). The court also addressed whether business tort claims premised upon the misappropriation of confidential, but not trade secret, information are pre-empted by the Arizona Uniform Trade Secrets Act (“AUTSA”).

The lawsuit was brought by Orca Communications Unlimited, LLC (“Orca”), an Arizona based public relations company, against its former President, Ann Noder (“Noder”), as well as Noder’s new company, Pitch Public Relations (“PPR”). Noder served as Orca’s President from 2002 until 2009. In connection with her employment, Noder executed an agreement prohibiting her from: 1) Using or disclosing confidential information for any purpose other than to benefit Orca; 2) competing with Orca for a period of 18 months after termination; and 3) soliciting any Orca customer, potential customer or employee for a period of 18 months after termination. Orca also asserted various other claims against the defendants, including breach of the covenant of good faith and fair dealing, breach of fiduciary duty and duty of loyalty, tortious interference with business expectancies, and unfair competition.

Confidentiality, Non-Competition and Non-Solicitation Provisions Held Unenforceable

Pursuant to the confidentiality provision of the Agreement, Noder was prohibited from “directly or indirectly circumvent[ing] or compet[ing] with The Company with regard to any confidential information.” The Agreement defined confidential information as “knowledge or information not generally known to the public or in the public relations industry.” This included “any information” learned by Noder as a result of her employment with Orca. While the Agreement noted that information readily accessible to the public in written format was not deemed confidential, “information that was only available through ‘substantial searching of published literature’ or that has to be ‘pieced together’ from a number of publications or sources” was also considered to be confidential per the Agreement.

The court found the definition of confidential information overbroad in two respects. First, the court rejected Orca’s argument that publicly available information could be considered confidential merely because one may have to spend substantial time in gathering and comprehending the information. If the information was publicly available, it could not be considered confidential regardless of how long it may take to collect such information. Second, according to the Agreement, any information Noder learned as part of her employment with Orca was deemed confidential irrespective of whether such information was publicly available. While this expansive definition made the provision overbroad and unenforceable on its face, the court also noted that preventing Noder from using such information effectively turned the confidentiality provision into “nothing more than an unlimited restriction against competing with Orca,” which the court refused to enforce.

With respect to the Non-Competition provision in the Agreement, the court found this restriction unenforceable as well in that it prevented Noder from “directly or indirectly advertising, soliciting or providing ‘Conflicting Services,’ which were defined as ‘any product, service, or process’ that directly competes with one [Noder] worked on or acquired confidential information about during her employment with Orca.” Because this provision restricted Noder from pursuing any type of work in the public relations industry, even work based upon her skill and talents and not related to confidential Orca information or customer relationships, the court determined that the restriction was ultimately a prohibition on competition per se, and Orca had no legitimate protectable interest in enforcing such a broad prohibition. And the court found that there were no set of facts that could ever justify such an overbroad restriction and dismissal of the claims was therefore appropriate.

In striking down the Non-Solicitation provision, the court explained that the provision purported to prohibit Noder from soliciting Orca’s potential customers (which could be anyone) as well as former customers who no longer did business with Orca. Because Orca had no protectable interest in customers or entities to which it was not doing business with, the court affirmed the trial court’s determination that the clause was unenforceable.

Dismissal of Other Claims Reversed

Though the Arizona Court of Appeals affirmed the dismissal of Orca’s breach of contract claim, it reversed the dismissal of various other claims made by Orca. In particular, the court found that Orca had asserted a valid breach of covenant of good faith and fair dealing claim against Noder for allegedly competing with Orca and soliciting her coworkers while she was still employed by Orca. This claim was proper irrespective of the enforceability of the Agreement.

Orca also successfully challenged the dismissal of its claims for breach of fiduciary duty and duty of loyalty, and tortious interference with business expectancies which the lower court said were pre-empted by the AUTSA. The Arizona Court of Appeals reinstated these claims because Noder allegedly established a new competing business and solicited Orca’s customers for that business while still employed by Orca.

AUTSA Does Not Prevent Claims Premised on Misappropriation of Confidential Information Not Rising to Level of Trade Secrets

The unfair competition claim asserted by Orca involved, at least in part, the alleged misuse of Orca’s confidential information other than trade secrets, and the trial court dismissed the claim as pre-empted by the AUTSA. The appellate court reversed the lower court and reinstated this claim primarily because of the plain meaning of the statute.

How This Decision Impacts Employers

This decision is significant in several respects. First, it addresses a variety of legal issues relating to employee restrictive covenants. Second, it represents a continuation of the increased scrutiny Arizona courts apply to these types of agreements under Arizona law. Third, it confirms the availability of various business torts to companies who have had their confidential, but not trade secret, information misappropriated by a former employee or agent.

In light of this ruling, employers should review their employee restrictive covenants and determine whether new and/or modified agreements should be entered into with employees. Companies should also review their policies and procedures with respect to the dissemination, protection, and storage of confidential information. Doing so now may be critical to any litigation matters that may arise in the future.

Quarles Can Help

Quarles & Brady LLP has an entire group of attorneys — the Trade Secrets and Unfair Competition Team — dedicated to helping clients with these issues. Their experience in this area of the law allows them to provide you with efficient and reliable advice. Quarles has assisted clients with these issues on both an hourly and flat fee basis. If you need assistance, please contact Eric B. Johnson, at (602) 229-5425 or [email protected].

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