We’re hearing from business clients what we’re all seeing in the headlines: Employees are hard to hire and retain these days. “The Great Resignation” is a new phrase used to describe the unprecedented level of employee movement in the past year. A natural consequence of this phenomenon is that noncompete agreements are being tested now more than ever, and we’ve seen a corresponding rise in noncompete disputes across Arkansas. This article will highlight some common issues employers are running into and questions we’ve been asked.
Must You Pay for Noncompetes to Be Enforceable?
Yes. For noncompetes signed after July 21, 2015 (when a landmark noncompete statute became effective), an employee’s continued employment is sufficient consideration. For noncompetes signed on or before July 21, 2015, the case law requires some consideration, but it doesn’t specify what constitutes enough for it to be enforceable.
Are Noncompetes Enforceable?
This is often the million-dollar question, and there’s a lot here to unpack. The answer depends on several factors, which include the length and the geographic reach of the restriction. In addition, it relies on how specifically it’s tailored to the needs of the business seeking to enforce it.
What’s a reasonable duration for a restriction? It depends. The first question to ask is, “When was this noncompete agreement signed?” As mentioned, the watershed date is July 21, 2015, which is when the noncompete statute came into play.
For noncompetes signed after July 21, 2015, the statute creates a presumption that two years is a reasonable duration for a restriction to be enforceable against employees. However, this general presumption can be rebutted.
If the facts and circumstances clearly demonstrate that two years is unreasonable compared to the employer’s protectable business interest, the noncompete agreement may not be enforceable. Because of this, the enforceability of a noncompete provision depends, in part, on the business interests being protected, and employers cannot blindly rely on two years as a standard duration.
For noncompetes signed on or before July 21, 2015, there’s less clarity. Although Arkansas courts typically draw the same line in the sand at two years, there’s no two-year presumption. A court must determine the “reasonable duration” from the specific circumstances of a case. In one often cited pre-2015 decision, the Arkansas Supreme Court noted that restrictions of up to five years are not inherently unreasonable.
What’s a reasonable geographic area of coverage for a restriction? Unfortunately, the answer to this question is also, “it depends.”
For noncompetes signed after July 21, 2015 (when the employee noncompete statute took effect), there’s no presumed reasonable geographic area. The statute does, however, provide guidance that the absence of a specific geographic restriction doesn’t make a noncompete overly broad if:
- The noncompete is limited with respect to time and scope; and
- It’s not greater than necessary to defend the protectable business interest of the employer.
Beyond this statutory guidance, courts will look to case law to determine what’s reasonable based on the facts of a particular case.
For noncompetes signed on or before July 21, 2015, courts generally try to determine what’s “reasonably necessary” to protect the employer’s interests. Noncompetes have been found to be too geographically broad when the restrictions exceed the area(s) where the employer engages in business.
Do Other Factors Affect Enforceability?
Yes. The individual being restricted affects the enforceability. For example, did the employee have any ownership of a business that was transferred as part of a purchase? If the employee/owner received generous payments to protect against such competition, courts are more likely to allow broader noncompete restrictions.
Another aspect to consider is whether the restriction completely bars the employee from performing work. Courts frown on restrictions that severely restrict an individual from earning a living, and if other factors are also leaning toward being heavily restrictive, this could persuade a court to find the covenant to be unenforceable.
What If a Noncompete Is Found to Be Unreasonably Broad?
In employment law, “blue penciling” is a practice in which a court modifies a noncompete agreement that it finds is too broad in order to make it enforceable. The alternative to blue penciling is ruling the noncompete as unenforceable altogether.
For noncompetes signed before July 21, 2015 (when the noncompete statute mentioned earlier took effect), there’s no blue penciling. In these cases, we often find ourselves advising clients that if a noncompete is overbroad by an inch, it’s overbroad by a mile, so it should be thrown out.
For noncompetes signed after July 21, 2015, a reviewing court can blue pencil an unreasonable noncompete agreement and impose a greater restraint than is necessary to protect the business interest of the employer. It then enforces the noncompete agreement under the narrowed terms and conditions created by blue-penciling.
As promised, there’s a lot to unpack in Arkansas noncompete law. Whether noncompetes are enforceable depends on several factors, including when they were executed. Because of the legal issues and nuances that may affect the enforceability of a noncompete, it’s wise to seek an opinion from an experienced employment lawyer to draft, review, and/or revise noncompete agreements.
Nate Read and Devin Bates are attorneys with Mitchell Williams in Little Rock, AR. They can be reached at firstname.lastname@example.org and email@example.com.