Lack of Consideration as a Defense to a Non-Compete? Not in Arizona.
Dec. 30, 2015|By Sean J. O’Hara
As business becomes more technical and knowledge-based, employers are increasingly asking their employees to sign covenants not to compete so they may protect trade secrets and confidential business information from being used by former employees who go on to work for competitors. As a result, individuals and companies contemplating new jobs or business opportunities are often faced with determining whether a non-compete agreement prohibits the new job—or whether the restriction is even legally enforceable.
One popular challenge to non-competes is lack of consideration; in other words, the non-compete contract is not enforceable because the employer did not give any new value to the employee for his or her promise not to compete following termination of employment. Without any consideration, they argue, the employee’s promise is not part of a valid contract but is instead an unenforceable gratuitous promise. In some states, this can be a strong argument, especially when the non-compete is signed after months or years or employment, where the employee receives nothing more than continued employment.
In Arizona, however, courts will rarely be receptive to this argument. By statute, Arizona law recognizes that every contract in writing imports consideration. Any party attacking enforceability of a contract on this ground bears the burden of showing the lack of consideration, especially when the employee continued to receive salary or severance payments.
Instead of relying on lack of consideration, a former employee or new employer looking to avoid the effects of a non-compete will have better luck arguing that the restrictive covenant is not enforceable because it is unreasonable under all of the circumstances. While receiving nothing other than continued employment after signing a non-compete may not be enough to prove a lack of consideration, the fact that an employee did not receive a special benefit or separate payment may help show that a broad restriction on his or her ability to get another job is not reasonable, and therefore is not enforceable.