In the past, Arkansas employers that desire to protect their business interests by implementing covenants-not-to-compete (non-compete agreements) with their employees were faced with uncertainty as to the enforceability of such agreements. Non-compete agreements were not favored by Arkansas courts prior to 2015. With respect to covenants-not-to-compete between an employer and employee, Arkansas courts would not enforce any part of a non-compete agreement that was found to be unreasonable in length of term or geographic scope, such being an all-or-nothing approach to enforceability. If the non-compete agreement was found to be unreasonable with respect to a particular restrictive covenant, then a court would not enforce any part of the agreement. To add insult to injury, some Arkansas employers attempting to enforce non-compete agreements were required to pay for the breaching employee’s attorney’s fees when the applicable non-compete agreement was determined by a court to be unenforceable.
In an attempt to give Arkansas employers clarity, an Arkansas statute was signed into law which took effect on July 22, 2015, giving Arkansas employers the capability to enforce contractual limitations on an employee’s ability to engage in acts of competition post-employment, even if the terms of a non-compete agreement are found to be unreasonable by a court. Ark. Code Ann. § 4-75-101 allows courts to enforce the reasonable parts of a non-competition agreement, while requiring courts to amend the over-broad, unenforceable provisions, rather than striking down the entire agreement. In other words, Arkansas Courts are now allowed to “blue-pencil” and rewrite what is otherwise found to be unreasonable without striking down the entire agreement.
Under Ark. Code Ann. § 4-75-101, a covenant not to compete will be enforced if the agreement is ancillary to an employment relationship or part of an otherwise enforceable employment agreement or contract, provided that:
- the employer has a “protectable business interest” defined to include trade secrets, intellectual property, customer lists, goodwill with customers, knowledge of business practices, methods, profit margins, costs, other confidential information that increases in value by not being known to a competitor, training and education of employees, and “other valuable employer data that the employer has provided to an employee that an employer would reasonably seek to protect or safeguard from a competitor.”; and
- the non-compete agreement is limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer.
Despite the foregoing requirements, courts are given the authority to determine the reasonableness of the agreement in light of the circumstances and are further required to reform agreements they deem to be unreasonable. Thus, even if the terms of an employer’s non-compete agreement are determined to be unreasonable by a court, the employer will still be able to enforce the agreement to the extent that the court deems the terms reasonable.
The statute also includes the following language enhancing enforceability of such agreements:
- The statute provides that continued employment is sufficient consideration for the employee to enter into the non-compete agreement.
- If the non-compete agreement does not contain a specific or defined geographic restriction, the absence of such provisions does not make the agreement overly broad, if the agreement is limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer.
- The statute provides that two (2) years is a presumptively reasonable length of time, unless the facts and circumstances of a particular case demonstrate that two years is unreasonable as compared to the employer’s protectable business interest.
- The statute states that a court may award, in a private court action, the employer damages and/or injunctive relief for breach of a covenant not to compete agreement, if appropriate.
However, the statute does not apply to non-compete agreements that are related to other non-employment contractual relationships, such as agreement for the sale and purchase of a business, a franchise agreement, or any other agreement not ancillary to an employment relationship. The statute also does not apply to agreements solely pertaining to a covenant not to solicit employees, or confidentiality agreements. In addition, the law excludes from coverage employees who hold professional licenses such as doctors.
One notable and important absence in the statute is language permitting retroactive effect to non-compete agreements entered into before the effective date of the statute, July 22, 2015. At least one federal court in Arkansas has ruled that Ark. Code Ann. § 4-75-101 is inapplicable to non-compete agreements entered into prior to July 22, 2015. See Cgb Diversified Servs. v. Bobby Mills, No. 4:15CV00291 SWW, 2016 U.S. Dist. LEXIS 180884 (E.D. Ark. Jan. 14, 2016). The Arkansas Court of Appeals has recently ruled the same. See Box v. J.B. Hunt Transp., Inc., 2017 Ark. App. 605, 533 S.W.3d 603 (Ark. Ct. App. 2017).
Accordingly, it is wise for all Arkansas employers that have implemented employment-related non-compete agreements prior to July 22, 2015 to require their employees to enter into new agreements that are updated to reference the statute.