An Arkansas non-compete agreement is a contract or part of a contract that prevents a person or group of people from acting in a way that competes against another person or business. Non-compete agreements will be upheld if they protect a valid interest and are not too broad geographically or last for too long.
Arkansas treats non-compete agreements differently depending on whether they result from an employment agreement or the sale of a business or similar transaction. Non-compete agreements in employment contracts may last no more than two years, while non-compete agreements from sale agreements may last as long as ten years.
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Yes. For such a covenant to be enforceable, it must meet three requirements:
(1) the person seeking the covenant must have a valid interest to protect;
(2) the geographical restrictions must not be overly broad; and
(3) a reasonable time limit must be imposed.
Non-compete agreements associated with the sale of a business or profession with its goodwill are favored more than agreements ancillary to employer-employee or professional association relationships. Mercy Health Sys. of Nw. Arkansas, Inc. v. Bicak, (2011).
A covenant not to compete agreement is enforceable if the agreement is ancillary to an employment relationship to the extent that:
(2) The covenant not to compete agreement is limited concerning time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer. AR ST § 4-75-101(a).
For purposes of non-compete agreements in employment contracts, the protectable business interest of the employer includes its:
For purposes of the sale of a business, protected interests may also include:
Customer Information: Customer lists, agent compensation plans, bid proposals, and marketing strategies are considered valid, protectable interests for purposes of non-compete agreements. Statco Wireless, LLC v. Sw. Bell Wireless, LLC, (2003)
Facilitating Transactions: A non-compete agreement with reasonable time and geography restrictions may not be struck down if the limits are essential to a transaction and some purpose besides merely preventing competition exists. See Madison Bank & Tr. v. First Nat. Bank of Huntsville (1982) (upholding the finding that limiting a bank’s ability to leave a community was a “legitimate purpose”).
The test of reasonableness of contracts in restraint of trade is that the limitation imposed upon one party must not be more significant than is reasonably necessary for the protection of the other and not so great as to injure a public interest. Spann, 389 S.W.3d at 89.
In determining whether the geographic area is reasonable, the trade area of the former employer is viewed. Where a geographic restriction is greater than the trade area, the restriction is too broad, and the covenant not to compete is void. Jaraki v. Cardiology Assocs. of Ne. Arkansas, P.A.(2001).
- The nature of the employer’s protectable business interest;
- The geographic scope of the employer’s business and whether or not a geographic limitation is feasible under the circumstances;
- Whether or not the restriction placed on the employee is limited to a specific group of customers or other individuals or entities associated with the employer’s business; and
- The nature of the employer’s business.
The statutory rules for non-compete agreements do not apply to a person holding a professional license in a medical profession as defined in Arkansas Code Title 17, Subtitle 3. Ark. Code Ann. § 4-75-101(j)(2).
Attorneys may not enter into employment, partnership, or settlement agreements that limit their right to practice. Ark. R. Prof. Cond. 5.6.
It is not clear whether a non-compete agreement remains enforceable after an employer terminates an employee.
The burden is on the party challenging the validity of a covenant to show that it is unreasonable and contrary to public policy. Dawson v. Temps Plus, Inc., (1999).
An employee’s continued employment is sufficient consideration for a covenant not to compete agreement. Ark. Code Ann. § 4-75-101(g)
A post-termination restriction of two (2) years is presumptively reasonable. Ark. Code Ann. § 4-75-101(d).
In the employment agreement, the court allowed a requirement not to compete with the employer throughout the state for two years following termination of employment. Advanced Env’t Recycling Techs., Inc. v. Advanced Control Sols., Inc., (2008)
In the sale of a business, ten years is the longest that has been allowed. For example, a non-compete agreement prohibiting opening a branch within ten (10) miles of a town for ten (10) years has been upheld. Madison Bank & Trust v. First Nat’l Bank of Huntsville (1982). However, ten (10) year restrictions have also been struck down as overly long.
Limitations of five years are more commonly approved. For example, in the sale of an accounting office, the court prohibited business activities within 50 miles of a town for five years following the sale. Spann.
Suppose restrictions in a covenant non-compete agreement are found to be unreasonable and impose a more remarkable restraint than is necessary to protect the protectable business interest of the employer. In that case, a court will reform the covenant non-compete agreement to the extent necessary to:
- (A) Cause the limitations contained in the covenant not to compete agreement to be reasonable; and
- (B) Impose a restraint that is not greater than necessary to protect the protectable business interest. The court will enforce the agreement under the reformed terms and conditions. Ark. Code Ann. § 4-75-101(f).
It is unclear, however, whether “blue penciling” is permitted in the context of non-competes arising out of the sale of a business. In Bendinger v. Marshalltown Trowell Co. (1999), the Arkansas Supreme Court wrote that “we are unable to rewrite the restrictive covenant” and declined to enforce an entire agreement because a portion of the deal was unreasonable. The case was decided before the passage of the statutes cited in this entry, but the statutes left alone court rulings related to the sale of a business. Ark. Code Ann. § 4-75-101(h).