Does an illegal clause create liability, or just invalidate the contract?

Question

A private company in Arizona wanted to bring me on as an independent contractor to research what they need to do for (ISO/etc) standards compliance. I was asked to sign an NDA before learning details; I reviewed the NDA, rejected it, offered instead my word not to steal their stuff, and was accepted. The CEO is moving away from NDA's, anyway. But there may be a few people who have already signed it, and this worries me, because I wonder if the company can get in trouble later just for trying to contractually take away someone's rights. Legal compliance isn't my department (I'm not a lawyer), but it's close enough to my other duties that I would write up a cost-benefit proposal for paying a lawyer to write up a new (safe) NDA that can replace the old NDA (which ought to be terminated if there's any risk to letting it remain in effect).

The document combines the NDA with a non-compete. The early (NDA) sections restrict the use of company documents for "the pursuit of profit or employment with" followed by a list of potential clients, including "Legal representatives of ANY kind". The late (non-compete) sections have nothing to do with documents anymore, but (switching out the company name for "EMPLOYER") does have this clause:

If CONSULTANT's employment with EMPLOYER terminates for any reason, the CONSULTANT shall not, for a period of one year from the date of termination, have any business dealings whatsoever, either directly or indirectly or through corporate entities or associates with any customer or client of EMPLOYER or its subsidiaries or any person or firm which has contacted or been contacted by EMPLOYER as a potential customer or client of EMPLOYER;

No restrictions (of industry) apply here, but taken in context with the NDA section (which implies intended clients), any legal representatives who were ever approached as potential clients (even if they immediately said "not interested" and refused to hear more), up to every legal representative anywhere if included in a marketing campaign that broad, would be off-limits for business dealings of all kinds. Such as, for instance, hiring a lawyer to review a contract before employment.

No lawyer reviewed this contract with him before he began using it:

"I did not have a lawyer draft it actually, and I just added a ton of shit in there and wrote it in about 5 minutes as an afterthought late at night about a month ago."

I asked a lawyer from out-of-state (about this and other clauses), who noted that he was not giving legal advice, but this particular clause was unconscionable and (unless Arizona had some weirdshit rules) illegal. This is not the worst contract I've seen written by a non-lawyer, and I expect to see more people trying failing to create an enforceable contract because they think it will save them the money of hiring a lawyer; I believe the theoretical aspect (not my specific situation, which is more of an example) will be generally useful for employers to be aware of what penalties their company may risk facing later on. I don't expect to be lucky enough that this precise clause has come up in prior case law; I'm hoping for other instances of illegal clauses, so I can include links in a risk analysis to show any general trend of "this has or has not been problematic for similar cases".

Answer 1

Restraint clauses, restrictive covenants, or non-compete clauses are fairly standard in professional contracts. You would usually find, in a well-drafted restraint clause, cascading duration and geographic limitations. For example, it might read:

... as a potentional customer or client of EMPLOYER.

This shall apply:

1. For 12 months; or, if that is found to be unenforceable,
2. For 6 months; or, if that is found to be unenforceable,
3. For 3 months; or, if that is found to be unenforceable,
4. For 1 month

and within a radius of:

1. 20km; or, if that is found to be unenforceable
2. 10km; or, if that is found to be unenforceable
3. 5km; or, if that is found to be unenforceable
4. 1km

from the work location.

These cascading clauses are designed to protect the employer in situations where a court finds the original restraint to be unreasonable and unenforceable.

The usual remedy for an unreasonable restraint clause is that a court will simply nullify it, or reduce it to a more reasonable time and geographical scope. However, if it materially changes the nature of the contract, then the contract as a whole may be voided.

Answer 2

This kind of "kitchen sink" employment agreement is becoming rampant.

Just two days ago, a contracting company sent me a document to sign that seemed to not only prevent me from contacting the client company directly, but enjoined me from buying coffee anyplace but the company store; parking anywhere but the company lot; using any travel agency but the company agency...etc.

That's a bit of hyperbole, but the point is solid: If you're given an NDA, it means "no disclosure to other parties and nothing else." If you're given a non-compete, it means "no scalping customers when you go work for the competitor, nothing else."

"It's a fine line between clever and stupid," and it's a fine line between protection and restraint of trade.

All that being said, I failed to answer the question. In the absense of a SEVERABILITY clause, you may be in shallow water here. A severability clause says, in effect, "anything here that turns out to be bullshit is null and void and ignored. everything else still holds though!" Absent that, there's an argument that if there's a tainted baby floating in the bathwater, the whole bucket is tossed.