When it comes to modifying the terms of a non-competition agreement deemed overbroad or unreasonable, North Carolina has long held to the blue pencil rule. Unlike many other states, North Carolina judges do not have the authority to rewrite the unreasonable provisions in the agreement. However, they can strike out, or “blue pencil,” the offending language if the remaining provisions of the agreement continue to make sense.
Last year, the blue pencil rule faced its first judicial challenge, when a divided panel of the North Carolina Court of Appeals concluded that parties to a non-compete used in a sale of business context could contractually agree to grant the court the authority to rewrite unreasonable or overbroad provisions. In Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, the asset sale agreement contained a non-compete that prevented the business’ sellers from competing in North Carolina or South Carolina for five years following the sale.
One of the sellers established a competing business, and the purchaser sued to enforce the restriction. The trial court concluded that the restriction was unenforceable because its territory included the Carolinas, while the seller only engaged in business in limited portions of both states. On appeal, the Court of Appeals reversed this decision, concluding that in a sale of business context (the court specifically said that its reasoning would not apply to employment non-competes, where the parties do not have equal bargaining power), the parties could agree to allow the court to rewrite overbroad provisions.
Earlier this month, the North Carolina Supreme Court reversed the Court of Appeals decision, again invalidating the non-compete because of the overbroad territory. The court stated that the parties to the non-compete could not grant the court with the power to rewrite the agreement, because North Carolina courts lack this ability in the first place. The court could only blue pencil out offending provisions, but in the case of the territory, this would not have left any enforceable restriction.
This decision slams the door on attempts to evade the blue pencil rule in North Carolina. The non-compete will stand or fall on its terms, unless the unreasonable provision can be removed while leaving an enforceable restriction. For employers or companies negotiating non-competes in North Carolina, this decision provides two important lessons.
First, the non-compete should be written in a manner that creates the minimal restrictions necessary to protect the business. This means that the scope, duration and territory of the restriction should be tied to clearly demonstrable business threats. Second, when including a territorial restriction, the party seeking the non-compete should consider use of a “cascade” of successively more restrictive territories. This would allow a judge to blue pencil out a broader territory deemed unreasonable, while still leaving a lesser geographic scope for the restriction.
In recent years, North Carolina courts have become more hostile to post-employment restrictive covenants in general. Any attempt to place employees under such restrictions, and to create a meaningful deterrence against their violation must be made through careful analysis and crafting of the restrictions put into place.