By: Christine F. Mayhew and Daniel J. Knight
When it comes to non-compete clauses, North Carolina courts adhere to the “strict blue pencil doctrine.” Generally speaking, a non-compete clause is valid and enforceable only if it is reasonable (i.e., no more restrictive than necessary) as to time and territory and it goes no further than necessary to protect an employer’s legitimate business interest. If the clause is unreasonable, then it is generally unenforceable. Under the “strict blue pencil doctrine”, a non-compete clause may be enforceable notwithstanding an unreasonable provision if the unreasonable provision is “distinctly separable” from the remainder of the non-compete provisions. If so, then the court “marks through” the unreasonable provision with its figurative blue pencil, enforcing only the reasonable portions. However, according to the North Carolina Court of Appeal’s recent decision in Beverage Sys. of the Carolinas, LLC v. Assoc. Beverage Repair, LLC, et. al., No. COA 14-185 (August 5, 2014), NC’s “strict blue pencil doctrine” might not be so strict anymore, at least as to contracts for the sale of a business.
In Beverage Sys., the plaintiff contracted to purchase the defendant’s business. Included within the purchase contract was a non-compete clause which further included a modification provision authorizing a court to modify the non-compete clause in the event the clause was found to be unreasonable. When the defendant violated the non-compete clause and the plaintiff filed a lawsuit, the trial court refrained from enforcing the non-compete on grounds that it was unreasonable as to geographic scope.
On appeal, the plaintiff sought enforcement of the non-compete on the ground that the parties had expressly authorized the court to enforce it in this very situation to the extent allowed by law (i.e., a reasonable geographic scope). In ruling in the plaintiff’s favor, a divided panel held that the trial court could have modified the non-compete, notwithstanding the “strict blue pencil doctrine”, because the parties, who expressly agreed to any modification, had equal bargaining power. Furthermore, allowing the parties to expressly agree to modifications of unreasonable non-compete agreements was a matter of “good business sense” and afforded better protection to the interests of both parties.
In Beverage Sys., the Court’s decision was directed at non-compete agreements in contracts for the sale of a business. However, the case now raises an issue as to whether the Court’s ruling will extend to non-compete agreements in employment contracts as well. Though unlikely, parties to a contract must now be wary that a modification provision within a non-compete agreement may ultimately allow the Court to enforce an unreasonable non-compete agreement which would have otherwise been unenforceable before Beverage Sys.
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This summary is for informational purposes only
and does not constitute legal advice or opinion.