Take everything you thought you knew about North Carolina’s “blue pencil” doctrine and scribble it out – well, at least as it pertains to non-compete agreements between parties to the sale of a business.
Historically, North Carolina’s limited “blue pencil” doctrine prohibited a court from “drafting a new contract for the parties” by restricting the court’s ability to modify an overly broad restriction. At most, the court could strike distinctly separable parts of a restrictive covenant if it found them overbroad – it could not revise or rewrite the covenant. In Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, et al, No. COA 14-185 (August 5, 2014) a divided panel of the North Carolina Court of Appeals may have partly erased this strict adherence to a limited “blue pencil” doctrine.
In Beverage Sys., plaintiff purchased defendant’s business and the parties executed a non-competition agreement which contained a contractual provision that specifically allowed for a court to revise its duration, scope, or geographic area in the event any of them were determined to be overly broad. Because the geographic area described by the non-compete was not limited to places where defendant had former customers and, thus, not necessary to maintain plaintiff’s customer relationships, the trial court determined the geographic scope was unreasonably overbroad and the agreement unenforceable. The trial court relied on North Carolina’s long-established limited blue pencil doctrine in support of its refusal to rewrite the non-compete provisions and disregarded the agreement’s express authority purportedly allowing the court to do so.
On appeal, the majority opinion, written by Judge Hunter, reasoned that a trial court’s ability to go beyond the restrictions of the “blue pencil” doctrine in a sale-of-business context makes “good business sense and better protects both a seller’s and purchaser’s interests in the sale of a business.” The majority relied on Outdoor Lighting Perspectives Franchising, Inc. v. Harders, __ N.C. __ App. __, 747 S.E.2d 256 (2013), for the proposition that North Carolina courts have indicated a willingness to recognize and enforce a revised non-compete agreement. The court distinguished the Beverage Sys. case from prior cases by stating that the non-competition agreement at issue expressly authorized the court to revise the agreement. The Court determined that given the fact that non-competes drafted pursuant to the sale of a business are afforded more latitude than those arising out of the employment relationship, the parties were in a relatively equal bargaining position and the trial court should have exercised its power to revise the offending geographic provision to make the agreement enforceable.
It remains to be seen whether this case will be appealed to the North Carolina Supreme Court, which has been somewhat more conservative with regard to the enforcement of non-competition agreements than the Court of Appeals. It is also unclear whether this same reasoning will be applied to employment agreements containing non-competes which are not entered in connection with the sale of a business. Regardless, it appears that North Carolina employers may be well served to include a modification provision in their non-competition contracts which expressly authorizes modification by a court of competent jurisdiction so that this argument is available in the event the original covenant is determined to be overbroad.