The doctrine of stare decisis does not obligate the Wyoming Supreme Court to follow precedent that is unjust, clearly contrary to plain and obvious principles of law, or has proven unworkable.
The blue pencil doctrine, which allows courts to modify unreasonable noncompetition agreements to make them reasonable, gives employers an incentive to overreach. Recently, two state supreme courts, Nebraska and Nevada, noting the weaknesses and inconsistencies of the doctrine, rejected the use of the blue pencil. In 2022, the Wyoming Supreme Court joined these other courts in criticizing the continued use of the blue pencil doctrine. Despite criticism, however, the doctrine somehow survives. Courts and state legislatures remain willing to rescue employers from their overly broad drafting. In recent years, some state legislatures have not only refused to eliminate the doctrine, but instead mandated its use whenever a court confronts an unreasonable and unenforceable agreement. In these states, legislatures restricted or eliminated judicial independence and discretion. A court in these states, when confronted with an unreasonable agreement, lacks the discretion to refuse to enforce the agreement. Instead, the court must change the language of the agreement to make it reasonable.
Rather than permitting the continued use of the blue pencil doctrine, states should embrace the common law enforceability test. The common law test requires a review of the reasonableness of the restrictions. If the proposed restrictions fall outside of the scope of reasonableness, a court should refuse to enforce the agreement. The reasonableness test acknowledges an employer’s interest in keeping its employees, while also encouraging employers to draft reasonable restrictions in their noncompetition agreements. Properly applied, the reasonableness test protects employee mobility while preventing unfair competition.
The blue pencil doctrine does the opposite. The blue pencil doctrine harms employees. Use of the blue pencil doctrine rewards drafting unreasonable restrictions, while reducing the need of the parties to negotiate in good faith. The blue pencil doctrine traps unhappy employees in a job, bound by an agreement whose actual terms are a mystery. Employers are relieved from having to make difficult choices because they know they can rely on the judicial system to correct any contracting errors.
In Part I of this article, I examine the nature of the noncompetition agreement, reviewing its unique characteristics. In Part II, I discuss the blue pencil doctrine, the legal rule permitting courts to reform an unreasonable noncompetition agreement to make it reasonable. I then turn, in Part III, to a disturbing trend—the movement by many state legislatures to strip discretion away from courts and force them to reform unreasonable agreements. In Part IV, I review the efforts of multiple state courts that have refused to blue pencil unreasonable agreements, thereby restoring balance to the noncompetition agreement conflict. Finally, in Part V, I advocate for the abolition of the blue pencil doctrine.
A noncompetition agreement is “[a] promise, usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.” The noncompetition agreement has other names: a “covenant not to compete,” a “noncompete,” or a “restrictive covenant.” Generally, these terms are interchangeable, and all refer to an employment contract provision purporting to limit an employee’s ability, upon leaving employment, to compete in the market in which the former employer does business.
Noncompetition agreements may appear in various guises: “(1) general non-competition; (2) customer (or client) non-solicitation; (3) employee non-solicitation; and (4) non-disclosure.” Noncompetition agreements typically bar a departing employee from working for, or engaging in business activities with, any other competing enterprises (typically outlined by product category, geographic location, or market). Nonsolicitation provisions, whether aimed at co-employee or client solicitation, often act as forms of noncompetition agreements. In a similar fashion, nondisclosure agreements may act as noncompetition agreements. Courts tend to hold noncompetition, nonsolicitation, and nondisclosure agreements subject to the same legal standard of enforceability. General noncompetition agreements may contain some or all of these protective clauses.
In any employment agreement, employers and employees have competing interests. Attempting to strike a balance between these interests has led to the uncertain enforcement of noncompetition agreements. Because of this uncertainty, noncompetition agreement enforcement presents stumbling blocks to employers, employees, and the courts. Furthermore, the confusion and complexity of noncompetition agreement law have worsened over time. In the words of one court, the law of noncompetition agreements is “a mess.”
From the employer’s perspective, noncompetition agreements, as well as the other restrictive clauses, are not intended to punish the former employee. An employer may choose to use a noncompetition agreement for several reasons, including the protection of trade secrets and confidential information, customer goodwill, and harnessing the benefits of training and investment in its workers. Noncompetition agreements shield the employer from unfair competition. Noncompetition agreements seek to protect an employer’s customer base, trade secrets, and other information vital to its success. An employer requiring the execution of a noncompetition agreement provides the employee with notice that the employer expects the employee to keep information learned on the job confidential after the end of the employment relationship. Moreover, companies that use noncompetition agreements may invest more in their employees. An employer does not want to invest time and energy in hiring and training a worker, only to have the worker leave and work for a rival, using the skills or clients provided by the employer. An employer will likely spend more on the employee if the employer can take precautions to prevent the employee from immediately moving to a rival. Noncompetition agreements “protect the investments an employer has made in an employee, ensuring that the costs incurred to develop human capital are protected against competitors who, having not made such expenditures, might appropriate the employer’s investment.”
The noncompetition agreement discourages employee movement between employers. Understandably, few employees can readily endure a period of inactivity—a period that could last up to two years based on a typical noncompetition agreement. A noncompetition agreement offers a powerful deterrent against leaving a position. Additionally, a noncompetition agreement restricting employees’ employment will make it more challenging for them to obtain a new job. Employers are aware of the challenges in stealing away workers who have signed noncompetition agreements. A company looking to poach key individuals from a rival will be aware that those candidates might not be available to start working right away. An employee who has been compelled to take a year or more off is much less appealing to another employer.
The noncompetition agreement restricts competitors in another way. A rival who recruits a worker away from a business, while aware that the worker is bound by a contract to not work for the competition, faces potential legal action by the original employer for tortious interference with a contract. A company that persuades a potential hire to breach a noncompetition agreement may be liable for this tort. The original employer then may have a suit not only against its former employee for breach of the noncompetition agreement, but also against the hiring competitor for encouraging the former employee to breach contractual obligations. Many employers may simply choose not to take the chance of hiring someone who is subject to a noncompetition agreement in the absence of compelling reasons to do so.
Traditionally, courts disfavored noncompetition agreements, believing that the agreements violate public policy and place unfair trade restrictions. Agreements that act as a restraint on trade “are not favored, will be strictly construed, and, in the event of an ambiguity, will be construed in favor of the employee.” Even in states that permit and regulate noncompetition agreements, the contract “is a disfavored contract in restraint of trade and will not be enforced unless it meets certain statutory requirements.” The enforceability of a covenant not to compete is a question of law.
Multiple policy reasons support the judicial system’s refusal to enforce noncompetition agreements. Mobility among employees is critical. Employee mobility has several advantages for workers, including better pay, more opportunities, better retirement and health care plans, and more job satisfaction. Employee mobility can also benefit the public by enabling increased contributions from employees with better salaries and by reducing the need for public assistance. Finally, increased employee mobility can benefit employers. When employees are freed from restrictive covenants, they are easily able to relocate to new positions. This mobility expands the pool of qualified and experienced individuals that are available for any given position.
Further, in the past, employers tended to use non-competition agreements only with senior personnel. In recent years, however, the usage of these agreements has grown to cover occupations that previously would not have been restricted. Approximately eighteen percent of American workers are subject to a noncompetition agreement, with thirty-eight percent reporting that they agreed to at least one in the past. Noncompetition agreements were, in the words of one commentator, “once reserved for a corporation’s most treasured rainmakers, [but] are now routinely applied to low-wage workers like warehouse employees, fast-food workers and even dog sitters. One out of every six workers without a college degree has signed one.” The controversy engendered by noncompetition agreements and low-wage workers received national attention in 2014, with the discovery that Jimmy John’s, the sandwich chain, had proposed the use of noncompetition agreements by its sandwich makers. Jimmy John’s required low-wage sandwich-makers—workers unlikely to have access to confidential information or stolen goodwill—to agree not to work for rival sandwich shops for up to two years after their employment ended. The broad scope of the agreement brought massive amounts of negative publicity, lawsuits, and settlements.
Particularly troubling for employees is the uncertainty as to whether the agreement will be enforced according to its terms. In fact, employers may draft provisions that they are aware are not enforceable. Courts may give little weight to the agreement as it is actually worded, adding to the confusion. In states that permit partial enforcement of noncompetition agreements, the language of the agreement represents only a starting point. Unlike most other contracts, enforcement of noncompetition agreements depends heavily on the circumstances of its execution: by the context in which they were signed, the nature of the industry or profession at issue, and the status of the restricted employee. This uncertainty produces an in terrorem effect on workers, holding them in positions even though the noncompetition agreement is unreasonable. As a result, noncompetition clauses may work even where the clause would never be enforced by a court.
The absence of a harmonized legal framework regulating noncompetition agreements within the United States compounds the complexity of the issue. In a small number of states, noncompetition agreements, in the context of employment, are virtually unenforceable. In other states, noncompetition agreements are subject to common law principles governing employment contracts. The remaining states have enacted statutes aimed at regulating noncompetition agreements. In these states, statutory language often imposes strict requirements on the agreement to ensure enforcement. Ultimately the enforceability of any noncompetition agreement hinges on which state’s law applies and where the dispute is litigated.
Courts analyze enforceability using the prism of reasonableness. In other words, before enforcement, courts examine noncompetition agreements to ensure that they are reasonable. Courts will not enforce unreasonable noncompetition agreements. All states view noncompetition agreements as different from ordinary contracts. No state will apply pure freedom of contract principles to the agreements. Instead, in common law jurisdictions, courts will generally enforce a noncompetition agreement “if the restraint imposed is not unreasonable, is founded on a valuable consideration, and is reasonably necessary to protect the interest of the party in whose favor it is imposed, and does not unduly prejudice the interests of the public.” Many states follow the test set forth in the Restatement (Second) of Contracts, which takes into consideration the following factors: (1) whether the restriction is greater than necessary to protect the business and goodwill of the employer; (2) whether the employer’s need for protection outweighs the economic hardship which the covenant imposes on the departing party; and (3) “whether the restriction adversely affects the interests of the public.”
While no standard approach exists, in most states courts engage in a two-step analysis to establish the reasonableness of a noncompetition agreement. In enforcing an agreement, an employer must first establish the existence of a legitimate protected business interest. This is a threshold issue. The noncompetition agreement’s scope must not go beyond what is necessary to protect that business interest. The validity of a restrictive covenant is a question of law resolved in light of the language and circumstances surrounding the specific covenant at issue. Notably, courts have acknowledged two situations that provide sufficient justification for the execution of noncompetition agreements: where an employer is (1) protecting the goodwill of its business, and (2) protecting its confidential information.
The first situation acknowledges an employer’s legal right to protect its goodwill. An employee often creates goodwill through interactions with clients and by fostering personal relationships with customers. That goodwill does not, however, belong to the employee who has conducted business as the employer’s agent; rather, the goodwill is an asset of the employer. The law protects these corporate customer relations as part of the “customer contact” theory.
The employer’s right to confidentiality serves as the second justification for the use of a noncompetition agreement. When an employee has procured special knowledge of “information pertaining especially to the employer’s business[,]” the employer has an interest in protecting that information by imposing reasonable restrictions on the employee. In the words of one court, a covenant that is reasonable in time and geographic scope shall be enforced to the extent necessary “(1) to prevent an employee’s solicitation or disclosure of trade secrets, (2) to prevent an employee’s release of confidential information regarding the employer’s customers, or (3) in those cases where the employee’s services to the employer are deemed special or unique.”
Once the court has determined that a legitimate business interest needing protection exists, it will turn to a traditional reasonableness analysis. To determine reasonableness, courts will often weigh the proportional severity of the harm that would be experienced by the employer and the employee to determine what is reasonable, and then make enforcement decisions accordingly. In measuring the potential harm and to examine the interests of the parties, courts consider numerous items outside the terms of the agreement. In most jurisdictions, whether by statute or common law, agreements must be reasonable in three ways: duration, geography, and scope of activity.
The blue pencil doctrine is a “judicial standard for deciding whether to invalidate the whole contract or only the offending words.” At common law, courts rarely enforced unreasonable agreements partially. A court would either invalidate the agreement or remove the offending passage. The blue pencil doctrine rests, in large part, on the “understanding that there is not necessarily a sinister purpose behind an overbroad restrictive covenant.” When considering whether to use the blue pencil doctrine, courts can look to the good faith of the employer.
Use of the blue pencil doctrine differs in each state. There are three approaches to the blue pencil. As the United States First Circuit summarized:
Courts presented with restrictive covenants containing unenforceable provisions have taken three approaches: (1) the “all or nothing” approach, which would void the restrictive covenant entirely if any part is unenforceable, (2) the “blue pencil” approach, which enables the court to enforce the reasonable terms provided the covenant remains grammatically coherent once its unreasonable provisions are excised, and (3) the “partial enforcement” approach, which reforms and enforces the restrictive covenant to the extent it is reasonable, unless the “circumstances indicate bad faith or deliberate overreaching” on the part of the employer.
Some states use a “no modification” approach to noncompetition agreements. Known as the “all or nothing” rule, this approach forbids the use of the blue pencil doctrine. Courts following this approach avoid either modifying or striking overbroad provisions in noncompetition agreements. In “no modification” states, courts first decide whether the restrictive covenant is reasonable as written. If it is not, courts will not rewrite or eliminate provisions, but will refuse to enforce the agreement at all.
The “strict blue pencil” rule applies to the second approach. The strict blue pencil rule does not permit courts to modify overly broad noncompetition agreements. In a strict blue pencil state, “only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words.” The strict approach allows courts to strike overbroad provisions and enforce the remainder of the agreement. The agreement is therefore enforceable if the agreement is reasonably limited after removal of the overbroad provisions.
Finally, other states have adopted a liberal form of blue pencil doctrine: the “reasonable modification” approach. Some courts refer to this as the “equitable modification” rule. These states permit a court to rewrite an overbroad non-competition agreement to reasonably limit the restrictions found in the agreement.
The blue pencil doctrine, although used in most states, is not universal. Certain states, notably Virginia and Wisconsin, follow the “no-modification” rule. This rule acknowledges the inequities that result from a rule that imposes an agreement on the parties that was not part of the original bargained-for exchange. For instance, courts in Virginia evaluate the noncompetition agreement as written without revising or eliminating provisions. Virginia courts lack the authority to “‘blue pencil’ or otherwise rewrite the contract” to eliminate any illegal overbreadth. Ambiguous language susceptible to two or more differing interpretations, one of which is functionally overbroad, renders the entire noncompetition agreement unenforceable. This remains true even though it may be reasonable in the context of the factors present.
In another example, Wisconsin has taken a strong statutory stance against the doctrine. The state codified its “no blue pencil rule” in § 103.465 of the Wisconsin Statutes. According to the statute, “[a]ny covenant [not to compete] . . . imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”
The strict blue pencil doctrine allows a court only to strike unreasonable contractual provisions. The court may not revise or add language to the agreement. The strict blue pencil doctrine seeks to limit employer overreach. This approach permits removal of the offending provisions and creates an otherwise enforceable agreement. Courts use the strict blue pencil rule to strike an unreasonable restriction “to the extent that a grammatically meaningful reasonable restriction remains after the words making the restriction unreasonable are stricken.”
Indiana courts utilize the strict blue pencil doctrine. In the past, Indiana courts have enforced reasonable restrictions, but have struck unreasonable restrictions, if the restrictions are separable. Despite the long history of the practice, Indiana courts did not adopt the term “blue pencil doctrine” until 1982. Indiana law provides that, “when an employer drafts an overly broad covenant, the price of over-reaching is that the restriction cannot be enforced at all, even if it would have been possible to draft and enforce a narrower, more reasonable restriction.” Even in those cases where the equities of the situation might suggest enforcement, courts must reject the overly broad clause rather than modify it. If, however, the noncompetition agreement contains clearly separated parts, and if some parts are reasonable and others are not, the court may sever the unreasonable clauses so that the remaining reasonable portions may be enforced. The strict blue pencil approach restricts a court: it may apply only the terms within the contract and cannot add terms.
Similarly, in Arizona, courts will not add terms or rewrite provisions to covenants. They will, however, blue pencil restrictive covenants, “eliminating grammatically severable, unreasonable provisions.” In the case of severable clauses, an Arizona court can enforce the lawful part and ignore the unlawful part. Even though courts may eliminate contractual provisions, they cannot rewrite them for the parties. The strict blue pencil doctrine cannot rescue those documents that require the court to rewrite the durational requirement or add geographic limitations. The strict blue pencil doctrine in Arizona permits courts to consider disparate clauses separately. But without severable language to eliminate to create a reasonable agreement, the court lacks the power to enforce the agreement.
In strict blue pencil states, if the agreement fails to meet the standard of reasonableness in any of the three areas—scope, duration, or geography—the court will deem the entire agreement unenforceable. For instance, in Valley Medical Specialists v. Farber, the Arizona Supreme Court addressed the enforceability of a non-compete clause prohibiting a departing physician from practicing medicine within a five-mile radius of any of three specific clinic locations for a period of three years. The contract contained a reformation clause that permitted a court, if necessary, to amend the noncompetition provision to make it enforceable. Despite the reformation clause, the court held that the agreement was unenforceable because both the scope of the activity prohibited and duration were unreasonable. Thus, the reformation clause did not permit the appellate court to rewrite the non-compete provision “in an attempt to make it enforceable.” The court explained, under Arizona law, courts may blue-pencil a covenant by “eliminating grammatically severable, unreasonable provisions,” but they are prohibited from adding or rewriting provisions.
Some courts in strict blue pencil states have based their decision to not narrow the scope of a clause because the parties did not agree to new terms. The strict blue pencil rule holds that a court may not, under the guise of interpretation, redraft a noncompetition agreement to make it more reasonable or narrower. The Georgia Supreme Court explained the proper application of the strict blue pencil doctrine. The court noted that using this approach, “[t]he ‘blue pencil’ marks, but it does not write. It may limit an area, thus making it reasonable, but it may not rewrite a contract void for vagueness . . . .” The Eleventh Circuit has explained that in a strict blue pencil jurisdiction, courts “cannot rewrite . . . restrictive covenants, inserting clauses and providing sufficient limitations so as to render the restrictions reasonable and enforceable. . . .”
West Virginia follows a similar approach in its enforcement of noncompetition agreements. West Virginia courts apply a “rule of reason” that determines whether a noncompetition agreement should be enforced. Under the West Virginia rule, courts should approach restrictive covenants with “grave reservations.” In West Virginia, therefore, an unreasonable agreement on its face is void and unenforceable. Any excessively broad covenant with respect to time or geographic scope is unreasonable on its face.
An unreasonably broad provision also renders the entire covenant unenforceable in North Carolina. Under North Carolina law, “equity will neither enforce nor reform an overreaching and unreasonable covenant.” More specifically, while North Carolina’s blue pencil rule restricts what the court may do to alter an unenforceable covenant, a court “may choose not to enforce a distinctly severable part of a covenant in order to render the provision reasonable.”
The liberal blue pencil doctrine gives a court more latitude to make substantive changes to an agreement. In these states, courts may use the blue pencil doctrine to alter an unreasonable noncompetition agreement and enforce the agreement to the extent that it is reasonable. Using the liberal blue pencil approach, a court may modify the agreement so that it is no broader than what is reasonably necessary to protect the employer.
Minnesota is a liberal blue pencil state with limited restrictions on the equitable powers of courts. In the case of Klick v. Crosstown State Bank of Ham Lake, Inc., for instance, the court stated that it had the power and discretion to modify or not modify an employment contract, depending upon equitable considerations and the specific facts of the case. Illinois also follows the liberal blue pencil rule, allowing courts “to modify . . . unreasonable terms of an agreement in order to make it reasonable.”
New Jersey provides another example of a jurisdiction that applies the blue pencil rule liberally. There, courts will enforce unreasonable agreements to the extent that is reasonable under the circumstances, rather than deem the covenant void ab initio. This question of partial enforcement does not depend upon the divisibility of a contract clause, but rather asks if “partial enforcement is possible without injury to the public and without injustice to the parties.” Likewise, Pennsylvania courts also use the liberal blue pencil doctrine. A court may still save the agreement, even when confronted with a “limitless” restriction that would render a noncompetition clause inherently unreasonable. Under Pennsylvania law, a court sitting in equity may enforce an overbroad covenant and, to cure the overreach, draft a restriction to make it reasonable and enforceable.
Massachusetts and New Hampshire also adhere to the liberal blue pencil doctrine. In Massachusetts, “courts will not invalidate an unreasonable noncompetition covenant completely but will enforce it to the extent that it is reasonable.” In New Hampshire, “[e]ven if the trial court determines that the covenant is unreasonable, the employer nonetheless may be entitled to equitable relief in the form of reformation or partial enforcement of an overly broad covenant upon a showing of his exercise of good faith in the execution of the employment contract.”
Maine applies the liberal blue pencil doctrine in an unusual manner. In Maine, the court disregards the agreement as drafted and agreed to by the parties. Instead, the court considers the scope of the agreement limited by the extent to which the employer seeks to enforce it. In essence, the contractual terms are too abstract and, as a result, the contract between the parties lacks meaning. The contractual terms are disregarded. The Maine Supreme Court developed this unique interpretation of the blue pencil doctrine in Chapman & Drake v. Harrington, where the court wrote the following: “Since the reasonableness of the noncompetition agreement depends upon the specific facts of the case . . . we assess that agreement only as . . . [the plaintiff] has sought to apply it and not as it might have been enforced on its plain terms.”
In 2017, the Nevada legislature reacted to the Nevada Supreme Court’s rejection of the blue pencil doctrine. In Golden Road Motor Inn v. Islam, discussed more fully below, the court had refused to alter an overly broad noncompetition agreement. Rather than respecting the well-reasoned opinion of the Nevada Supreme Court, the Nevada legislature moved to require courts to make unreasonable agreements reasonable by using the blue pencil. To overturn the Nevada Supreme Court’s decision, the legislature chose to revise the state’s previous statute addressing noncompetition agreements. The previous law did not include any language regarding the judicial modification of unreasonable noncompetition agreements.
The new statute did two things. First, it provided a new analytical structure to determine which noncompetition agreements in Nevada are valid and enforceable. The new law requires that agreements be evaluated using a standard different than that set forth in prior court decisions or by previous versions of the statute. The revised statute states that restrictive covenants are unenforceable unless the employer establishes that the agreement
(a) is supported by valuable consideration; (b) does not impose any restraint that is greater than is required for the protection of the employer for whose benefit the restraint is imposed; (c) does not impose any undue hardship on the employee; and (d) imposes restrictions that are appropriate in relation to the valuable consideration supporting the noncompetition covenant.
The statute also contains a legislative mandate requiring courts to use the blue pencil:
If an employer brings an action to enforce a noncompetition covenant and the court finds the covenant is supported by valuable consideration but contains limitations as to time, geographical area or scope of activity to be restrained that are not reasonable, impose a greater restraint than is necessary for the protection of the employer for whose benefit the restraint is imposed and impose undue hardship on the employee, the court shall revise the covenant to the extent necessary and enforce the covenant as revised.
The statute continues, “Such revisions must cause the limitations contained in the covenant as to time, geographical area and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than is necessary for the protection of the employer for whose benefit the restraint is imposed.”
This provision expressly rejected the Nevada Supreme Court’s Golden Road decision. Interestingly, the Nevada legislature’s action went well beyond what the dissent in Golden Road called for. There, the dissenting justices argued that modification should occur, but only in limited circumstances. The new law, however, robs courts of their discretion to not modify an agreement. And because the court has no ability to refuse to modify the agreement, employers face little chance of sanction for requiring the employee to sign an unreasonable agreement. Rather, because courts may not make an inquiry into the motives of the employers, the new statute incentivizes an employer to overreach in the making of noncompetition agreements.
Arkansas also requires its courts to remove their adjudicatory hats, pick up their blue pencils, and modify unreasonable agreements. Prior to 2015, Arkansas courts viewed noncompetition agreements with disfavor. State courts would not enforce any part of a noncompetition agreement that they had determined was unreasonable in length of term or geographic scope. Courts in Arkansas followed the strict compliance rule: if the non-compete agreement was unreasonable with respect to a particular restrictive covenant, then a court would not enforce any part of the agreement. Moreover, if a court found the agreement to be unreasonable, and thus unenforceable, the employer seeking to enforce the agreement could be required to pay for the breaching employee’s attorney’s fees.
In 2015, that approach changed. The Arkansas legislature expanded the enforceability of noncompetition agreements in Arkansas. The state gave employers the ability to restrict competition after the termination of the employment relationship, even if a court found the terms of a non-compete agreement to be unreasonable. The new law allows courts to enforce the reasonable parts of a non-competition agreement, while requiring courts to amend the over-broad, unenforceable provisions. A court may no longer strike down the entire agreement.
Arkansas courts are now required to rewrite the unreasonable sections of the agreement, without striking down the entire agreement. The statute states: “If restrictions in a covenant not to compete agreement are found to be unreasonable and impose a greater restraint than is necessary to protect the protectable business interest of the employer under subdivision (a)(1) of this section, the court shall reform the covenant not to compete agreement . . . .” The new law orders the court to reform the 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.” In essence, even if a court determines that the terms of an employer’s noncompetition agreement are unreasonable, the employer does not lose the right to enforce the agreement. Instead, it can enforce the agreement to the extent of the court’s reformation. In such a case, it appears that there are no negative consequences to an employer’s overreach.
The Arkansas statute further expanded the ability of employers to restrict the mobility of their employees. First, the statute provides that continued employment constitutes sufficient consideration for the employee to enter into the noncompetition agreement. The statute says nothing about how long the continuation of employment must be—it seems likely that only another day of employment is required to constitute consideration. Moreover, the Arkansas statute limits the need for a geographical restriction. If the noncompetition agreement does not contain a specific or defined geographic restriction, the absence of such provisions does not make the agreement overly broad, so long as the agreement is limited with respect to time and scope in a manner that is no greater than necessary to defend the protectable business interest of the employer.
The Arkansas statute also provides for a lengthy time restriction, stating that a two-year period of restraint is presumptively reasonable. Unless the employee can establish that the particular facts and circumstances establish unreasonableness, the employee will remain bound. Finally, the new statute provides employers with easier enforcement of the law. The law states that “a court may award the employer damages for a breach of a covenant not to compete agreement, appropriate injunctive relief, or both, if appropriate.” Additionally, the statute presumes that, to obtain injunctive relief, “[t]he immediate harm associated with the breach of a covenant not to compete agreement shall be considered irreparable.”
Idaho too created rules requiring courts to blue pencil unreasonable agreements. Historically, Idaho courts hesitated to modify unreasonable agreements so as to make them reasonable. Instead, courts often simply chose to not enforce those unreasonable agreements, in whole or in part. The state legislature, however, altered this approach. Idaho law now states that, if a noncompetition agreement contains unreasonable restrictions, “a court shall limit or modify the agreement or covenant as it shall determine necessary to reflect the intent of the parties and render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement or covenant as limited or modified.”
Texas also implemented rules designed to make it easier for employers to impose noncompetition agreements on employees. The law requires that courts modify unreasonable agreements as to make them reasonable and enforceable. The Texas statute provides that, if a court determines that the restrictions in an agreement
are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee, the court shall reform the covenant to the extent necessary to cause the limitations . . . to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promisee and enforce the covenant as reformed . . . .
The Georgia legislature instituted laws regarding judicial modification of unreasonable noncompetition agreements. The law overturned precedent that prevented courts from modifying unreasonable agreements. The statute now expressly permits the practice. The statute does not, however, mandate the use of the blue pencil. Presumably, this omission was deliberate. Years ago, the Georgia legislature attempted to mandate the use of the blue pencil doctrine and require courts to reform unreasonable agreements. The Georgia Supreme Court objected, however, to the legislative attempt to undermine the court’s role in determining the enforceability of unreasonable agreements and found the statute unconstitutional. In 2009, the Georgia court reiterated its stance, writing, “[T]his Court has rejected a legislative attempt to usurp the application of standards of reasonableness to noncompetition covenants in employment agreements.”
As noted above, the Nevada legislature changed its blue pencil law in response to the Nevada Supreme Court’s decision in Golden Road Motor Inn, Inc. v. Islam. In 2016, the Nevada Supreme Court held that noncompetition agreements that go “beyond what is necessary” to protect the former employer’s interests are unreasonable and unenforceable. The court further urged “exercise of judicial restraint when confronted with the urge to pick up the [blue] pencil.”
In that case, the employee, Sumona Islam, executed several documents, including a noncompetition agreement, with her employer, Atlantis Casino. The agreement prohibited Islam from employment at, or in association with, any other gaming establishment within 150 miles of the Atlantis Casino. The restriction called for a term of one year from the termination of employment. Three years later, Islam left her job to take a position with a competitor, Grand Sierra Resort. Before leaving, however, she altered and concealed the contact information to eighty-seven players in the Atlantis electronic database. She also copied the names of casino players, their contact information, level of play, game preferences, credit limits, and other proprietary information from the Atlantis database into her personal notebook. Shortly after starting her position with her new employer, Islam placed the information that she copied from the Atlantis into the Grand Sierra database. Because it believed that Islam’s information came from previous relationships, Grand Sierra marketed its casinos to the Atlantis clients.
Despite the unusual circumstances, the Nevada Supreme Court found that Islam’s noncompetition agreement was unreasonable, given that it restricted more than was necessary to protect Atlantis’s interests. The Court also found that the agreement, which restricted her ability to find employment, unduly burdened Islam. The court refused to modify or strike terms from the agreement to make it reasonable. The court stated, “Rightfully, we have long refrained from reforming or blue-penciling” private parties’ contracts. The Golden Road court noted the potential for abuse by employers of the blue pencil doctrine. The court cited with favor the Georgia Supreme Court’s opinion in Richard P. Rita Personal Services International, Inc. v. Kot. In that case, the court warned of the consequences of a court’s modification of a noncompetition agreement, cautioning that “if severance is generally applied, employers can fashion truly ominous covenants with confidence that they will be pared down and enforced when the facts of a particular case are not unreasonable . . . .” As the Golden Road court noted:
For every covenant that finds its way to court, there are thousands which exercise an in terrorem effect on employees who respect their contractual obligations and on competitors who fear legal complications if they employ a covenantor, or who are anxious to maintain gentlemanly relations with their competitors.
The Nevada Supreme Court criticized the blue pencil doctrine by noting three negative aspects of the doctrine: (1) the possibility of “trampling the parties’ contractual intent” through modification; (2) the need to preserve judicial resources; and (3) the requirement to take notice of the employer’s superior bargaining position. The court reiterated that its decision to show restraint in the modification of an employment agreement “is sound public policy. Restraint avoids the possibility of trampling the parties’ contractual intent.”
First, the court noted that committing any trespass on the parties’ intent, even a slight one, “is indefensible, as our use of the pencil should not lead us to the place of drafting.” Instead, the court noted that the judicial system should refrain from creating new agreements. “Drafting would simply be inappropriate public policy as it conflicts with the impartiality that is required of the bench.”
Second, the Nevada court noted that restraint preserves judicial resources. Restraint is consistent with basic principles of contract law that hold the drafter to a higher standard. The court recognized that re-drafting a contract wastes time and resources. Expending the time and energy of the court on such drafting “is unwarranted and blurs the line between the bench and the bar.” Courts lack the power to make private agreements. “Such actions are simply not within the judicial province.”
Third, and perhaps most importantly, the court emphasized the disparity in bargaining power between the employer and its employee. “A contract must be construed most strongly against the party who prepared it, and favorably to a party who had no voice in the selection of its language.” A court applies a strict test of reasonableness to restrictive covenants in employment cases because of the nature of the employee-employer relationship. As the Golden Road court noted, “One who has nothing but his labor to sell, and is in urgent need of selling that, cannot well afford to raise any objection to any terms of the contract of employment offered to him, so long as the wages are acceptable.” Thus, the contract terms should be construed against the employer.
Use of the blue pencil to amend an agreement favors the employer. The employer “holds a superior bargaining position, and . . . drafts a contract that is greater than required for its protection and is thereafter rewarded with the court’s legal drafting aid, as the other party faces economic impairment, restrained in his trade. In the context of an agreement that is in restraint of trade, a good-faith presumption benefiting the employer is unwarranted.” The court found that its refusal to modify any unreasonable agreement discourages employers from getting the benefits of a “free ride,” secure in the knowledge that a court will correct their mistakes.
In 2015, the Nebraska Supreme Court had a similar opportunity to decide whether Nebraska courts should utilize the blue pencil doctrine to modify unreasonable noncompetition agreements. In Unlimited Opportunity, Inc. v. Waadah, the court analyzed a noncompetition clause contained in a franchise agreement. The franchise agreement was between the franchisor, Jani-King, and franchisee, Waadah. The agreement contained a clause that barred its franchisees from competing with Jani-King following termination of the agreement. The clause prohibited a franchisee from operating the same or a similar business within the territory of the agreement for two years. The clause further prohibited a franchisee from operating for a period of one year a competing business in any other territory in which a Jani-King franchise operated.
The trial court objected to the scope of the territorial restraint. The court found that the limitation was unreasonable because it prevented Waadah from working “in any other territory in which a Jani-King franchise operates.” Because Jani-King did business around the world, the court found the geographic limitation to be unreasonably large, given that it prevented (in theory at least) Waadah from competing anywhere in the world. Jani-King appealed, claiming that the noncompetition agreement was not unreasonable, because it had never attempted to enforce it. The Nebraska appellate court ruled in favor of Waadah.
In its decision, the Nebraska Supreme Court criticized the use of the blue pencil doctrine. The court stated that “it is not the function of the courts to reform a covenant not to compete in order to make it enforceable.” Once again, it rejected the blue pencil rule, stating that “we must either enforce [a covenant] as written or not enforce it at all.” The court cited “important public policy considerations” to justify its finding. The court rejected contract reformation “because it creates uncertainty in employees’ contractual relationships with franchisors, increases the potential for confusion by parties to a contract, and encourages litigation of noncompete clauses in contracts.”
In Hassler v. Circle C Resources, the employer, Circle C Resources, sued its former employee, Charlene Hassler, for breach of a noncompete agreement. The trial court used the blue pencil rule to modify the restrictions in the noncompete agreement to make them reasonable, found that Hassler breached the now modified agreement, and granted summary judgment to Circle C. The Wyoming Supreme Court disagreed and held that “it is no longer tenable for courts to use the blue pencil rule to modify unreasonable noncompete agreements.”
Hassler’s agreement with Circle C contained a clause expressly providing to a court the right to modify the agreement, if it concluded that one or more of the restrictions was unreasonable.
C. Maximum Restrictions of Time, Scope, and Geographic Area Intended. The parties agree and acknowledge that the time, scope and geographic area and other provisions of this agreement have been specifically negotiated by the parties, and employee specifically agrees that such time, scope, and geographic areas, and other provisions are reasonable under these circumstances. Employee further agrees that if, despite the express agreement of the parties to this agreement, a court should hold any portion of this agreement unenforceable for any reason, the maximum restrictions of time, scope, and geographic area reasonable under the circumstances, as determined by the court, will be substituted for the restrictions held unenforceable.
The court noted that courts generally enforce contracts as written, and “are not at liberty to rescue parties from the consequences of a poorly made bargain or a poorly drafted agreement by rewriting a contract under the guise of construing it.” But then the court stated that contracts contrary to public policy are not “‘recognized by the court, and the parties to the contract are left as the court finds them.’”
The court noted the unique vagaries of the balancing test. “When considering the enforceability of agreements not to compete, the court must balance competing principles—the public’s interest in free competition and trade, the parties’ freedom to contract, and the employee’s freedom to work.” To overcome the presumption, “it is incumbent on the [employer] to prove that there existed some special circumstances which rendered [the restraint on trade] reasonably necessary for the protection of the [employer’s] business.”
The New York Court of Appeals, New York State’s highest court, warned employers that courts may refuse to blue pencil restrictive covenants if their formation involved the “coercive use of dominant bargaining power.” In Brown & Brown Inc. v. Johnson, the court noted that the employee at issue was not employed at the time that she signed the covenant. Her unemployment raised questions as to whether that “caused her to feel pressure to sign the agreement rather than risk being unemployed.” The Brown court noted that a “case-specific analysis” was necessary to determine these surrounding circumstances. The court found that the presence of fact issues prevented summary judgment.
In March 2016, the North Carolina Supreme Court rejected a lower court’s modification of an overly broad noncompetition agreement. In Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, the court noted that “blue-penciling is the process by which ‘a court of equity will take notice of the divisions the parties themselves have made [in a covenant not to compete], and enforce the restrictions in the territorial divisions deemed reasonable and refuse to enforce them in the divisions deemed unreasonable.’” The Beverage Systems court, however, reaffirmed North Carolina’s strict interpretation of the blue pencil rule, which permits a court to strike overbroad restrictions, but not create new ones to take their place: “[W]hen an agreement not to compete is found to be unreasonable, . . . the court is powerless unilaterally to amend the terms of the contract.”
The court was not swayed by the language of the agreement, which expressly gave to the court the power to modify the territorial restriction if the court found it to be overbroad. The court noted that “parties cannot contract to give a court a power that it does not have.” Because striking the unreasonable territory provision resulted in “no territory left within which to enforce the covenant not to compete,” the court refused to enforce the noncompetition agreement.
The court criticized the notion that courts should substitute their terms for those of the parties to the contract. “Courts are not at liberty to rewrite contracts for the parties. We are not their guardians, but the interpreters of their words. We must, therefore, determine what they meant by what they have said—what their contract is, and not what it should have been.” The court criticized the idea that the parties could “assign their drafting duties as parties to a contract.” Permitting this modification would thus reduce the court to the “role of scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation.” The court concluded that it saw “nothing but mischief in allowing such a procedure.”
Similarly, in a case applying North Carolina law, the U.S. Fourth Circuit Court of Appeals refused to modify an overly broad agreement. The employer sought to enjoin a former employee from working for a competitor, citing a noncompetition agreement that stated that the former employe could “not directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area.” The court found several problems with this language. First, the scope of the restricted activity was created by reference to competitor, thus preventing the former employee from working for a competitor in any capacity. Second, the restriction applied prospectively as well. If the employer took up an entirely new line of business, the former would presumably be unable to work in that industry as well. The court criticized the agreement, which focused not on employment that increases the risk of unfair competition, but instead on whether the new employer is similar to the old. “That is not a sufficient limiting factor for a covenant not to compete.”
The employer urged the court “to take up North Carolina’s ‘blue-pencil’ doctrine and strike the offending language.” But the Fourth Circuit refused to do so, noting the limited reach of North Carolina’s blue pencil doctrine. The court acknowledged that a court may choose not to enforce a distinctly separable part of a covenant in order to render the provision reasonable. But North Carolina’s blue-pencil rule “severely limits what the court may do to alter” an overly broad covenant not to compete.
In Illinois, at least one state appellate court refused to modify an unreasonable restriction. After examining the overly broad restrictions, the court found that it could not modify the agreement as the problems were “too great to permit modification.” The court’s refusal to modify the agreement was especially noteworthy in that the agreement contained a clause expressly permitting judicial modification. The court explained that “[i]n determining whether modification is appropriate, the fairness of the restraints contained in the contract is a key consideration.” The court’s position was consistent with Illinois precedent. Illinois courts “may slightly alter an agreement to reflect the intent of the parties rather than completely invalidating them when possible.” Nevertheless, in deciding whether to modify unreasonable agreements, courts should consider “the degree of unreasonableness of the original restraint.” If a noncompetition agreement prevents competition per se, and would require courts to draft a new provision, “the proper course of action is to refuse enforcement of the overly restrictive provision altogether.”
In Turnell v. CentiMark Corp., the U.S. Court of Appeals for the Seventh Circuit applied Pennsylvania law to modify an unreasonably broad agreement. The court stated that where “restrictions are so ‘gratuitous[ly]’ overbroad that they ‘indicate[] an intent to oppress the employee and/or to foster a monopoly,’ a court of equity may refuse to enforce the covenant at all.” Nevertheless, the court agreed that, “absent bad faith, Pennsylvania courts do attempt to blue-pencil covenants before refusing enforcement altogether.”
A legislative mandate to amend unreasonable noncompetition agreements encourages employers to draft broad agreements, secure in the knowledge that mistakes in drafting not only can be corrected but must be corrected by a court. The blue pencil doctrine permits employers to overreach and, in so doing, harms employees. Employers may enter into unreasonable agreements, whether intentionally (or negligently), secure in the knowledge that their bad faith (or lack of care) will be excused by a court. The employer can take advantage of a free ride on a contractual provision that the employer knew (or should have known) would never be enforced. In the words of one commentator, “This smacks of having one’s employee’s cake, and eating it too.” As the court in Rita Personal Services noted, “[T]he mobility of untold numbers of employees is restricted by the intimidation of restrictions whose severity no court would sanction.”
Blue-penciling of the employment agreement creates an “in terrorem effect on an employee, who must try to interpret the ambiguous provision to decide whether it is prudent, from a standpoint of possible legal liability, to accept a particular job or whether it might be necessary to resist plaintiff’s efforts to assert that the provision covers a particular job.” The in terrorem effect of an overbroad agreement unduly restricts an employee’s ability to change jobs.
In a time of near-full employment, employers must compete for the best employees. In a free market, employees would be able to sell their services to the employer that provided the highest wages and the best benefits. By legislatively mandating the blue pencil, however, states have placed a heavy thumb on the scale—to the disadvantage of employees. Enforcement of a barely reasonable noncompetition agreement threatens the livelihoods of employees who had little say in the original language of the agreement.
In making an employment agreement, the disparity in bargaining power between the employer and the employee is great. The parties are in very unequal bargaining positions. At the moment that an employee contracts with his employer, the employee is aware that he must agree to almost any provision regarding the restriction of mobility, even an unreasonable one. “Under a blue pencil doctrine, the employer then receives what amounts to a ‘free ride’ on the provision, perhaps knowing full well that it would never be enforced.”
It seems inevitable that use of the blue pencil doctrine, whether a result of judicial discretion or statutorily mandated, will increase the prevalence of overly broad clauses. Employers may overreach, whether negligently or on purpose. The Rita Personnel Services court properly noted the negative consequences of the blue pencil doctrine. The court explained that “[i]f severance is generally applied, employers can fashion truly ominous covenants with confidence that they will be pared down and enforced when the facts of a particular case are not unreasonable.” In Valley Medical Specialists v. Farber, the Arizona Supreme Court criticized the use of the blue pencil doctrine, noting that “employers may therefore create ominous covenants, knowing that if the words are challenged, courts will modify the agreement to make it enforceable.”
Even in the absence of a legislative mandate, the blue pencil doctrine confuses employees, employers, and the court system. The doctrine prevents all parties—employees, employers, and courts—from predicting the proper construction of a noncompetition agreement. The blue pencil doctrine builds a level of uncertainty into every employment relationship. In those states that require the use of the blue pencil doctrine, an employee seeking greater opportunity will never be certain of her rights and will not know the actual terms of her noncompetition agreement. This uncertainty carries a cost: “the employee who remains at his position, fearful that the blue pencil would not help his case, suffers lost opportunity costs. The employee who leaves his position may be forced to accept a reduced salary from a new employer due to the perceived risk of litigation.” In Dearborn v. Everett J. Prescott, Inc., the court captured the heart of the problem:
The restless or departing employee could have no “clear understanding of what conduct is prohibited.” He could not secure meaningful legal advice because he could not know what the employer might want to enforce. He could not ask the employer to decide without effectively burning bridges with the employer.
The blue pencil doctrine also burdens employers. The blue pencil doctrine deprives employers of access to well-trained employees. A company that hires an employee nominally bound by a noncompetition agreement with a former employer may face potential liability for, among other things, tortious interference with contract. An employer seeking to hire a new employee must weigh the possible benefits of the hire against the possible burden of a lawsuit for tortious interference with contract by the previous employer. Moreover, the blue pencil doctrine prevents an employer from ever knowing to what extent the previous noncompetition agreement will be enforced. The noncompetition agreement is a double-edged sword in the context of employment: every employer that successfully restricts an employee from leaving deprives another employer from that employee’s efforts.
Finally, the blue pencil doctrine creates confusion for the judicial system. A court’s role is to adjudicate disputes and not to draft agreements. Courts that in the past have been called upon to decide questions of reasonableness must now also be charged with the responsibility of then drafting substitute noncompetition agreements. A court should not be burdened with this responsibility. The use of the blue pencil represents a poor use of judicial resources. It is hard to imagine a greater waste of judicial time and energy than the need to re-draft a contract that has already been negotiated and executed.
The compelled use of the blue pencil doctrine represents bad public policy. The blue pencil doctrine creates an agreement containing terms that the parties did not agree to. The power to create a contractual obligation other than what the parties agreed to should rest only with the parties. A court has the responsibility of interpreting contracts and not writing them. “[S]etting a precedent that establishes the judiciary’s willingness to partake in drafting would simply be inappropriate public policy as it conflicts with the impartiality that is required of the bench, irrespective of some jurisdictions’ willingness to overreach.” Delegating the drafting of employment agreements “blurs the line between the bench and the bar.” Courts should lack the power to create such agreements.
In considering whether to enforce a noncompetition agreement, a court must contend with competing interests. A court must first acknowledge that parties have a right to contract with each other. Moreover, the parties have the right to negotiate the terms of that agreement. Courts must generally enforce contracts according to their terms. The judge’s only role is to interpret contracts consistently with the parties’ intent. A court should not rescue parties from the consequences of their own poor drafting. At the same time, however, a court safeguards society by refusing to enforce contracts that violate public policy. The common law policy against restraints of trade is embedded deeply into our legal consciousness. The public has an interest in free trade and competition. Society wants to encourage employees to pursue better career opportunities and launch new enterprises. Contracts that prevent such efforts contravene public policy.
The blue pencil doctrine creates an exception to this important judicial function. The doctrine frees courts from their duty to guard against enforcing contracts that violate public policy. Courts are given license (or even required) to ignore the parties’ agreement. Rather than interpreting and construing a contract, the court now takes on the role of contract maker, substituting its judgment for that of the parties. In doing so, the court abandons its traditional role of respecting the parties’ intentions and guarding society’s interests. For all these reasons, the time has come to cast aside the blue pencil doctrine and return focus to the creation of reasonable agreements.
