July 13, 2020 Top Story

Reformation Clause Can’t Save Noncompetition Agreements

Courts cannot add terms to make agreements reasonable

By Josephine M. Bahn

An overly broad noncompetition agreement cannot be saved by the agreement’s reformation clause, according to a state supreme court. The court rejected the assertion that the clause, which expressly granted the authority of a court to make the agreement enforceable, could be used by the court. As a result, the noncompetition agreement was not enforceable. The decision is a stark reminder to practitioners that states that apply the “blue pencil” doctrine will not add terms to noncompetition agreements to make them enforceable.

The employee recruited employees from his former employer.

The employee recruited employees from his former employer.

Credit: Dean Mitchell | iStockphoto by Getty Images

Court Denies Addition to Contract Terms

In Heraeus Medical, LLC v. Zimmer, Inc., an employee left his position to work for a competitor. Within a few weeks following his transition to the competitor, the former employee began recruiting other employees from his former employer to the competitor. Because of a noncompete agreement, the former employer sued the former employee, relying on the non-solicitation clause in the agreement. The non-solicitation clause stated that the former employee could not solicit or employ any individual employed by the former employer to work for a competitor. The agreement also contained a reformation clause giving the court the authority to reform any provisions “to make it enforceable under applicable law.”

Following a hearing, the trial court granting a preliminary injunction, enjoining the former employee from recruiting from his former employer. The former employee then appealed to the Indiana Court of Appeals. The court held that the language of the non-solicitation clause was too broad and was unenforceable as written. But, relying on the reformation clause, the appeals court limited the non-solicitation covenant to apply to “those employees in which ‘the former employer’ had a legitimate protectable interest.”

The former employer appealed again, to the Indiana Supreme Court. The former employee argued that the lower court had erred by adding limiting language, which violated the blue pencil doctrine.

On appeal, the Indiana Supreme Court held that since noncompetition agreements are a restraint on trade they should only be enforced if the terms of the agreement are reasonable. Further, Indiana applies the blue pencil doctrine. Under that doctrine, the court may remove unreasonable terms, but it may not add language to make agreements reasonable.

The court held that even though the agreement here contained a reformation clause allowing the court to add language, the blue pencil doctrine bars a court from adding any language to clarify the terms. In its ruling, the court found that the blue pencil doctrine protects parties by not subjecting them to agreements they did not intend to make. The court reasoned that allowing the addition of language under the blue pencil doctrine would encourage parties to draft overbroad or unreasonably restrictive covenants in contracts.

Majority of Jurisdictions Follow the Blue Pencil Doctrine

ABA Section of Litigation leaders note that a majority of jurisdictions do not follow the blue pencil doctrine. “As of last count, 29 states are ‘reformation’ states, meaning that courts are empowered to reform overbroad covenants to make them reasonable, and 14 states are ‘blue pencil’ states, meaning that any overbroad restrictions will be stricken,” opines Erik W. Weibust, Boston, MA, chair of the Section of Litigation’s Business Torts & Unfair Competition Committee’s Restrictive Covenant Subcommittee.

Weibust explains that the remaining states are either “red pencil” states, meaning that if any portion of a covenant is overbroad the entire covenant will be stricken, or the issue has not been definitively resolved, and even in those states that do permit reformation or blue penciling there can be nuances.

Impact on Law Practice

“Despite having the power of reformation, we have seen a number of courts in ‘reformation’ states decline to do so because employers sometimes draft unreasonable restrictions expecting that a court will save the agreement and make it reasonable,” says Christopher S. Hennessy, Chicago, IL, the Section’s Employment & Labor Relations Law Committee newsletter editor.

Hennessy advises that parties should articulate the meanings of each covenant of their non-solicitation or noncompete agreements to ensure that agreed-upon restrictions are specific and reasonable. The failure to do so, he says, leaves open the door for the possibility of a court to strike an entire restrictive covenant.

 

Josephine M. Bahn is an associate editor for Litigation News.


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