Historically, North Carolina’s law of non-competition agreements has prohibited a court from “drafting a new contract for the parties” where it finds an overly broad non-compete agreement. A court has been limited to striking distinctly separable parts of a non-compete agreement, if it found them overbroad, it could not revise or rewrite the offending covenant —a limited “blue pencil” doctrine. Now, a divided panel of the North Carolina Court of Appeals may have partially erased this strict rejection of the full “blue pencil” doctrine in Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, et al., No. COA 14-185 (Aug. 5, 2014), to allow courts greater flexibility in adjudicating non-competition disputes.
The parties executed a non-competition agreement in tandem with the plaintiff’s purchase of the defendant’s business. The agreement specifically provided that a court could revise and refine its duration, scope, or geographic area in the event any of its provisions were determined to be overly broad. After the plaintiff discovered that the defendant created a competing company immediately after the sale, he brought suit.
The trial court found the non-compete agreement’s description of the geographic area, which was not limited to places where the defendant had former customers, was overly broad, covering more territory than was necessary to protect the plaintiff’s legitimate business interests — the maintenance of the plaintiff’s customer relationships. But rather than exercise the authority granted in the non-compete agreement to redraft and limit the description of the geographic area, the trial court left it as it was and determined the clause to be unenforceable. The trial court relied on North Carolina’s long-established, limited blue pencil doctrine in support of its reluctance to rewrite the agreement.
On appeal, a majority of the North Carolina Court of Appeals, in an opinion written by Judge Robert C. Hunter, reasoned that a trial court’s ability to go beyond the restrictions of the “blue pencil” doctrine, specifically in a sale-of-business context, made “good business sense and better protects both a seller’s and purchaser’s interests in the sale of a business.” Finding North Carolina courts have indicated a willingness to recognize and enforce a revised non- compete, Outdoor Lighting Perspectives Franchising, Inc. v. Harders, 747 S.E.2d 256 (2013), the Court distinguished Beverage Sys. from prior cases because the non-competition agreement at issue expressly authorized a court to revise the agreement. It determined that non-competes drafted pursuant to the sale of a business are afforded more latitude than those arising out of the employment relationship since the parties were in relatively equal bargaining positions. Therefore, the Court ruled the trial court should have exercised its power to revise the offend- ing geographic provision to make the agreement enforceable. It remanded the case to the trial court to do so.
Whether Beverage Sys. will be appealed to the North Carolina Supreme Court remains to be seen. The North Carolina Supreme Court historically is more conservative with regard to the enforcement of non-competition agreements than the Court of Appeals. Moreover, it is unlikely that the reasoning in Beverage Sys. would be applied to non-compete agreements arising outside the context of a sale of a business. Regardless, North Carolina employers may be well-served to include a modification provision in their non-compete agreements expressly authorizing court modification so that this argument is available in the event the original covenant is determined to be overbroad.