United States: Draft Carefully: North Carolina Supreme Court Affirms Strict Blue Pencil Doctrine Still Applies To Non-Competes

Last Updated: June 10 2016
Article by Caitlin Goforth

North Carolina courts traditionally recognized their limited power in amending terms of unenforceable non-compete agreements. The "blue pencil" rule permits a court to enforce restrictions that are reasonable, while striking those deemed to be unreasonable. This striking power has always been limited to just that, striking. The courts will not write in any language to make an unenforceable agreement enforceable, and the language of the document must make sense on its own after any deletions. However, a decision by the North Carolina Court of Appeals called into question this doctrine when it ruled a court could rewrite contract terms where the parties expressly gave the court permission to do so in the agreement. Recently, the North Carolina Supreme Court overruled the Court of Appeals, reinstating the traditional rule.

In Beverage Sys. Of the Carolinas, LLC v. Associated Beverage Repair, LLC, two companies in the beverage service industry entered into negotiations for the sale of a business. Both parties signed a non-compete agreement that included geographic terms. In an attempt to be proactive, the agreement explicitly allowed a court to rewrite unreasonably broad portions should any enforceability issues occur in the future. After the parties executed the non-compete, a business dispute arose, and the enforceability of the agreement became a central issue.

The trial court determined the non-compete was overly broad in geographic scope and therefore unenforceable. Even though the agreement specifically allowed for the court to rewrite certain provisions in order to save the non-compete, the trial court refused.

On appeal, the North Carolina Court of Appeals reversed the trial court's ruling. The Court of Appeals agreed with the trial court that the non-compete was unreasonable because the geographic scope was too broad. However, while the appellate court recognized the limitations of the blue pencil doctrine, it determined that the strict rule did not apply. The parties' consent in the agreement for the court to rewrite problematic geographical terms trumped the blue pencil doctrine. This ruling would allow a court to step in and rewrite terms of a non-compete that would be binding between the parties.

In a recent decision, the North Carolina Supreme Court reverted to the old rule. In its decision, the court held, "parties cannot contract to give a court power that it does not have." Where terms of a non-compete are deemed unenforceable, the court will not take on the "role of scrivener" or act as the parties' "guardian." The court said making judges create reasonable terms that the parties should have agreed to at the time of execution is "mischief." Thus, in North Carolina, courts are limited to striking or enforcing terms in the non-compete that were drafted by the parties themselves.

The reaffirmation of the strict blue pencil rule increases the importance of careful drafting when preparing non-competes governed by North Carolina law. Companies using non-competes with overly broad restrictions – whether too broad in geography, time, or activities – cannot rely on the courts to fix their problems for them. In particular, any use of boilerplate non-compete language or language from agreements used in other states may result in an unenforceable agreement. Companies and their attorneys should be sure each non-compete is carefully drafted and no broader than necessary to protect legitimate business interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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