Non-Compete Agreements Need to Be Carefully Drafted!

Non-Compete clauses have been an important tool in business practice for many years, used primarily in employer/employee relations and also as part of business purchases, both within the context of limiting future competition and adding value to the business. When one sells a trade or business and, as an incident of the sale, covenants not to engage in the same business in competition with the purchaser, the covenant is valid and enforceable (1) if it is reasonably necessary to protect the legitimate interest of the purchaser; (2) if it is reasonable with respect to both time and territory; and (3) if it does not interfere with the interest of the public. Within the employment context, a similar test has been developed. In the past, a doctrine referred to as the “blue pencil doctrine” limited a North Carolina court from revising a poorly drafted or overly restricted non-compete clause.  The agreement was either upheld as drafted or failed and was unenforceable if it was unreasonable or overly broad.  However, in a 2014 case, Beverage Systems of the Carolinas, LLC  v. Associated Beverage Repair, LLC, the North Carolina Court of Appeals went beyond the past rulings and extended the court’s power to revise beyond the strict blue pencil doctrine, based on the provision in the contractual agreement between these parties expressly granted the court the authority to revise the restrictive covenant in the asset purchase agreement. At that point the question became whether this type of clause could be inserted into an employment clause, allowing a court at a later date to potentially revise or modify and agreement if there was a dispute. The issue seems to have been addressed in a recent United States District of NC court case Lab. Corp. of Am. Holdings v. Kearns, in which a similar provision allowing a court to revise any portion of the agreement that was unreasonable or overbroad, was not given effect. The District Court found that at this stage, it is not clear that North Carolina courts would extend Beverage Systems to the employment context, citing the Beverage Systems ruling as limited to the sale of a business. In contrast, the Lab Corp decision noted that the North Carolina Supreme Court has long emphasized that contracts restraining employment are looked upon with disfavor and further stated that even assuming that the North Carolina Supreme Court would accept the rule from Beverage Systems, LabCorp had not made a clear showing that North Carolina’s appellate courts would extend the holding to employment agreements.

The lesson is that when drafting a non-compete agreement, a party is wise to obtain counsel and draft the agreement narrowly and reasonably.  Do not draft it with any expectation that the Courts will revise or modify the clause to conform to the requirements necessary to enforce it.