North Carolina Court of Appeals Rewrites Geographic Territory of Non-Compete in Business Purchase Agreement

When it comes to non-compete agreements, North Carolina is a “blue pencil” state. This is a legal term meaning that when faced with an agreement that is overbroad or unreasonable when applied to the particular circumstances at hand, North Carolina courts cannot rewrite the offending restriction to make it reasonable. However, courts can delete, or blue pencil the provision in its entirety.  If the remaining restrictions make legal and logical sense, they can be enforced to that extent.
 
Last week in a 2-1 decision, the North Carolina Court of Appeals concluded that the blue pencil rule does not apply in the sale of business context, where the non-compete expressly gives the court the ability to rewrite its terms in the event they are considered unreasonable. Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC involved a non-compete signed at the time the defendants sold their business to the plaintiff.  The plaintiff alleged that the defendants then began a similar business in North Carolina and South Carolina in violation of the agreement. The defendants contended that the non-compete was overbroad, because their former business had only operated in small parts of the two states.
 
Under the blue pencil rule, if the statewide territories were found to be overbroad, the court could not limit them to parts of the two states, and the non-compete would be unenforceable. However, the majority decision relied on language in the agreement that permitted courts reviewing the restrictions to modify their terms if they were found to be overbroad. The majority concluded that the parties had contractually agreed to waive the blue pencil rule, and to grant courts the power to reform overbroad provisions in the non-compete.
 
The dissenting judge held that North Carolina courts have no underlying authority to rewrite non-compete language. North Carolina employers should read this opinion with caution. First, it dealt with a sale of business, and although not expressed in the decision, its reasoning may not translate to the employment relationship. The majority noted that the parties freely agreed to allow a court to reform the non-compete. In the employment context, courts traditionally read the agreements with a higher degree of scrutiny, and may conclude that someone signing the agreement as a condition of employment is not making a free decision to waive this right.
 
Given the split decision, the North Carolina Supreme Court may decide to review the case. In the meantime, businesses using non-competes in North Carolina should continue to use geographic and other restrictions that are narrowly drawn to their particular business needs, and not rely on courts to salvage overbroad contractual provisions.

Topics:  Non-Compete Agreements, Purchase Agreement, Restrictive Covenants

Published In: Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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