Part VII of “The Restricting Covenant” Series: Blue Pencils and Brokers
The start of the new school year, and kids around the country sharpening their pencils to learn in earnest (or at least I hope they are) sparked the topic for this seventh article in this Series. It discusses restrictive covenants and the “blue-pencil” doctrine – a tool many courts use to modify overly broad restraints on post-employment business activities.
Why “Blue” Pencils?
Being the legal geek that I am, I was curious about the origins of the blue-pencil doctrine, including how it got its name, how it applies in restrictive covenant cases, and which states have adopted it given that restrictive covenant law varies state by state.
In the days before electronic editing and word processing, professional editors would use a blue pencil to show corrections and edits to a document. Apparently, the color blue often was selected because it would not show up in some editing, lithographic or photographic reproduction processes. Red pencils were a popular choice to use as well (a certain not-to-be-named partner in my office is very fond of red ink when editing briefs). In any event, many courts use a virtual “blue pencil” to modify, reform, or delete overbroad restrictions in non-competition agreements.
Blue-Penciling in Non-Compete Cases
The blue-pencil doctrine developed as a rule of state common law. Black’s Law Dictionary defines it as “a judicial standard for deciding whether to invalidate the whole contract or only the offending words.” The blue-pencil doctrine allows a court to delete overbroad restraints, while leaving the remainder of the restrictions in a contract intact if the offending provisions do not defeat the central purpose of the agreement and can be severed. It is sometimes referred to as a rule of “severability.”
One of the earliest applications of the blue-pencil doctrine in a non-compete case was by the English House of Lords in Nordenfelt v. The Maxim Nordenfelt Guns & Ammunition Company (1894). That case involved the sale of a war munitions business and a 25-year worldwide covenant not to compete. The court struck broad “unreasonable” non-competition language and enforced “reasonable” restraints on trade (amending the non-compete that Nordenfelt “for the next 25 years, would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way,”). Nordenfelt was prohibited from making guns or ammunition worldwide, but was permitted to trade guns or ammunition in direct competition with Maxim so that he could earn a living.
Since Nordenfelt, American courts in many states have adopted some form of the blue- pencil doctrine, including Arizona, Arkansas, Delaware, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania. Some states have passed laws addressing the blue-pencil doctrine, including Wisconsin, which has codified a no-modification rule, and recently in June 2017, Nevada, which now allows for blue-penciling of unreasonable restrictions.
Different Shades of Blue
For states that have adopted the blue-pencil doctrine, some apply the doctrine strictly and some apply it liberally.
Generally, courts that apply the doctrine strictly will not rewrite restrictions by inserting clauses or modifying limitations to make them reasonable and enforceable. If the offending portions of the covenant cannot be crossed out while leaving the remainder grammatically meaningful, the entire covenant will not be enforced.
In AssuredPartners v. Schmitt (Ill. App. Ct. 2015), the court applied the blue-pencil doctrine strictly, and affirmed the trial court’s refusal to judicially modify covenants (non-compete, non-solicitation and confidentiality clauses) signed by an insurance broker. The appellate court found that the agreement contained several overbroad restrictive covenants that effectively prevented the broker from practicing his trade. The deficiencies were “too great to permit modification.”
Courts applying the blue-pencil doctrine strictly have criticized the looser version of the doctrine on the ground that it encourages employers to draft much broader restrictions than are legally permissible. As one court in Arizona explained,
“Even the blue-pencil rule has its critics. For every agreement that makes its way to court, many more do not. Thus, the words of the covenant have an in terrorem effect on departing employees. Employers may therefore create ominous covenants, knowing that if the words are challenged, the courts will modify the agreement to make it enforceable.”
North Carolina, for example, applies the blue-pencil doctrine strictly, and its courts will only strike offending provisions and not rewrite or reform overly broad restrictions. Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC (N.C. 2016) (“Allowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation. We see nothing but mischief in allowing such a procedure.”).
Courts that apply the blue-pencil doctrine more liberally – which some people call “judicial modification” to distinguish it from strict blue penciling – generally are open to reforming or partially enforcing reasonable restrictions.
In Solomon Agency Corporation v. Choi (EDNY 2016), for example, a federal district judge, at the preliminary injunction stage of the case, applied the blue-pencil doctrine to the geographic scope of a non-compete signed by an employee (Choi) of an insurance brokerage company (Solomon). Solomon conceded that the restrictive covenant, as written, was “impermissibly broad” because it prevented Choi from working in the same industry, anywhere within 50 miles of Solomon’s offices, including offices where Choi was not employed and with respect to clients with whom Choi had not developed a relationship as a result of his employment with Solomon. The court noted that while at one time, these overly broad provisions may have proved fatal to Solomon’s efforts to enforce the restrictive covenant, the “prevailing, modern view” under New York law rejects a per se rule that invalidates entirely any overbroad employee agreement not to compete. Instead, a court can “blue pencil” the covenant and grant partial enforcement for an overly broad covenant. After weighing the factors of “reasonableness” (need to protect legitimate business interests, public policy, and hardships), the district court enjoined Choi from soliciting or providing any insurance brokerage services to any current or former clients of Solomon, with whom Choi worked during his employment and with whom he did not have a pre-existing relationship, and who were located within 50 miles of the Solomon office where Choi was primarily employed.
Pencils Down in Some States
Not all states have adopted the blue-pencil doctrine, or they have considered it and rejected it. Some states, like South Carolina, Virginia, Georgia, Nebraska and Arkansas, take a no-modification or all-or-nothing approach. In these states, all restrictions typically will be deemed void and unreasonable if one restriction in the contract is unenforceable.
Special thanks to Summer Associate Joshua Lattimore for his assistance with this post.
Part 1 - Psychologists and Psychiatrists
Part 2- Barbers and Beauty Shops
Part 3- Recipes and Restaurants
Part 4 - Coaches and Colleges
Part 5- Lawyers and Law
Part 6- Veterinarians and Vehicles