By Jon Wall, Member, Higgins Benjamin, PLLC
Beverage Systems, LLC v. Associated Beverage Repair, LLC, 762 S.E.2d 316 (N.C. Ct. App. 2014) is headed to the North Carolina Supreme Court for review. The Court should reverse the Court of Appeals’ decision, as it represents a significant departure from our jurisprudence on noncompetition agreements (also called “noncompetes”).
Beverage Systems involved a non-compete provision in a sale-of-a-business context. Tangential to the sale of a business, the seller covenanted not to operate a competing business in the states of North and South Carolina. Evidence indicated that the seller and buyer, however, conducted operations in only a few counties in South Carolina and less than half of the counties in North Carolina. The agreement also provided that if the noncompetition territory was found to be overbroad, the court should re-write the agreement to make it enforceable. The trial court found the territory overbroad and refused to enforce it.
The Court of Appeals reversed and held that North Carolina’s “strict blue pencil rule” did not apply because the contract provision imbued the court with authority to re-write the territory. The strict blue pencil rule allows a court to strike through overbroad restrictions and enforce the remaining reasonable provisions, but it does not permit the court to rewrite provisions. The appellate court reversed and remanded to the trial court with instructions to “to revise the territorial area of the noncompete to [make it enforceable].” Judge Elmore dissented.
Because of the split decision, the case is now before the North Carolina Supreme Court, which should carefully consider all of the implications raised by the lower court’s decision. These include:
- There is a misperception that noncompetition agreements are “good for business.” Many believe the opposite, as noncompetes serve to strangle the labor market and squelch innovation and entrepreneurship. Thus, much of Silicon Valley’s success is attributed to California’s ban on noncompetition agreements altogether. Likewise, Massachusetts Governor Deval Patrick is advocating for a ban on noncompetition agreements (while strengthening protections for trade secrets), hoping to spur more entrepreneurial growth. How will Research Triangle and the Triad’s nanotechnology and bio-sciences sectors fare in attracting new businesses if the Court of Appeals’ decision stands? See On Amir & Orly Lobel, Driving Performance: A Growth Theory of Noncompete Law, 16 Stanford Tech. L. Rev. No. 3, p. 833 at 846, 857-62, 865-66 (2013) (reviewing research outlining negative effects of noncompetition agreements on labor market, job creation, and the economy).
- Permitting courts to rewrite contract provisions ignores long-held tenets of contract law. Foremost, a contract is to be a “meeting of the minds,” yet it is clear the rewritten provisions were not within the parties’ consciousness at the time the contract was entered. The court’s revisions constitute a “reformation” of the contract. Until now, there have been strict limitations on when a court may reform a contract, limited to those situations involving some type of fraud or mistake. As none of those circumstances are present here, the Court should not entertain any type of reformation.
- Private parties cannot enlist our courts to make their agreements for them. Acknowledging, let alone enforcing, such provisions sets a bad precedent. In an analogous case, the court observed that “the parties have no right to grant or accept a power held only by the judiciary.” Ibele v. Tate, 594 S.E.2d 793, 795 (N.C. App. 2004) (consent order’s provision that agreement could be enforced using the court’s contempt powers would not be given effect, as it was not within private parties’ power to dictate the business or powers of the court). Courts should not become the parties’ scriveners when they fail to exercise reasonableness and restraint themselves.
- Restraints on trade are illegal in North Carolina. Noncompetition agreements are partial restraints of trade, and as such there is a substantial body of case law reciting that “[c]ontracts restraining employment are looked upon with disfavor in modern law.” Kadis v. Britt, 224, N.C. 154, 160, 29 S.E.2d 543, 546 (1944). Are we to pay mere lip service to these tenets by creating special rules of enforcement for noncompetition agreements, ensuring their extra-contractual, universal enforcement?
- While the agreement under review involved the sale of a business rather than a post-employment noncompete, the same principles have been applied in reviewing enforceability of both types of noncompetes. In the employment context, the courts’ post facto rewriting of noncompetes in order to enforce them is especially troubling because it encourages employers to draft overly broad and oppressive clauses. See, e.g., Tradesman, Int’l, Inc. v. Black, 724 F.3d 1004, 1018 (7th Cir. 2013)(employers have powerful incentive to draft oppressive clauses if court will rewrite them; in the few cases that go to court, the employer can retreat to reasonable position without suffering any penalty or disadvantage of its oppressive drafting). Moreover, for every case that gets heard in court, hundreds more go unchallenged as employees assume the clauses are enforceable and lack the resources to challenge them. This in terrorem effect was noted over 50 years ago. Harlan M. Blake, Employee Agreements Not To Compete, 73 Harv. L. Rev. 625, 682-83 (Feb. 1960). Thus, the Court of Appeals’ decision would be especially troubling if it were affirmed without unmistakable clarification that the new rule did not apply in the employment context.
- Reformation of contracts is an equitable doctrine. As such, it is generally discretionary with the court whether or not to invoke its equitable powers to “save” a contract term. Use of such discretion depends on the circumstances of each case and should never be “mandated” by a private contract.
Because the Court of Appeals’ decision disregards years of well-reasoned precedent and would be harmful to our State’s economic growth, the N.C. Supreme Court should reverse the decision.
If you would like to discuss an issue involving Noncompetition Agreements, contact Jon Wall at (336) 273-1600, ext. 134, or jwall@greensborolaw.com.
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