The Dilemma of Judicial Remedies to Non-Compete Agreements

Blog Post | 111 KY. L. J. ONLINE | March 29, 2023

The Dilemma of Judicial Remedies to Non-Compete Agreements

By: Lillie Stivers, Senior Staff Editor, Vol. 111

Non-compete agreements[1] have become a prevalent mechanism used by employers in the United States.[2] In fact, around 20% of American workers are bound by non-compete covenants.[3] Employers use these agreements to protect themselves from unfair competition practices that may result from an employee leaving to work for a competitor or establish a competing business of their own.[4] Many, however, criticize the use of non-compete agreements as oppressive on an employee’s ability to take advantage of opportunities to move upward in the workforce.[5]

In most states, a non-compete is enforceable if the provision protects a legitimate business interest of the employer, the terms are reasonable, and enforcement does not create an undue harm to public interest.[6] Legitimate business interests often include protecting the employer’s trade secrets and maintaining customers or clients who the employee obtained a special relationship with during the course of employment.[7] The reasonableness of the non-compete covenant is assessed on the scope of the restriction, the geographical range encompassed by the non-compete, and the duration of the non-compete’s enforceability.[8] Undue harm to public interest usually stems from a need for the prohibited service in the employer’s community, such as a rural town that might need more than one family doctor.[9]

The controversy surrounding non-competes pits two principles of law against each other: freedom of contract and freedom of trade. [10] Parties are generally allowed to contract as they see fit, regardless of whether the terms agreed to significantly benefit one party.[11] On the other hand, public policy favors worker mobility, entrepreneurship, and the flow of information.[12] As a response to this tension, courts have developed a unique approach to remedying non-compete agreements that overreach in scope.[13]

This approach, known as the blue pencil doctrine, allows judges to reform overreaching non-compete agreements to a scope that the judge deems fair.[14] For example, a non-compete provision in a physical therapist’s employment contract might stipulate that in the event of discharge she is not to work for a similar clinic within one-hundred miles of the employer for a period of two years after the termination. If a judge finds that only the geographic restraint overreaches, the judge has the power to strike out the limitation from the agreement and adjust the range to fit the judge’s discretionary notion of fairness.[15]

The blue pencil method is ostensibly a reformation remedy, yet conflicts with that remedy’s essential purpose: to reform a contract to reflect the contracting parties’ original agreement.[16] Traditionally, written contracts are presumed to represent the intent of the parties in making the agreement.[17] Thus, reformation of a contract is only appropriate when the contract does not accurately reflect that intent.[18] Absent fraud or mistake, both the employer and employee agreed to the terms of the non-compete covenant, thus making reformation unwarranted. [19] In the non-compete context, however, judges use the reformation remedy to reform the contract to reflect the judge’s conceived notion of reasonableness rather than the parties’ original agreement. Because of this, the approach is an anomaly to contract remedies.[20]

Not only does the blue pencil doctrine defy traditional contract jurisprudence, it also incentivizes employers to draft overbroad non-compete agreements.[21] Although an employer may recognize the invalidity of a non-compete’s breadth, oftentimes employees do not. This can have the effect of deceiving employees into thinking they are bound by the non-compete and inhibiting them from taking advantage of opportunities that would violate the covenant.[22] Thus, employers can benefit from overreaching in the scope of their non-compete agreements, with the blue-pencilling of the agreement as the only potential consequence.[23]

The alternative to blue penciling is the “all or nothing” approach, which is more reflective of traditional contract remedies.[24] Under this approach, if any term of a non-compete provision is unreasonable, the whole provision is deemed unenforceable.[25] The biggest criticism of the all-or-nothing approach is that it unduly harms employers who in good faith overreach in the scopes of their employment agreements.[26] An employer may include a non-compete that is slightly over the line, and with the all-or-nothing approached utilized, the entire covenant would be held invalid. Thus, there is no room for error for the employer.[27]

The blue pencil doctrine conflicts with the reformation remedy and creates harmful incentives for employers, and the all or nothing approach comes down hard on employers who mistakenly overreach. Potential solutions for this dilemma could include a high threshold for legitimate business interests and an inquiry into the employer’s good faith in crafting the scope of non-compete covenants.

[1] Since this blog was written, the Federal Trade Commission has issued a controversial Proposed Rule that would largely ban the use of non-compete agreements. See generally Rules Concerning Unfair Methods of Competition, § 910 (proposed Jan. 5, 2023) (to be codified at 16 C.F.R. pt. 910).

[2] See Non-Compete Clause Rulemaking, Fed. Trade Comm’n. (Jan. 5, 2023), https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

[3] Id.

[4] Griffin Toronjo Pivateau, An Argument for Restricting the Blue Pencil Doctrine, 7 Belmont L. Rev. 1, 4 (2019).

[5] See Ryan Nunn & Matt Marx, The Chilling Effect of Non-Compete Agreements, EconoFact (May 20, 2018), https://econofact.org/the-chilling-effect-of-non-compete-agreements.

[6] Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672, 678–80 (2008).

[7] Restatement of Employment Law §8:07

[8] Pivateau, supra note 3 at 6. 

[9] 43 A.L.R.2d 94, § 8(c).

[10] Frank Cavico, “Extraordinary or Specialized Training” as a “Legitimate Business Interest” in Restrictive Covenant Employment Law: Florida and National Perspectives, 14 St. Thomas L. Rev. 53, 56 (2001).

[11] 16A C.J.S. Constitutional Law § 823.

[12] See Ryan Nunn and Matt Marx, The Chilling Effect of Non-Compete Agreements, EconoFact (May 20, 2018), https://econofact.org/the-chilling-effect-of-non-compete-agreements.

[13] See generally Pivateau supra note 3.

[14] Id. at 27.

[15] See id.

[16] See 76 C.J.S. Reformation of Instruments § 1.

[17] Id.

[18] Id.

[19] Id.

[20] See Pivateau, supra note 3 at 27.

[21] Pivateau, supra note 5 at 689–90.

[22] Id.

[23] Id.

[24] See Jessica Weltge, Blue Penciling Noncompete Agreements in Arkansas and the Need for A Public Policy Exception, 2017 Ark. L. Notes 1954 (2017).

[25]  Id.

[26] Jon P. McClanahan & Kimberly M. Burke, Sharpening the Blunt Blue Pencil: Renewing the Reasons for Covenants Not to Compete in North Carolina, 90 N.C. L. Rev. 1931, 1968 (2012).

[27] Id.