No Blue Pencil: Non-compete Clauses in Business Sale Contracts

The North Carolina Supreme Court recently clarified the playing field with respect to non-compete clauses in sale-of-business contracts. In Beverage Systems of the Carolinas, LLC v Associated Beverage Repair, LLC, No. 316A14 (N.C. Sup. Court Mar. 18, 2016), the court affirmed a long-standing practice and declined to enforce a covenant not to compete though the parties gave the court permission to do so.

Non-competition clauses are valid but are limited by scope, time and geography. Pursuant to the sale of a business, the parties agreed that competition would not occur before five years in either North or South Carolina. The parties further agreed that a court could revise a territorial restriction if the court deemed the restriction unreasonable. North Carolina follows a strict blue-pencil doctrine. A court can either strike an unreasonable provision and leave reasonable provisions intact or strike the non-compete entirely if it cannot be separated from reasonable provisions.

After reviewing the business territories of the parties, it was determined that the restriction including all of North and South Carolina, was unreasonable.

The question then posed to the court was: can the court rewrite the non-compete provision to make it reasonable if the parties have given the court permission to do so in the written agreement? The Supreme Court’s answer is no.

The Court is not allowed to rewrite the agreement, only to strike the unreasonable portions. In this case, if the court strikes the provision relating to all of North and South Carolina, there is nothing left to enforce. The non-compete was determined to be unenforceable at law.

The important point to take away from this case is that multi-jurisdictional sales of businesses require careful drafting with respect to non-competition clauses.

The law varies from state to state on enforcing unreasonable territorial restrictions. Some states do not allow modification of any kind from the court, some states allows reasonable terms to be substituted for unreasonable terms to carry out the parties’ intent, and some states, like North Carolina, only allow the striking of unreasonable terms, not rewriting the terms.

Finally, it should be noted that this case related to the sale of a business and not an employment contract. What may be reasonable with respect to an employment non-competition clause will likely be different from what is reasonable with respect to a business sale.

If you have additional questions regarding non-competition clauses in either sale contracts or employment contracts, please contact Kurtz Law for more information.

The foregoing is written for educational purposes only and should not be relied upon as legal advice. It should not be utilized as a substitute for the professional services of an attorney. If legal advice is required, the services of a professional should be sought.  Please contact Kurtz Law, PLLC for assistance with legal matters.