N.C. Supreme Court Reaffirms Strict Blue Pencil Doctrine for Restrictive Covenants

The North Carolina Supreme Court reaffirmed in a March 2016 decision that the power of North Carolina courts to “blue pencil” restrictive covenants is extremely limited, even when an agreement purports to give a court express authority to revise and rewrite unreasonable provisions.

North Carolina has long applied a “strict blue pencil doctrine” under which courts cannot change or add to the language of an agreement.  Rather, courts are limited to striking unenforceable portions while enforcing divisible and reasonable portions. 

However, in Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, No. 316A14 (March 18, 2016), the parties sought a contractual workaround to the “strict blue pencil doctrine” by expressly providing in their agreement that a court could revise the agreement’s temporal and territorial restrictions should a court find them to be unreasonably broad.

The Court of Appeals found that the limitations of the “strict blue pencil doctrine” did not apply where the agreement expressly authorized a court to revise unreasonable temporal and territorial restrictions to make them reasonable.  It found that the agreement’s territorial restriction of “the states of North Carolina or South Carolina” was overbroad because it included areas not necessary to maintain customer relationships, and remanded the case with instructions to the trial court to revise the territorial restriction to make it reasonable.

The North Carolina Supreme Court reversed that decision.  Rejecting an effort to broaden the doctrine, the Supreme Court reasoned that the agreement in question could not be “rewritten, blue-penciled, or revised.” 

First, the Court held that the agreement could not be rewritten.  It held that a court may not amend the terms of an unreasonable covenant not to compete; rather, a court should simply not enforce it.  For example, if the parties have agreed on a territorial restriction that is overbroad, a court cannot rewrite the agreement to include new, reasonable subdivisions of the overbroad territory.  The covenant must be enforced “as written or not at all.”

Next, the Court held that the agreement could not be blue-penciled, because it did not set out both reasonable and unreasonable restricted territories.  The Court agreed that restricting competition “in the states of North Carolina or South Carolina” was unreasonable, but noted that striking the unreasonable portions left no territory where the covenant not to compete could be enforced.  (In other words, the agreement did not list subdivisions like counties where a court could strike some and leave others.)

Finally, the Court held that the agreement could not be revised even though there was a contractual provision allowing a court to modify the agreement.  It reiterated that courts may not rewrite contracts for parties, and held that “parties cannot contract to give a court power that it does not have.”  The Court also raised concerns about the prudence asking judges to determine what the parties would have agreed to be reasonable.

This affirmation of North Carolina’s “strict blue pencil doctrine” is a reminder to contracting parties that relying on courts to revise overbroad restrictive covenants is not a viable strategy in North Carolina.  If restrictive covenants are important to your business and they are governed by North Carolina law, it is essential to make sure that they avoid well-recognized drafting errors and contain narrowly tailored terms.

Co-authored with Brent F. Powell and Blair L. Byrum