January 11th, 2016

When a court determines that a non-compete agreement is overly broad and unenforceable as written, that may not be the end of the story. A distinct minority of states will refuse to enforce the entirety of a non-compete agreement that the court deems unreasonable, a practice sometimes referred to as “all or nothing enforcement.” However, the majority of courts will still try to enforce the agreement if they can correct its flaws. Certain courts will rewrite parts of the contract to make it reasonable, a policy referred to as “judicial reformation.”  In addition to, or instead of judicial reformation, some jurisdictions employ “blue penciling,” a practice where courts will strike the offending language from the agreement.

New York Courts will modify a non-compete clause when an employer can demonstrate that, among other factors, it sought the agreement in good faith.  See BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999). To establish good faith, an employer must show that it did not use coercion to form the agreement and that it designed the non-compete to protect a legitimate business interest, like trade secrets or client confidentiality. New York Courts, however, are hesitant to reform non-compete agreements due to a presumption against restraints on competition, stating that “our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas.” See Reed, Roberts Associates, Inc. v. Strauman, 386 N.Y.S.2d 677, 680 (1976). New York Courts have also noted that non-compete agreements are only enforceable to the extent they are reasonable, but that “the formulation of reasonableness may vary with the context and type of restriction imposed.” Id. at 679.   If an employer is clearly taking advantage of its employees by using superior bargaining power in negotiating its contracts, a New York Court may find that the non-compete is entirely unenforceable under such circumstances and refused to engage in blue pencilling. See Scott, Stackrow & Co., C.P.A’s, P.C. v. Skavina, 9 A.D.3d 805, 807-08 (3d Dep’t 2004).

New Jersey Courts may modify or blue pencil a non-compete agreement to the extent reasonable under the circumstances. See Solari Industries, Inc. v. Malady, 264 A.2d 53 (1970).  An employer is entitled to enforce an overly broad noncompetitive agreement if the agreement “is reasonably necessary to protect their legitimate interests, will cause no undue hardship on the defendant [employee], and will not impair the public interest.”  Id. at 61.  Furthermore, New Jersey courts have held that a non-compete agreement may be reduced in geographic scope for appropriate reasons such as the potential adverse impact on the public of an unduly broad geographic scope of coverage in a physician’s non-compete agreement.  Cmty. Hosp. Group, Inc. v. More, 183 N.J. 36 (2005).

 

 

Posted in: Restrictive Covenants 101