Blue Pencils and Non-Competes

IMPORTANT NOTICE! IN APRIL OF 2024, THE FTC ANNOUNCED A NEW RULE THAT GREATLY LIMITS THE ENFORCEMENT OF NON-COMPETE AGREEMENTS.  THAT RULE WILL, FOR THE MOST PART, MAKE FOLLOWING DISCUSSION OF LIMITED IMPORTANCE.

We previously wrote here about non-compete agreements and here about non-solicitation agreements. In this post, we will address a concept known as the “blue pencil.”

As our prior article explains, in Mississippi, a non-competition agreement must be reasonable in scope. The term “scope” generally refers to (i) the time over which the agreement will remain in effect and (ii) the geographic area in which the agreement will apply.

Let us use an example. Suppose an employee goes to work as a salesperson for a company located in Yazoo County. That company only performs sales in Yazoo, Humphreys, and Holmes Counties.

Depending upon the nature of the salesperson’s job and access to confidential information, a non-compete agreement with a duration of one year and a geographic area covering only those three counties might be reasonable.

On the other hand, an agreement with a duration of five years and a geographic area covering the entire state of Mississippi would probably be unreasonable.

The term “blue pencil” refers to the practice of Mississippi courts in reducing an unreasonable scope of a non-compete agreement down to something that is reasonable. See, e.g., Redd Pest Control Co. v. Heatherly , 157 So.2d 133 (Miss. 1963):

See also , Herring Gas Co., Inc. v. Magee , 813 F.Supp. 1239 (S.D. Miss. 1993) [If a court finds that the limitations contained in a covenant not to compete are unreasonable, then the court will modify the limitations so that they are reasonable].

So, returning to our earlier example, a court may reduce the term of five years down to one year and  change the geographic area from the entire state of Mississippi down to just three counties.

I submit that there are two specific problems and that Mississippi courts should abandon that procedure. Let me explain why.

Mississippi courts have repeatedly said that they will enforce agreements made by the parties but will not make a contract that the parties themselves did not make.

“A court cannot subtract, add to or modify the terms of a contract that already is in existence.” Townsend v. Townsend , 859 So. 2d 370 (Miss. 2003).

“Courts cannot write into a contract that which fails to appear, nor can it interpret a contract liberally just to help one party.” Southern Natural Gas Co. v. Fritz , 523 So.2d 12 (Miss. 1987).

Yet, when a court takes a “blue pencil” to a non-competition agreement, it is doing exactly that. It is making a contract that the parties did not make for themselves.

The courts of some states refuse to blue pencil the contract and will simply declare an unreasonable non-compete agreement to be unenforceable. This is known as the “red pencil” approach.

One example is the state of Nebraska. As that state’s supreme court has stated: “We have declined to apply the ‘blue pencil rule.’ We have found that reformation is tantamount to the construction of a private agreement and that the construction of private agreements is not within the power of the courts.” Unlimited Opportunity, Inc. v. Waadah , 861 N.W.2d 437 (Neb. 2015).

In most instances, when parties draft a contract, they want to be sure the provisions of the contract are enforceable. They want to be reasonable and precise in the language they use.

But, the blue pencil approach gives an employer justification for drafting a non-compete agreement that is overly broad rather than one that is reasonable.

The employer can do this with the knowledge that if a court later decides to blue pencil the contract and reduce the scope to something reasonable, it has lost nothing in the process.

This creates an unreasonable burden on the employee. The employee will now have to engage in expensive litigation simply to get the court to re-draft the non-compete agreement to read as it should have at the beginning.

In the meantime, as the litigation progresses, the employee may decide it is necessary to comply with the non-compete as drafted, even though the employee might be willing to comply with a more reasonable agreement.

An excellent discussion of these issues by Griffin Toronjo Pivateua can be found in Putting the Blue Pencil Down – An Argument for Specificity in Noncompete Agreements , 86 Nebraska Law Review, page 672. Click here to read the article.

Panter Law Firm, PLLC, 7736 Old Canton Road, Suite B, Madison, MS 39110

601-607-3156

www.craigpanterlaw.com

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