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North Carolina Courts Are Forbidden To “Blue Pencil” An Unenforceable Non-Compete

If you need to ask whether or not you can do a certain thing, the answer is probably no. When Thomas Dotoli and his wife drafted a contract to sell their companies to their daughter-in-law, Cheryl, they included a clause that allowed a court to modify the non-compete agreement if the court deemed it to be too broad. But not all courts have the authority to rewrite contracts.

Non-compete agreements are pretty standard in most business contracts. They’re designed to protect the business interests of both parties, ideally without infringing too much on the other party’s legitimate business interests.

In the contract in question, Cheryl, as the owner and operator of Associated Beverage Systems of the Carolinas, was prevented from doing business in either North Carolina or South Carolina for a period of five years after purchasing the companies from the Dotolis for $10,000. The contract provided that a court could revise the terms of the agreement if it found them to be unreasonable.

When Associated Beverage began conducting business in both North and South Carolina, the Dotolis sued Cheryl, her company, and Loudine, their son and Cheryl’s husband, for tortious interference as well as deceptive and unfair practices. Loudine was charged with breach of contract.

Cheryl and Loudine alleged the terms of the non-compete agreement were too broad to be enforceable. The trial court agreed with them.

The Dotolis responded by appealing the decision and the appellate court reversed the lower court’s ruling. In its decision, the Court of Appeals approved the five-year time limit on the agreement, but argued that the trial court should have restricted the territorial limitation, which the appellate court agreed was unreasonable.

Cheryl and Loudine appealed the decision and argued their case before the North Carolina Supreme Court, which ruled in their favor. In its decision, the state’s Supreme Court noted that geographic limitations on a non-compete agreement can only be deemed reasonable as long as they are limited to the specific locations where the seller of the company conducts business.

The Supreme Court further noted that courts do not have the authority to rewrite contracts. It can either uphold agreements as they are written, or strike them out completely.

In some states, courts do have the authority to modify the terms contracts they determine to be unreasonable. The practice is known as “blue-penciling” and the extent to which courts are allowed to modify contracts varies from state to state.

In some places, courts are not allowed to modify contracts at all, only to uphold them or rule them invalid. Other states do allow their courts to replace unreasonable terms in contracts with reasonable terms, but North Carolina’s legislation falls somewhere in the middle.

Courts in North Carolina are allowed to strike out unreasonable provisions from contracts, but not change them. Therefore, the only thing the North Carolina courts could legally do was strike the overly restrictive geographic limitations of the non-compete agreement in question. This left the contract with no geographic limitations at all, which makes the entire non-compete agreement invalid.

Our Chicago non-compete agreement and business dispute attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

DiTommaso-Lubin a firm of Chicago business dispute lawyers handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business lawyers with offices near Lombard, Addison, Oak Brook and Chicago have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommaso-Lubin a Chicago business litigation law firm represents both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Our firm has also handled many shareholder and LLC disputes between owners of closely held corporations, and LLCs.

Based in Oakbrook Terrace and downtown Chicago, our Lake Forest and Deerfield non-compete clause and business dispute lawyers take cases from Schaumburg and Aurora and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact one of our Chicago business dispute lawyers through the Internet or call toll-free at 1-877-990-4990 today.