Court Finds Two-State Non-Compete in Sale of Business Contract Void for Overbreadth

blue-pencil_cropSometimes a party to a contract gets greedy. As an example, sometimes a party seeks an onerous non-competition provision in a contract. Will a court enforce it? Will the court modify the agreement if it is too broad in some respect? Let’s see how this played out in a real case. 

 Elegant Beverage Products, LLC (“Elegant”) and Imperial Unlimited Services, Inc. (“Imperial”) were two businesses that supplied, installed, and serviced beverage products and beverage dispensing equipment in parts of North Carolina and South Carolina. Thomas Dotoli owned Imperial, while his wife Kathleen and their son Loudine owned Elegant.

Mark Gandino purchased Elegant and Imperial to operate as Beverage Systems of the Carolinas.

Parties Sign Two-State Non-Compete Agreement

The closing, sale, and purchase were completed in September 2009. The parties also executed a “Non-Competition, Non-Solicitation and Confidentiality Agreement” in which the Dotolis agreed not to compete with plaintiffs business in either North or South Carolina. Paragraph six of the Agreement contained a provision permitting the trial court to revise its temporal and geographic limits should the court find them to be unreasonably broad. Beverage Systems believed the Dotolis were in breach of the noncompetition portion of the Agreement.

Cheryl Dotoli, Loudine’s wife, was not a party to either the purchase contract or the Agreement.  In 2011, Cheryl formed defendant Associated Beverage Repair, LLC. Associated Beverage began to install and service beverage dispensing equipment in parts of North and South Carolina, thus operating in a manner similar to Imperial. Gandino learned of Associated Beverage’s existence in March 2011 when Thomas Dotoli told representatives of Bunn-O-Matic, one of Imperial’s former customers, that Imperial had been sold to Beverage Systems. Thereafter, Bunn-O-Matic chose to conduct business with defendant Associated Beverage rather than plaintiff Beverage Systems.

Court Refuses Injunction

When litigation eventually started, the trial court refused to enforce the covenant not to compete, even though the parties had expressly agreed that a court could rewrite overbroad temporal and territorial limitations that would otherwise render the covenant unenforceable. The case eventually ended up in the North Carolina Supreme Court.

A North Carolina court will enforce a covenant not to compete made in connection with the sale of a business (1) if it is reasonably necessary to protect the legitimate interest of the purchaser; (2) if it is reasonable with respect to both time and territory; and (3) if it does not interfere with the interest of the public.

Here, the Agreement prohibited defendants from engaging in a competing business venture in the entire states of North Carolina and South Carolina. This geographical restriction was unreasonably broad.

North Carolina has adopted the “strict blue pencil doctrine” under which a court cannot rewrite a faulty covenant not to compete but may enforce divisible and reasonable portions of the covenant while striking out the unenforceable portions.

Thus, when an agreement not to compete is found to be unreasonable, a court is powerless unilaterally to amend the terms of the contract.

Court Will Not Blue Pencil Overbroad Agreement

Plaintiff argued that the blue pencil doctrine should save the Agreement. Blue-penciling is the process by which “a court of equity will take notice of the divisions the parties themselves have made in a covenant not to compete, and enforce the restrictions in the territorial divisions deemed reasonable and refuse to enforce them in the divisions deemed unreasonable.”

In this case, the Agreement’s territorial limits could not be blue-penciled unless the Agreement could be interpreted so that it set out both reasonable and unreasonable restricted territories.

Plaintiff argued that the parties gave the trial court the power under paragraph six of the Agreement to revise its territorial limits to make them reasonable. However, parties cannot contract to give a court power that it does not have.

According to the Supreme Court, allowing litigants to assign to a court their contract drafting duties would put the court in the role of scrivener, making judges postulate new terms that the court hopes the parties would have found reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation. The non-compete portions of the Agreement were unenforceable despite the clause allowing a court to blue pencil. The case is Beverage Systems of The Carolinas, LLC v. Associated Beverage Repair, LLC, 284 S.E.2d (N.C. 2016)

Michael R. Lied is a partner at Howard & Howard’s Peoria, Illinois office. He concentrates his practice in the areas of labor & employment law, and related litigation and immigration law, representing employers. 

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