Wednesday, May 5, 2010

Are "Step-Down" Provisions Enforceable?

Corporate attorneys in strict "blue-pencil" states have to be extra-careful when drafting non-compete covenants. For instance, if a court will only strike or delete overbroad provisions (and decline to reform them by adding or changing terms), practitioners need to separate out activity restrictions into distinct paragraphs. Additionally, lawyers will want to think about adding alternative provisions that relate to prohibited competition, so that if one provision is struck down, an alternative may give the employer a fall-back enforcement position.

This issue, though, becomes tricky when you start talking about geographic and time restrictions. One drafting technique that attorneys are starting to use is called a "step-down" provision. In theory, the idea is simple. Draft the non-compete so that the restriction is for 2 years, but if a court finds it to be unenforceable or overbroad, then the agreement is automatically pared back to 9 months. The same idea applies to geographic scope. It can define a restricted territory as the State of Illinois, but if the same is held unreasonable, then it applies only to those counties in which the defendants were assigned accounts at the time of termination.

There are several issues that step-down provisions raise, including the notion that the contract may not be properly formed in the first place on account of the fact that the parties never had a "meeting of the minds" as to key terms. Also, the provision may not be definite and certain, and may even violate public policy. On the other hand, in a jurisdiction that employs the equitable modification rule, it is hard to see how using step-down provisions is all that different than what occurs during litigation. It may even be better, since the step-down restriction could be less onerous than what a court could impose after ruling on the reasonableness of the covenant.

To the best of my knowledge, no court has ruled on the enforceability of step-down clauses. In my judgment, courts in strict blue-pencil states may find them unenforceable as a matter of public policy.

1 comment:

  1. See Compass Bank v. Hartley, 430 F. Supp. 2d 973 (D. Ariz. 2006) as an example of a court in a blue pencil jurisdiction upholding step down provisions.