Thursday, July 28, 2016

Supreme Court of Nevada Rejects Blue-Pencil Doctrine

Non-compete law continues to evolve at the state level, both in terms of targeted legislation and judicial refinement of common-law principles. For the most part, the decided trend is for lawmakers and judges to pare back the use of broad non-competes and to make specific public-policy based exceptions (or create categorical limits), as in the case of covenants impacting emerging technology workers and health-care providers.

I have often remarked, both here and in presentations to colleagues, that if we're going to get serious about the proper use of non-compete agreements then we ought to hone in on two very specific concepts: ensuring the adequacy of consideration (preferably at the outset of a lawsuit) and discarding the notion that courts should be reforming overbroad contracts that are carelessly and gratuitously written.

This month, the Supreme Court of Nevada rejected the blue-pencil doctrine and held that courts may not rewrite a non-compete agreement to make it reasonable. The case is Golden Road Motor Inn, Inc. v. Islam, 132 Nev. Adv. Rep. 49 (a link to the docket page is available here). Briefly stated, the case involved a casino manager who signed a one-year, post-termination covenant (apparently well after she started working for Atlantis Casino Resort) that broadly prohibited her from working in any gaming business within 150 miles of her employer. The effect of the restriction rendered her unemployable in Nevada's largest casino market.

The Court, in a 4-3 opinion, rejected the blue-pencil doctrine as inconsistent with Nevada law on reformation of contracts. In a passage that is sure to be cited in future cases, the majority rejected the dissent's endorsement of the blue-pencil rule where appropriate and said:

"Our exercise of judicial restraint when confronted with the urge to pick up the pencil is sound public policy. Restraint avoids the possibility of trampling the parties' contractual intent...Even assuming only minimal infringement on the parties' intent, as the dissent suggests, a trespass at all is indefensible, as our use of the pencil should not lead us to the place of drafting. Our place is in interpreting. Moreover, although the transgression may be minimal here, setting a precedent that establishes the judiciary's willingness to partake in drafting would simply be inappropriate public policy as it conflicts with the impartiality that is required of the bench, irrespective of some jurisdictions' willingness to overreach."

Apart from these public policy principles, the Court defaulted its legal analysis to general principles on contract reformation. Generally, courts can reform contracts if one shows mutual mistake by clear and convincing evidence. That is an awfully tough showing, reserved for cases where a writing does not reflect what the parties intended. The blue-pencil rule has nothing to do with conforming a contract to the parties' mutually-held intent, but rather fashions a judicial rewrite of an agreement after-the-fact under the guise of fairness.

The Court then parsed reformation further, focusing on procedure. That discussion is crucial for lawyers to understand. What the Court in Golden Road Motor Inn was saying is that courts often reform or blue-pencil non-competes in the context of awarding preliminary injunctions. It didn't endorse that approach, to be sure. But once a case reaches final judgment on the merits, the employer must demonstrate the agreement is reasonable on its face and not plead for judicial reformation.

It is interesting to see the Court make this nuanced distinction. The thinking apparently is that an injunction is in fact equitable in nature and courts have the ability to fashion appropriate relief at an emergency hearing, subject of course to the possibility that the court later may find the agreement is unreasonable. But at a preliminary stage, a court does not make ultimate fact determinations and so is not ruling definitively on enforceability. Conceivably, a court could say it is likely the agreement is reasonable but that the injunction requested seeks too much. Therefore, we'll just blue-pencil for now.

That may be what happens in practice, but I don't think so. To be certain, the cases don't read this way. And therein lies the problem. The blue-pencil rule has become a crutch, used to deter fair competition and used to bless poor drafting and (in many cases) an intent to restrain trade for no valid reason.

On this score, the Golden Road Motor Inn dissent's argument that the blue-pencil rule "also favors the employee by appropriately limiting the restriction" is pure nonsense. My experience is that employees sure as hell don't feel that way. The next employee who comes into my office and is excited by an overbroad agreement and the potential for judicial modification (after expensive litigation) will be the first.

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