Tuesday, February 28, 2017

Monthly Column (2017, No. 2): Georgia Ruling Illustrates Difficulty with Relying on Blue-Pencil Rule

One of the issues I see most frequently when litigating non-compete disputes involves what's known as the blue-pencil rule. The rule actually has a few separate iterations to it, but for the layperson it's the idea that a court might be able to revise or narrow an overbroad agreement and still enforce it (or at least part of it).

(I wrote a state-by-state guide to the blue-pencil rule more than 8 years ago. It may not be entirely accurate now, as I don't routinely update old posts. It remains one of my most viewed pages, with nearly 40,000 unique viewers having read it (i.e., clicked through to it)).

Advising clients about how courts may deploy the blue-pencil rule is a challenge because in many places - including Illinois -its use is discretionary. This makes rendering predictions somewhat challenging, particularly since very few non-compete scenarios are alike.

There's also a separate problem. My experience is the rule is somewhat judge-specific. By that I mean, different judges apply the rule with different philosophies in mind. Many (most?) don't like to insert themselves in the contract drafting process. Others see themselves as arbiters of equity, charged with a more activist role to do "what's right" under the circumstances. Unless you have direct experience on the precise issue with the same judge, that makes predictive counseling an enormous chore.

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The reason I write on, and revisit, this topic now is due to two separate events. First, from Georgia, we encountered LifeBrite Laboratories, LLC v. Cooksey, No. 1:15-cv-4309. In that case, the district court evaluated the blue-pencil rule in Georgia in light of the 2011 change to Georgia law. Previously, courts had not allowed any sort of blue-penciling. If a covenant was overbroad, the entire thing failed. Georgia's new law gave courts the ability "to modify a covenant that is otherwise void." But the court noted that the new law did not define the term "modify."

It had a choice. Did the term mean to remove offending language or make substantive changes of the court's own accord? The court, having relied on Georgia's common law before the statutory change, chose the former and not the latter. I would guess this came as a surprise to Georgia lawyers, many of whom likely assumed "modify" granted the court broader discretion. I don't think we've heard the last on this subject. LifeBrite isn't controlling in Georgia state courts.

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I also write because of an appeal I have pending in Illinois. At least one district of the Appellate Court of Illinois has explained its law of severability in terms of non-compete agreements. I happen to have the very issue pending before the same district, so we'll see if the court expounds on its prior case law. The law of severability states that even if some part of a contract is unenforceable, a court may enforce the rest of the agreement "in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange."

The italicized language has been held to ruin an entire non-compete when one clause is unenforceable. That means, for instance, that an overbroad customer non-solicitation covenant could imperil an otherwise enforceable non-disclosure agreement. Or vice versa. And given the crackdown in Illinois on overbroad non-disclosure agreements, I expect the law of severability may rear its head time and again.

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As a quick primer, recall that there are several permutations to blue-penciling and severability. The terms are important:

1. Blue-penciling. This doctrine is what the Georgia court in LifeBrite endorsed. A court can remove offending language and save the balance of the covenant. That would mean, for instance, deleting a particular county in which the employee never worked but which is part of the restriction.

2. Equitable modification/Reformation. This is a broader doctrine, which allows courts to rewrite an overbroad agreement. It is less technical and interjects the court in the drafing process.

3. Red-penciling. This is a very strict, pro-employee doctrine. If the covenant is overbroad, the court will strike it and not change it in any respect. Nevada is a red-pencil state, as we found out last year.

4. Severability. As discussed above, this doctrine means a court can strike an entire restrictive covenant but save the rest of the agreement. In Illinois, I think it's at best an open question now how the law of severability applies to restrictive covenants. Probably case-by-case, depending on the language of the agreement.

5. Step-Down Clauses. A step-down clause provides that if a court determines one covenant is unenforceable, then a different term or restriction applies. For instance, a step-down clause may say that "if the court determines an 18-month non-solicitation restriction is overbroad, then the parties expressly agree to a 6-month covenant in its place." This, in theory, eliminates the court's job in rewriting a contract. I wrote once on this topic. Notably, the district court in LifeBrite stated it would have enforced a step-down clause providing an alternative provision to the overbroad clause that rendered the agreement unenforceable. (See FN 78 at page 21).

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