By: John N. Fleming
Non-Compete clauses have long been an important part of transactions involving the purchase of a business. Much of what is often purchased in a business acquisition includes the relationships, contracts and goodwill built-up and established by the seller. Often, the non-compete restrictions imposed upon and agreed to by the seller and its owner protect and preserve the value of what is being purchased.
North Carolina courts have held that a non-compete restriction that is part of the sale of a business is valid and enforceable if the written non-compete restriction: (1) is reasonably necessary to protect the legitimate interest of the purchaser; (2) is reasonable with respect to both time and territory; and (3) does not interfere with the interest of the public. Further, traditionally in North Carolina, when courts have been asked to interpret overly-broad restrictive covenants, they have been limited to applying what is called the strict blue pencil doctrine. Under the blue pencil doctrine, a court may cross out or choose not to enforce a distinctly separable part of a covenant to render the remainder of the provision reasonable. However, under this theory, a court may not otherwise revise or rewrite the restrictive covenant to make it reasonable.
Recently, in the case of Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, Ludine Dotoli and Cheryl Dotoli, the North Carolina Court of Appeals went beyond, the strict blue pencil doctrine because the buyer and seller had expressly granted the court the power to revise the restrictive covenant in the asset purchase agreement. More specifically, the non-compete clause in the agreement gave the court the authority to revise the restrictive covenant to cover the maximum period, scope and area permitted by the law. The North Carolina Court of Appeals found that the trial court had the power to revise the restriction regarding territory to make it reasonable and thus enforceable. As a result of this decision, and when expressly directed by the buyer and the seller, the court could do more than cross out a distinct provision, but it could now revise or re-write a restrictive covenant to determine reasonableness. It is important to note that this expansion of a court’s authority from the limitations of the blue pencil doctrine to allowing revisions by the court is limited to the interpretation of restrictive covenants that are part of the sale of a business and in situations where the purchaser and seller expressly grant the court such authority. At present, the expansion of a court’s authority so that it may revise a restrictive covenant has not been interpreted in the context of an employment agreement.
Although this expansion of court authority has yet to be interpreted by the North Carolina Supreme Court, it does have implications for buyers and sellers of businesses and their attorneys. When negotiating the agreement to buy or sell a business, attention should be placed on whether a clause should be included to empower the court to revise an otherwise unenforceable provision of a restrictive covenant. Including such a provision may result in a court revising an overly-broad restrictive covenant and preserving for the buyer the value of what was purchased.
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John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law. For help concerning the sale or purchase of a business, or for more information, contact John Fleming at jfleming@mwbavl.com or (828) 254-8800.
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