C1 ASSOCIATION OF CORPORATE COUNSEL
By Maria Kalogredis, Jon L. Cochran, and Dylan J. Steinberg
CHEAT SHEET.
Blue pencil.
In many US
states, courts are permitted
to reform, or “blue pencil,” a
non-compete agreement if it is
overly broad. Depending on the
jurisdiction, that court may be
permitted to narrow portions
of the agreement that it finds
unreasonable, or sever invalid
terms while preserving others.
A wide net.
In July 2016, the
Nevada Supreme Court created a
significant dilemma for employers
in
Golden Road Motor Inn
,
Inc. v. Islam by invalidating a
non-compete agreement in its
entirety for being too broad. In
response to the decision, the
Nevada legislature mandated
that any non-compete agreement
deemed overly broad should be
revised instead of invalidated.
Sudden shift.
There are two
structural elements that make
the law of employee non-
competes susceptible to a
sudden regulatory shift: First, the
interpretation and enforcement
of non-competes is controlled by
the common law of contract, and
second, the common law of non-
competes is not fully established.
Protection direction.
With
uncertainty surrounding the
legal framework of non-compete
agreements, employers should
closely follow relevant appellate
court decisions, limit the
language of their own policies,
and revisit standards regularly.
34 ASSOCIATION OF CORPORATE COUNSEL
C1 ASSOCIATION OF CORPORATE COUNSEL
During the past few years, non-competes —
agreements that employees sign limiting their
future right to work in positions that compete with
their current employer — have been the subject
of remarkable controversy. A variety of sources
including the New York Times op-ed page
1
and former
US President Barack Obama
2
have argued that the
use and enforceability of such covenants should be
limited because they stifle the economy and unfairly
restrict the ability of workers, including workers in
low-paying positions, to find new jobs. The attorneys
general of both New York and Illinois have actively
pursued companies in their respective jurisdictions
for perceived overuse of non-compete covenants,
resulting in some well-publicized consent decrees. On
the other hand, many companies regard non-competes
as essential to their willingness to entrust workers
with sensitive information and training.
ACC DOCKET APRIL 2018 35
Legislation proposing various limitations
on the validity and enforceability of non-
competes has been proposed in the US
Congress and in numerous state houses.
ese proposed legislative changes have
been closely watched by companies
who rely on non-competes to protect
their interests. Corporate executives and
representatives of trade organizations
have testied at legislative hearings in
numerous jurisdictions.
But while the activities of legislative
bodies with respect to employee non-
competes are oen closely followed by
employers and trade organizations, the
activities of appellate courts — whose
decisions can be just as disruptive to the
existing regime — have not received the
same attention. is article examines
this issue through the lens of a recent
decision by the Nevada Supreme Court
regarding the “blue pencil” doctrine
and suggests ways for employers with
a signicant interest in the enforce-
ability of employee non-competes to
prepare themselves for the possibility
of unexpected change to the applicable
legal framework, including following
closely the appellate courts in relevant
jurisdictions, ensuring that covenants
are appropriately tailored to the employ-
ees they cover, and taking advantage of
opportunities to regularly review and
recalibrate the covenants applying to
their employees.
The blue pencil doctrine
Under the law of many states, courts are
permitted to reform, or “blue pencil,”
a non-competition covenant that is,
on its face, unenforceably overbroad.
Depending on the jurisdiction, the court
may be permitted — or in some cases,
required — to narrow a covenant that it
nds unreasonable as written to render
it enforceable or, alternatively, to sever
invalid terms while preserving others.
us, in many cases, the focus of the
courts is not on whether the non-compe-
tition covenant will be enforced as writ-
ten but rather on whether a covenant can
be constructed that reects the parties’
agreement and properly balances the for-
mer employer’s need for protection from
unfair competition with the employee’s
right to seek new employment and to
earn a living. While the majority of
jurisdictions in the United States permit
courts to blue pencil non-competes to at
least some degree, the doctrine has long
been the subject of debate.
e proponents of blue penciling note
that voiding an entire covenant because
of modest overreach “would frustrate the
intent of the contracting parties,” particu-
larly given that “a reasonable time period
or geographical area is not capable of
precise calculation.”
3
ey point out that
the existence of a non-compete covenant
is evidence of the parties’ shared intent
to impose limitations on the employee’s
right to move to a competitor and that an
all-or-nothing approach to enforcement
may eectively frustrate that intent.
On the other side of the argument,
courts that refuse to blue pencil non-
competes have focused on three primary
concerns. First, courts have observed
that blue penciling “is tantamount to the
construction of a private agreement and
that the construction of private agree-
ments is not within the power of the
courts.”
4
Second, courts have expressed
concern that blue-penciling creates an
incentive for the employer to overreach,
knowing that if the non-competition
covenant is found unenforceably broad
as draed, a narrower version will be
substituted and enforced.
5
ird, courts
note that “for every covenant that nds
its way to court, there are thousands
that exercise an in terrorem eect on
employees who respect their contractual
obligations and on competitors who
fear legal complications if they employ
a covenantor.” Because most employees
simply comply with their non-competes
rather than challenging them in court,
the argument goes, the law should pro-
vide a strong incentive for employers not
to overreach.
Golden Road Motor Inn
It was against the background of this
debate that, in July 2016, the Nevada
Supreme Court decided Golden Road
Motor Inn, Inc. v. Islam, 376 P.3d 151
(Nev. 2016). In that case, Atlantis
Casino Resort Spa had a contract with
its employee, Sumona Islam, that in-
cluded a covenant not to accept employ-
ment with another gaming establish-
ment within a 150-mile radius for one
year aer the end of her employment
with Atlantis. Islam was a casino host at
Atlantis and was responsible for manag-
ing Atlantis’ relationship with some of
its most frequent guests.
Islam le Atlantis to work in an iden-
tical position for a competing casino,
Grand Sierra Resort, located less than
four miles from Atlantis. In addition,
she took the contact information for
many of Atlantis’ frequent customers
Maria Kalogredis is deputy general counsel at Wawa, Inc., as well as vice president and
secretary of the Wawa Foundation, Inc. She also currently serves on the board of directors of ACC
Greater Philadelphia. [email protected]
Jon L. Cochran represents financial institutions, corporations, and individuals in a range of
complex matters including noncompete clauses, ERISA, and employment disputes. He also
maintains an active pro bono practice. jcochran@hangley.com
Dylan J. Steinberg draws on his consulting background for a deep understanding of how legal
issues impact businesses and the bottom line, specifically for businesses in the pharmaceutical
and technology sector. [email protected]
36 ASSOCIATION OF CORPORATE COUNSEL
ADDRESSING INCREASING UNCERTAINTY IN THE LAW OF NON-COMPETES
with her. She entered that information
into the computer database at Grand
Sierra and contacted many of her for-
mer customers at Atlantis, encouraging
them to gamble at Grand Sierra instead.
Atlantis sued and the trial court held
that Islam had breached her non-com-
petition covenant.
6
e Nevada Supreme Court examined
the non-competition covenant at issue
and found it overbroad in two respects.
First, it found that the 150-mile radius
was too wide, nding it “unlikely that
Islam would be luring players from
Atlantis” to another casino 150-miles
away. Second, the court found that
a covenant prohibiting any type of
employment with another gaming
establishment was unnecessarily
restrictive and unreasonably prevented
Islam from gainful employment.
Importantly, neither of those bases for
overbreadth was reected in the facts
of Islam’s case. She had gone to work in
an identical position for a casino less
than four miles away. Nevertheless, the
court found that, as draed, the non-
competition covenant was substantially
broader than necessary to protect
Atlantis’ business interests.
e court’s next sentence may strike
fear into the hearts of employers who
rely on non-competes: “Under Nevada
law, such an unreasonable provision
renders the noncompete agreement
wholly unenforceable.” Having found the
terms of the non-competition covenant
to be overbroad, the court adopted an
all-or-nothing approach to construction
of the agreement and refused to grant
Atlantis any relief on its claim. e ma-
jority expressed concern that any other
action would essentially create a new
contract for the parties from whole cloth,
which, it concluded, the court lacked the
power to do. e court was persuaded
by many of the factors that have guided
those jurisdictions that have refused
to permit blue-penciling, including a
concern that the doctrine “favors the
employer by presuming the employer’s
good faith,” encouraging employers to
dra overbroad covenants, and that the
lack of consequences to the employer of
overbroad non-competes has the eect of
punishing employees who do not litigate
but instead abide by the terms of their
contract as written without litigation.
e three dissenting justices raised
serious concerns about this holding.
ey noted that there was “no doubt
that Islam and Atlantis agreed to restrict
Islam’s future employment as a ca-
sino host and that such a restriction is
reasonable.” Because a non-competition
covenant barring Islam’s actual con-
duct — going to work in an identical
position for a competitor less than four
miles away — would unquestionably
have been reasonable, and because there
was no evidence of bad faith on Atlantis’
part, the dissenters took the position that
granting relief to Atlantis was the best
way to give life to the intent of the con-
tracting parties. ey further pointed out
that reformation of a contract is a recog-
nized equitable remedy and that, here,
those equities clearly favored Atlantis.
Golden Road represented a cataclys-
mic shi for Nevada employers. One
Nevada employment lawyer wrote, in an
advisory to his clients, that Golden Road
“will fundamentally impact the interpre-
tation and enforceability of almost every
non-competition agreement in Nevada.”
7
e Nevada court’s decision created
a signicant dilemma for employers,
The court’s next sentence
may strike fear into the
hearts of employers who
rely on non-competes:
“Under Nevada law,
such an unreasonable
provision renders the
noncompete agreement
wholly unenforceable.”
ACC DOCKET APRIL 2018 37
particularly because the enforceability of
non-competes is a fact-intensive inquiry
the results of which can be dicult to
predict in advance. On the one hand,
employers would like to maximize
the scope of the protections in their
contracts. On the other hand, under the
Nevada Supreme Court’s approach, if
the employer overreaches, there could
ultimately be no protection at all.
In response to the resulting conster-
nation, the Nevada legislature stepped
in and eectively overturned Golden
Road, quickly passing legislation that
requires courts to blue-pencil overbroad
non-competes.
8
e law now provides
that the court “shall revise the covenant
to the extent necessary and enforce the
covenant as revised,” if the language is
found to be overbroad.
But perhaps the most striking fact
about the Golden Road decision is a
procedural one. Despite the sig-
nificance of its holding for Nevada
employers, not a single employer or
advocacy group filed an amicus brief
before the Nevada Supreme Court.
Golden Road, and particularly the
lack of participation by the broader
community of Nevada employers,
underscores the importance of fol-
lowing not only potential develop-
ments in the legislature but those in
the courts as well. And, as discussed
in more detail below, employers that
carefully tailor the scope of their
non-competes and that revisit such
clauses regularly are in the best posi-
tion to weather the sorts of changes
that may arise suddenly out of the
appellate courts.
Sources of instability in the
law of non-competes
e risk of such a sudden shi in the law
exists in many areas. But there are two
structural elements that make the law of
employee non-competes particularly sus-
ceptible to the kind of rapid about-face
that occurred in Nevada.
First, although legislative proposals
have been frequently brought forward
in recent years, the interpretation and
enforcement of non-competes is pri-
marily controlled in most states not by
statute but by the common law of con-
tract. While some states have enacted
statutes that expressly govern when
non-competes may be enforced, see, e.g.,
Cal. Bus. & Prof. Code § 16600 (prohib-
iting non-competes except as expressly
permitted by statute); Mont. Code Ann.
§ 28-2-703 (same), the majority of states
evaluate the validity and enforceability
of non-competes under common law
of contracts as developed by the courts.
And, even where statutory schemes are
in place, many factors pertaining to the
enforcement or interpretation of non-
competes may be outside the scope of
the statute and thus controlled by com-
mon law. In California, for example, the
court cannot blue-pencil a non-compet-
itive covenant to bring it into compli-
ance with statutory prohibitions.
9
Second, and relatedly, the common
law of non-competes is oen not fully
established. Much of the litigation over
non-competes occurs in the form of
motions for preliminary injunction
when, for example, an employer seeks to
enjoin a former employee from working
for a competitor. In many of these cases,
by the time an appeal could even be
considered by the state’s highest court, it
has been mooted by the passage of time
either because the employee’s contractual
period of restriction has come and gone
or because the technology or asset the
former employer was seeking to protect
has long since been revealed. us,
although non-competes may be the sub-
ject of frequent litigation in trial courts,
they are much less frequently addressed
Much of the litigation over
non-competes occurs in
the form of motions for
preliminary injunction
when, for example, an
employer seeks to enjoin
a former employee from
working for a competitor.
38 ASSOCIATION OF CORPORATE COUNSEL
ADDRESSING INCREASING UNCERTAINTY IN THE LAW OF NON-COMPETES
by appellate courts, particularly states’
highest courts. is can lead to a dearth
of precedential decisions and leaves the
law in many jurisdictions rather murky.
Taken together, these factors can lead
to substantial uncertainty and instability
in the law applied to non-competes. In
Pennsylvania, for example, the blue-pen-
ciling of non-competes is still controlled
largely by two Supreme Court cases that
are more than 40-years-old and whose
holdings can be dicult to reconcile.
Reading Aviation Service, Inc. v.
Bertolet, 311 A.2d. 628 (Pa. 1973)
concerned an attempt to enforce a non-
competition covenant that contained no
limitations as to geographic scope or du-
ration. e Pennsylvania Supreme Court
refused to enforce the covenant on the
ground that it was overbroad and refused
to blue-pencil the covenant — citing the
same argument that the Nevada Supreme
Court recently relied on in Golden Road
— because modifying such overbroad
clauses “tends to encourage employ-
ers […] possessing superior bargaining
power over that of their employees and
vendors to insist upon unreasonable
and excessive restrictions, secure in the
knowledge that the promise may be
upheld in part, if not in full.”
Just three years later, in Sidco Paper Co.
v. Aaron, 351 A.2d 250 (Pa. 1976), the
same court reached essentially the oppo-
site result. Sidco concerned the enforce-
ment of a non-competition covenant that
prevented an employee from working
in a similar business anywhere from
Virginia to Massachusetts, even though
his sales territory actually covered a
much smaller area. Although it con-
cluded that the covenant was overbroad
on its face, the Supreme Court armed
a narrower, blue-penciled geographic
scope, emphasizing that this was neces-
sary to prevent the wrongful conduct
of the former employee. e court con-
cluded: “e reason for this policy is a
refusal to allow the employee to prot, at
the expense of his former employer, from
his wrongful and inequitable conduct.”
e Sidco court narrowly constrained
Reading Aviation’s skepticism of the blue-
pencil doctrine, nding that it should be
applicable only to covenants that exhibit
“gratuitous overbreadth,” which is indica-
tive of “an intent to oppress the employee
and/or foster a monopoly, either of
which is an illegitimate purpose.”
Although Reading Aviation and
Sidco reach largely contradictory
conclusions about the permissibility of
blue-penciling, both remain good law in
Pennsylvania and both are still regularly
cited by litigants and by trial and inter-
mediate appellate courts. Eectively, the
law in Pennsylvania is that suggested by
the Golden Road dissent: Blue-penciling
is permissible absent a showing of bad
faith by the employer. But that regime
has arisen not out of a clear statement
of law from the Pennsylvania Supreme
Court, but as a patchwork assembled
by the lower courts’ collective reading
of the ambiguous tea leaves of Reading
Aviation and Sidco.
Against the background of frequently
uncertain and underdeveloped law, it
is far easier for a state’s highest court
to adopt a policy — as the court did in
Golden Road — that works a substantial
change in the law on the ground. In
the absence of the stability provided by
statutory authority or the stare decisis
considerations raised by robust and
recent precedent, there is little to prevent
a court from altering the law and un-
dermining the plans of employers who
have developed their contractual forms
and policies in reliance on the law as it
currently exists. As a result, it would not
be surprising to see other courts take the
approach of the Nevada Supreme Court
and change the law of non-competes to
avoid results they see as inequitable.
How can employers protect themselves?
With all this uncertainty about the legal
regime that applies to non-competes,
what should employers who rely on
those covenants do to protect their
interests? We recommend that employers
take three common-sense steps.
Follow relevant appellate courts.
e key takeaway from Nevada’s
experience with Golden Road is that
employers that rely on non-competes
should monitor cases in the appellate
courts in the jurisdictions where
they have employees.
11
Where cases
raising signicant issues related to
non-competes are pending before
those courts — particularly the
highest court in a jurisdiction —
employers and trade organizations
should consider ling amicus briefs
to ensure that the court is aware
of the potential broad eects of
the holdings sought by the parties.
While such participation will not
necessarily prevent a problematic
result, it does at least ensure that the
court is aware of the ramications of
its potential decision.
12
Don’t overreach. While the legal
regimes applicable to the validity
and enforceability of non-competes
are highly variable from one state
to another, there is one near-
constant: e more narrowly
tailored a covenant is to protection
of the employer’s legitimate
interests, the more likely it is to be
enforced. Consideration of what
protection is actually necessary
regarding each employee will help
the employer design covenants
that provide adequate protection
but reduce the risk of being seen
In the absence of the
stability provided by
statutory authority or the
stare decisis considerations
raised by robust and recent
precedent, there is little to
prevent a court from altering
the law and undermining
the plans of employers
who have developed their
contractual forms and
policies in reliance on the
law as it currently exists.
ACC DOCKET APRIL 2018 39
as overreaching. It is frequently
better to draft a narrow covenant
that the employer is confident
will be enforced than a broad
covenant whose enforceability
may need to be litigated. This is
particularly true where the same
covenant is applicable to many
similar employees. If a covenant
applicable to many employees is
voided or modified by a court,
that ruling may preclude the
employer from seeking to enforce
that same covenant against other
employees. In addition, some
courts will consider evidence
regarding whether an employer
tailors its restrictive covenants
to the particular situations of its
employees when deciding whether
those covenants are reasonable
and, therefore, enforceable.
Revisit covenants regularly.
Because both the roles of
particular employees and
the competitive situations of
employers change over time,
it is important to regularly
consider whether the scheme of
non-competes in place strikes
the proper balance between
reasonability and protection of
the employer’s interest. A “set
it and forget it” approach to
non-competes, while perhaps
simplest in execution, does not
provide the best protection for
the employer’s interests. In some
jurisdictions, for example, a non-
competition covenant may only
be entered into or strengthened
if the employee receives new
consideration at the time of the
agreement.
13
Thus, the times
when such new consideration is
provided — when the employee
receives a promotion, a raise,
a bonus, or a grant of stock
options, for example — are
opportune times for the employer
to examine whether the non-
competition covenant applying
to that particular employee
is appropriate and adjust it if
necessary. Those same junctures
may also represent a change in
employee job responsibility, which
might likewise warrant a review of
applicable covenants. And, indeed,
a regular practice of reviewing the
scope of existing non-competes
may constitute further evidence
of appropriate tailoring and good
faith and thus may ultimately
help the employer support the
validity of those covenants in the
event of litigation. Such a practice
also provides a built-in, periodic
opportunity for the employer to
react to a court decision that alters
the existing legal framework for
the validity or enforceability of
non-competes.
Conclusion
In sum, while possible statutory
changes often win more attention,
employers should be cognizant of
the possibility that state appellate
courts may significantly change the
law governing non-competes with
little warning. By taking the practical
steps outlined above, employers can
put themselves in the best position to
weather changes in this often uncer-
tain area of the law.
ACC
NOTES
1 www.nytimes.com/2017/05/04/opinion/
noncompete-agreements-workers.html.
2 https://obamawhitehouse.archives.
gov/blog/2016/05/05/what-you-need-
know-about-non-compete-agreements-
and-how-states-are-responding.
While the legal regimes
applicable to the validity
and enforceability of non-
competes are highly variable
from one state to another,
there is one near-constant:
The more narrowly tailored
a covenant is to protection
of the employer’s legitimate
interests, the more likely
it is to be enforced.
40 ASSOCIATION OF CORPORATE COUNSEL
ACC EXTRAS ON… Non-compete agreements
ACC Docket
Creating Defensible
Employment Agreements
Before an Employee’s
First Day (Sept. 2017).
www.accdocket.com/
articles/creating-
defensible-employment-
agreement.cfm
I’m Out! 7 Things to Do
When a Key Employee
Leaves (Aug. 2017). www.
accdocket.com/articles/7-
things-to-do-when-a-key-
employee-leaves.cfm
The Future of Non-
compete Agreements
in In-house Practice
(Nov. 2014). www.
accdocket.com/
articles/resource.
cfm?show=1380728
QuickCounsel
Post-term non-
compete clauses in
the European Union
(May 2017). www.acc.com/
legalresources/quickcounsel/
non-compete-clauses-in-
the-european-union.cfm
Should Non-compete
Clauses be Compensated?
(April 2014). www.acc.com/
legalresources/quickcounsel/
snccc.cfm
Wisdom of the Crowd
Independent Contractor/
Employee Violation
of Non-Compete
(Jan./Feb. 2017).
www.acc.com/legalresources/
wisdom/violation-of-non-
compete.cfm
ACC HAS MORE MATERIAL
ON THIS SUBJECT ON
OUR WEBSITE. VISIT
WWW.ACC.COM, WHERE
YOU CAN BROWSE
OUR RESOURCES BY
PRACTICE AREA OR
SEARCH BY KEYWORD.
ADDRESSING INCREASING UNCERTAINTY IN THE LAW OF NON-COMPETES
3 Health Care Fin. Enterprises, Inc.
v. Levy, 715 So. 2d 341, 343
(Fla. Dist. Ct. App. 1998).
4 CAE Vanguard, Inc. v. Newman, 518
N.W.2d 652, 655 (Neb. 1994).
5 Richard P. Rita Pers. Servs. Int’l,
Inc. v. Kot, 191 S.E.2d 79, 81 (Ga.
1972) (finding that “employers can
fashion truly ominous covenants with
confidence that they will be pared
down and enforced when the facts of a
particular case are not unreasonable”).
6 There were various other claims
against both Islam and Grand Sierra
at issue both in the trial court and on
appeal but, for purposes of this article,
we focus on the claim for breach
of her non-competition covenant.
7 www.lrrc.com/client-alert-
atlantis-decision.
8 2017 Nevada Laws Ch.
324 (A.B. 276).
9 See, e.g., Applied Materials, Inc. v.
Advanced Micro-Fabrication Equip.
(Shanghai) Co., 630 F. Supp. 2d
1084, 1091 (N.D. Cal. 2009) (finding
that California law does not permit
blue-penciling of a non-competition
covenant to bring it into compliance
with statutory prohibitions).
10 The enforceability of choice of law
provisions in employment contracts
is beyond the scope of this article,
but employers may be able to reduce
the number of relevant jurisdictions
by incorporating a provision selecting
the law of their primary place of
business or state of incorporation.
11 See, e.g., Hostetler v. Answerthink, Inc.,
599 S.E.2d 271, 275 (Ga. Ct. App.
2004) (applying preclusion doctrines
against the employer with regard to
enforcement of an overbroad covenant).
12 See, e.g., Laidlaw, Inc. v. Student Transp.
of Am., Inc., 20 F. Supp. 2d 727, 765
(D.N.J. 1998) (refusing to blue-pencil
non-competes where the employer failed
to “tailor their restrictive covenants
based on the confidential information
to which the covenantor had access”).
13 Labriola v. Pollard Grp., Inc., 834, 100
P.3d 791, 794 (Wash. 2004) (identifying
potential sources of new consideration
for a non-competition covenant including
“increased wages, a promotion, a
bonus, a fixed term of employment”).
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