Illinois is one of several jurisdictions that recognizes the authority of courts to blue pencil or judicially modify otherwise unenforceable restrictive covenants to be enforceable. See, e.g. Weitekamp v. Lane, 250 Ill. App. 3d 1017, 1028, 620 N.E.2d 454, 462 (4th Dist. 1993) (affirming judicial modification of 300-mile non-compete to specific county); Arpac Corp. v. Murray, 226 Ill. App. 3d 65, 80, 589 N.E.2d 640, 652 (1st Dist. 1992) (affirming the circuit court’s modification of restrictive covenant when it was modified “only slightly” and holding that the balance of the restrictions were reasonable and necessary to protect Arpac’s legitimate business interests).

Recent reported decisions, however, cast doubt on the availability of judicial modification in all but exceedingly limited circumstances. In the past three years, only a handful of cases even mentioned judicial modification and, of those cases, not one actually modified, or affirmed the modification of, an otherwise unenforceable covenant. See AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, ¶ 52 (2015) (refusing to modify restrictive covenants because “deficiencies too great to permit modification”); Bankers Life & Cas. Co. v. Miller, No. 14 CV 3165, 2015 WL 515965, at *3 (N.D. Ill. Feb. 6, 2015) (deciding choice of law, noting that “Illinois courts are circumspect in their modification” and that “Illinois courts look skeptically at modifications, and may modify covenants only after ensuring that fairness is not harmed”); Fleetwood Packaging v. Hein, No. 14 C 9670, 2014 WL 7146439, at *9 n.7 (N.D. Ill. Dec. 15, 2014) (rejecting a proposed modification that would a create a durational limitation where none existed before, noting that “[e]ven when courts have found judicial reformation to be warranted, the challenged restrictive covenants needed only slight modification to become reasonable”).  Continue Reading Illinois Employers Should Not Depend on Blue Penciling to Enforce Restrictive Covenants

shutterstock_210713560Since July 1, 2001, Missouri law with respect to non-solicitation clauses has been fairly straightforward.  Specifically, § 431.202 of the Missouri Statutes states that a covenant not to solicit between an employer and an employee is presumed reasonable if it is no longer than one year in duration and designed to protect confidential information, customer relationships, and/or good will. Section 431.202 also states that the statute does not apply to covenants not to compete, thereby allowing the courts to decide the enforceability of a non-competition clause on a “case-by-case” basis.  (Id. § 3).

A Bill, however, currently pending in the Missouri House of Representatives seeks to abolish Missouri’s non-solicit statute and ban all restrictive covenants except for those restrictive covenants found in a “business to business” setting.  Specifically, House Bill 479, introduced by Representative Keith Frederick (R), seeks to eliminate all types of restrictive covenants (non-compete, non-solicit, and non-hire) except when the restrictive covenants involve the sale of a business or are between two corporations engaged in a joint venture. The Bill would go into effect August 28, 2017.  Thus, any restrictive covenant agreement between an employer and an employee that is a) controlled by Missouri law and b) entered into after August 28, 2017 would be unenforceable.

In addition to House Bill 479, a recent Federal Court decision in the Eastern District of Missouri also has the attention of non-compete lawyers. In Durrell v. Tech Electronics, Inc., plaintiff Robert Durrell brought suit against his former employer, Tech Electronics, Inc., alleging that he was wrongfully terminated and retaliated against for taking FMLA leave. Durrell’s Complaint further alleges that the restrictive covenants found in his Employment Agreement are unenforceable due to a lack of consideration. The Court denied Tech’s Motion to Dismiss Durrell’s restrictive covenant claims by ruling that at-will employment is “not a source of consideration under Missouri contract law.” Notably, the Court did not address § 431.202’s specific language that a non-solicitation clause is enforceable if it protects confidential information, customer relationships, and/or good will. In fact, the Court does not even mention § 431.202 in its opinion. (Probably because the Court was only asked to address whether “at-will employment” is sufficient consideration for enforcing a restrictive covenant).

We will continue to monitor House Bill 479 (the Bill is currently in “Executive Session”) as well as the Durrell case, and will provide all relevant updates on this blog.

shutterstock_287601008A California federal district court has recently given employers a small victory against former employees who misappropriate trade secrets and assert whistleblower immunity or the litigation privilege as after-the-fact defenses. The federal district court for the Eastern District of California recently rejected, for a second time, a defendant’s anti-SLAPP motion to strike a trade secret lawsuit brought against him by his former employer. Notably, the court rejected the defendant former employee’s whistleblower and litigation privilege defenses as inapplicable, thereby allowing the beer company’s trade secret action to proceed.

On March 1, 2013, the beer company sued the former employee for, among other things, trade secret misappropriation and breach of nondisclosure agreements. The former employee subsequently filed a motion to dismiss and strike the Complaint under California’s anti-SLAPP statute. Specifically, the former employee argued that the Complaint was an attempt to punish him for purportedly exercising his constitutional rights of petition and free speech in connection with a consumer class action litigation that he filed against the company exactly one week before.

The federal district court denied the former employee’s anti-SLAPP motion and concluded that the company’s claims did not arise out of the former employees protected litigation activity. The former employee appealed.

The Court of Appeals for the Ninth Circuit reversed the district court and remanded back so the district court could consider the next prong of the anti-SLAPP analysis, the plaintiff’s probability of prevailing on its claims.

Upon its second review of the former employee’s anti-SLAPP motion, the federal district court concluded that the company had demonstrated a likelihood of prevailing on its trade secret misappropriation and breach of contract claims. The court then turned to and rejected the former employee’s substantive legal defenses of public policy, whistleblower immunity, and the litigation privilege.

First, the court rejected the former employee’s argument that confidentiality agreements are unenforceable as a matter of public policy. The court refused to adopt such a sweeping rule that would render confidentiality agreements unenforceable that would allow former employees to disclose trade secret or confidential information.

Second, the court acknowledged that California provides protection to whistleblowers but only when the employee discloses reasonably based suspicious of illegal activity to a governmental agency. The court concluded that such protections did not apply to employees who disclose information to their attorneys in order to further a class action against an employer.

Lastly, the court rejected the former employee’s argument that the misappropriation of documents in furtherance of anticipated litigation was protected under the litigation privilege. The court reasoned that the litigation privilege does not protect against illegal activity that causes damage and to protect such threats is inconsistent with the purposes of the anti-SLAPP statute.

It would be interesting to see the court’s analysis and decision, however, had the alleged misappropriation occurred after the enactment of the new Defendant Trade Secrets Act (“DTSA”), which appears to provide broader whistleblower protections. The court in this case highlighted that California’s whistleblower statute protected only disclosures to government agencies and not a defendant’s attorneys. The DTSA, however, protects individuals from criminal and civil liability under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding. (For additional information on the DTSA and its implications regarding whistleblowers, please see our DTSA Guide.)

Nonetheless, this case confirms that employees do not have an unfettered right to surreptitiously take documents from the workplace for their own use in litigation or otherwise. Indeed, the Ninth Circuit has rejected the concept of “blanket” protection for whistleblowers for violation of confidentiality agreements and misappropriation of confidential documents. See Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011).

With the likely broader whistleblower protections under the recently enacted DTSA, however, employers that utilize agreements and policies to protect trade secrets and other confidential information should ensure such documents have been updated to comply with the DTSA and its important employee and whistleblower notification provisions

 

shutterstock_547628332In Spring 2011, the Georgia legislature passed a new restrictive covenant statute, which, for the first time, allowed Georgia courts in reviewing non-competition agreements between employer and employee to blue-pencil or “modify a covenant that is otherwise void and unenforceable so long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” O.C.G.A. § 13-8-53(d). Since the new Georgia statute only applies to agreements executed after its enactment, there has been limited litigation concerning the meaning and scope of this provision.

Most of the litigation between 2011 and the present has involved requests by a party that the Court strike an offending provision in a non-compete agreement. Recently, the Northern District of Georgia was given the opportunity to determine whether Georgia’s blue-pencil provision also gives Georgia courts the authority to modify an unenforceable non-compete provision. In LifeBrite Labs., LLC v. Cooksey, No. 1:15-CV-4309-TWT, 2016 WL 7840217, at *1 (N.D. Ga. Dec. 9, 2016), the former employer, LifeBrite, sued its former employee, Cooksey, after she began working for a competitor company. Cooksey’s non-compete provision provided as follows:

7.2. Non-Competition. For as long as she is employed and for a period of one (1) year thereafter, employee shall not participate, directly or indirectly, as an owner, employee, consultant, office management position, in any proprietorship, corporation, partnership, limited liability company or other entity, engaged in any laboratory testing that is being sold by employee on behalf of company.

The Northern District of Georgia found that this provision was overbroad and unenforceable as it did not contain any geographic limitation. Consequently, the Court considered whether or not Georgia’s blue-pencil rules allowed it to modify the non-compete provision to insert a reasonable geographic limitation. In reasoning through the analysis, the Court referred to pre-2011 cases in which Georgia courts interpreted a similar non-compete provision in the context of sale of business agreements. In those cases, Georgia courts held that the blue-pencil marks but it does not write. Thus, the NDGA declined to enforce Cooksey’s non-compete and held that in applying Georgia’s blue-pencil statute, “courts may not completely reform and rewrite contracts by supplying new and material terms from whole cloth.”

The NDGA also noted that Georgia’s employers are “sophisticated entities” which “have the ability to research the law in order to write enforceable contracts; courts should not have to remake their contracts in order to correct their mistakes.” This case is simply further caution to Georgia employers to review their non-competition agreements for overbreadth, vagueness, and the absence of essential limiting terms. As always, the attorneys at Seyfarth Shaw LLP are available to assist in these endeavors.

The LifeBrite Laboratories, LLC v. Cooksey case was dismissed with prejudice on January 25, 2017.

shutterstock_413782369There were significant developments and a near miss in trade secret and restrictive covenant law both federally and in Massachusetts in 2016, including the passage of the federal Defend Trade Secrets Act and the failure again of the Massachusetts legislature to pass noncompete reform legislation.  In addition, the Obama White House issued a “Call to Action” with respect to noncompete agreements in its waning days.  Understanding the impact of these changes, and what to expect in 2017, will help your company safeguard its most valuable assets and maintain its advantage over competitors.

On Wednesday, December 14th at 8:00 a.m. Eastern, the Boston office is hosting a Breakfast Briefing entitled “Change is in the Air: 2016 Developments in Trade Secret and Restrictive Covenant Law in Massachusetts and Beyond, and What to Expect in 2017.” Attorneys Katherine Perrelli, Erik Weibust, and Dallin Wilson will discuss recent developments in restrictive covenant and trade secrets law, and what to expect in 2017.

The program will focus on practical responses to the following issues and questions:

  • What you need to know about the federal Defend Trade Secrets Act of 2016
  • What to expect with respect to noncompete reform in Massachusetts in 2017
  • What does the White House’s Call to Action mean for Massachusetts businesses, and will it stick with the new Administration?
  • Important decisions of 2016 in Massachusetts and beyond

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There is no cost to attend but registration is required and seating is limited. Members of the general counsel’s office, HR professionals, corporate executives, risk managers, and directors are invited to attend. The breakfast briefing will take place from 8:00 a.m. to 10:00 a.m. Eastern at Seyfarth’s Boston office: Two Seaport Lane, Suite 300, Boston, MA 02210.

Cross Posted from Employer Labor Relations Blog.

Seyfarth Synopsis: The U.S. Court of Appeals for the D.C. Circuit recently denied Quicken Loans, Inc.’s petition for review of an NLRB decision finding that confidentiality and non-disparagement provisions in the company’s Mortgage Banker Employment Agreement unreasonably burdened employees’ rights under Section 7 of the NLRA.

Back in 2013, an NLRB administrative law judge found that certain confidentiality and non-disparagement provisions contained in Quicken’s Mortgage Banker Employment Agreement violated the NLRA (see our earlier blog post here). The Board agreed with the ALJ, and the Company petitioned the D.C. Circuit for review. Recently a three-judge panel of the D.C. Circuit denied the Company’s petition for review and granted the NLRB’s cross-application for enforcement, finding that there was nothing arbitrary or capricious about the Board’s decision and there was no abuse of discretion in the Board’s hearing process (Case No. 14-1231).

Facts

As a condition of employment, mortgage bankers were required to sign a Mortgage Banker Employment Agreement that included a confidentiality provision and a non-disparagement provision. The confidentiality provision prohibited employees from disclosing nonpublic information regarding the company’s personnel, including personnel lists, handbooks, personnel files, and personnel information of coworkers such as phone numbers, addresses, and email addresses. The non-disparagement provision prohibited employees from publicly criticizing, ridiculing, disparaging or defaming the company or its products, services, policies, directors, officers, shareholders or employees.

Court’s Reasoning

The D.C. Circuit noted that its review of the Board’s decision was limited, as Congress has entrusted the Board with implementing Sections 7 and 8(a)(1) of the Act and determining when an employer’s workplace rules run afoul of those provisions. The three-judge panel noted that the Board’s determinations are therefore entitled to considerable deference and will be sustained as long as the Board “faithfully applies” the legal standards and its textual analysis of a challenged rule is “reasonably defensible” and adequately explained.

In finding that the Board properly determined that the confidentiality provision violated employees’ Section 7 rights, the court noted that the very information the provision forbids employees from sharing (i.e., personnel lists and employee rosters) has long been recognized as information that employees must be permitted to gather and share among themselves and with union organizers. With respect to the non-disparagement provision, the court found that the Board “quite reasonably found that such a sweeping gag order would significantly impede mortgage bankers’ exercise of their Section 7 rights because it directly forbids them to express negative opinions about the company, its policies, and its leadership in almost any public forum.”

In reaching its conclusions, the appeals court noted that the validity of a workplace rule turns not on subjective employee understandings or actual enforcement patterns, but on an objective inquiry into how a reasonable employee would understand the rule’s disputed language. The court observed that this approach serves “an important prophylactic function: it allows the Board to block rules that might chill the exercise of employees’ rights by cowing the employees into inaction,” rather than forcing the Board to wait until that chill is manifest and then try to undertake the difficult task of dispelling it. The court also noted that the absence of enforcement “could just as readily show that employees had buckled under the Employment Agreement’s threat of enforcement.”

Employer Takeaway

In recent years, the Board has issued numerous decisions in which workplace rules were found to unlawfully restrict employees’ Section 7 rights, and the D.C. Circuit’s decision demonstrates that employer petitions for review of such decisions may not be successful. The decision also highlights the need to not just draft and review employee handbooks and policies for possible non-compliance with the NLRA, but employment agreements as well.

shutterstock_394290406As a thank you to our valued readers, we are pleased to announce the webinar “Enforcing Non-Compete Provisions in Franchise Agreements” is now available as a podcast and webinar recording.

In Seyfarth’s seventh installment in its series of Trade Secrets Webinars,  Seyfarth attorneys John Skelton, James Yu and Dawn Mertineit focused on the importance of State specific non-compete laws and legislation and recent Federal and State efforts to regulate the use of non-compete agreements; enforcement considerations for the Franchisee when on-boarding and terminating employees; and lessons learned from recent decision regarding enforcing non-compete provisions upon termination and non-renewal.

As a conclusion to this well-received webinar, here are three key takeaway points:

  • As reflected by the May 5, 2016 White House report (Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses), state and federal non-compete legislative proposals and recent enforcement action by the Illinois Attorney General challenging the use of non-compete agreements for lower level employees, Franchisors and Franchisees need to anticipate more regulation and scrutiny.
  • With respect to their own employees, Franchisors and Franchisees need to develop and implement on-Boarding, termination and other procedures designed to ensure that both departing and prospective employees understand their ongoing obligations with respect to the company’s confidential and proprietary information and trade secrets and that such information is protected throughout the employment relationship.
  • The enforceability of non-compete provisions are most often litigated in the context of a request for a preliminary injunction and several recent decisions confirm that to enforce a non-compete against a departing franchisee the franchisor (1) should be able to show harm to actual competition; (2) needs to act promptly and that enforcement delays likely means that any alleged harm is not irreparable; and (3) should develop and implement a post-termination plan beyond simply sending a notice of termination as the franchisor will need to present evidence of actual harm.

shutterstock_208182985A severance agreement executed in connection with a Stark Truss employee’s resignation included a one-year non-competition clause.  It allowed the company unfettered discretion to decide if his new employer was a competitor and, if so, to terminate his severance.  The ex-employee took another job and sued Stark Truss in an Ohio court, seeking a declaration that he was entitled to 100% of his severance.  The trial court’s judgment for Stark Truss was affirmed on appeal.  Saunier v. Stark Truss Co., Case No. 2015CA00202 (Ohio App., May 23, 2016).

The parties.  Stark Truss is an Ohio manufacturer and distributor of wood and steel components used in building construction.  Saunier, a 35-year employee, was the company’s asset manager.  Immediately after his separation from Stark Truss, Saunier accepted a similar position, nearby, with Carter Lumber.

Stark Truss’ “sole discretion”.  Under the severance agreement, Start Truss had “sole discretion” to denominate Saunier’s subsequent employer a “Competitor.”  The definition of “Competitor” was a business located within 100 miles of Stark Truss and “substantially similar” to that company.  Saunier was required to provide the company with detailed information concerning his new employment.  If Saunier affiliated with a “Competitor” within one year from his separation date, he forfeited further severance payments.  Stark Truss determined that Carter Lumber was a “Competitor.”

Ruling on appeal.  The Court of Appeals noted that both parties were represented by counsel in negotiating the Severance Agreement.  Consistent with several Ohio judicial decisions involving a “sole discretion” contract provision in other contexts, the appellate tribunal determined that the clause was unambiguous and was valid.

The court did not address the issue of whether Stark Truss’ “sole discretion” was without limitations.  Perhaps the judges concluded that the company’s determination was within the bounds of sound judgment and, therefore, it was reasonable.  Nor did the judges say whether the same ruling would have been issued to a “sole discretion” provision in a traditional employment contract non-compete rather than a severance agreement.

Takeaways.  The Saunier appellate court held that, under the circumstances there, an employer may reserve to itself the unilateral right to decide whether an employee has violated a non-compete.  Is such “sole discretion” unqualified?  Probably not.

There are very few reported decisions mentioning, much less adjudicating, the limits of a “sole discretion” contract provision in a non-compete context.

  • One opinion that refers to a “sole discretion” provision within a non-compete agreement is SkyHawke Technologies LLC v. Unemployment Commission, 27 A.3d 1050, 1052-53 (Pa. Commonwealth Court 2011).  However, the court did not address the provision’s validity.  There, an individual had a contract to provide services to a company.  He was permitted to furnish similar services to others, but he could be fired if the company determined, in its “sole discretion,” that his performance of those similar services was not in its best interests.  The company apparently made such a determination and terminated the contract.  The litigation concerned (a) the individual’s claim that he had been an employee and was entitled to unemployment compensation, and (b) the company’s counter that he had been an independent contractor to whom no such compensation was owed.  The court ruled in favor of the company but without significant discussion of the “sole discretion” provision.
  • A case holding that “sole discretion” sometimes is unlimited is Sunshine Gas. Distributors, Inc. v. Biscayne Enterprises, Inc., 39 So.3d 978 (Fla. App. 2014).  Each party to a lease had “sole discretion” to decide whether or not to renew.  The jurists stated that imposing a duty of “good faith and fair dealing” with respect to a contract containing what they called a “binary choice” would frustrate, rather than protect, the parties’ interests.  39 So.3d at 980 n.1.
  • However, an older Florida Appellate Court decision, Cox v. CSX Intermodal, Inc., 732 So.2d 1092, 1097-98 (1979), explained when a “good faith and fair dealing” requirement should be imputed with respect to an exercise of “sole discretion.”  In the jurists’ view, if a “broad range of authority is reposed in one party” to a contract, “the reasonable expectations” of the parties may need to be protected from an arbitrary discretionary decision.  So, if the parties seem to have anticipated that community standards of honesty, decency and reasonableness would be applied, “good faith and fair dealing” is required.  Although the Cox lawsuit did not involve a non-compete, the same principles might well be applied to an employer exercising “sole discretion” to decide whether an ex- employee is engaging in prohibited competition.

 

WebinarOn Tuesday, June 21, 2016 at 12:00 p.m. Central, Seyfarth attorneys, John Skelton, James Yu and Dawn Mertineit will present the seventh installment of the 2016 Trade Secrets Webinar series. This program will focus on protecting a franchisor’s trade secrets, confidential information, and goodwill through the use of covenants against competition.

The Seyfarth panel will specifically address the following topics:

  • The scope of protectable interests (for both the Franchisor and the Franchisee) in the franchise relationship and with respect to the franchise operating system.
  • Enforcement considerations for the franchisee when onboarding and terminating employees and for the franchisor with respect to terminated or withdrawing franchisees.
  • State non-compete laws and legislation and other state specific nuances.
  • Enforcing in-term and post-term non-compete provisions in the franchise context.
  • Lessons to be learned from recent non-compete decisions.

Our panel of attorneys have significant experience advising franchise, dealer, and distributor clients on protecting their brands, trade secrets, and other intellectual property, including litigating trade secret cases, drafting protection agreements, and conducting trade secret audits.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

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If you have any questions, please contact events@seyfarth.com.

shutterstock_406019920Palmetto bought the assets of Knight Systems’ mortuary transport business. The agreement of purchase and sale included (a) Palmetto’s commitment to buy body bags, at specified discounted prices, exclusively from Knight Systems for 10 years, and (b) Knight Systems’ promise not to provide mortuary transport services within 150 miles of Palmetto’s offices for the same period.  Notwithstanding the non-compete covenant, a few years later Knight Systems submitted a timely proposal — and was selected — to provide those services to a Palmetto customer within the 150-mile territory.  Palmetto sued Knight Systems for breach of contract, won below, but lost in the South Carolina Court of Appeals.

Status of the case.  By consent, Palmetto’s complaint and Knight Systems’ counterclaim were tried before a court-appointed referee.  Concluding that the geographic restriction in the non-compete was reasonable, he ruled in favor of Palmetto and awarded $373,000.  The Court of Appeals reversed and remanded. Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., No. 2014-001819 (S.C. Court of Appeals, May 4, 2016).

Background. Four years after the purchase and sale transaction, Palmetto customer Richland County published a RFP with regard to providing mortuary transport services to the county for five years.  The day before the deadline for responding, Knight Systems accused Palmetto of purchasing body bags from others in violation of its commitment to buy those products exclusively from Knight Systems.  Palmetto replied that it had spent a minimal amount, less than $450 (1% of the aggregate amount it had paid Knight Systems), for products covered by the contract’s exclusivity provision.

Knight Systems was the only source for the odor-proof body bags required by the RFP. Shortly before the contract was awarded, it informed Richland County that it (Knight Systems) intended to take those products off the market.  This would leave Palmetto unable to satisfy a contractual condition.  Whether for this reason or otherwise, and despite Palmetto’s contention that it had submitted the most favorable proposal, Knight Systems was awarded the contract.

Reversal of the referee’s decision. The only issue addressed on appeal was the reasonableness of the geographic limitation in the assets sale agreement.  According to the court, the referee cited two bases for his conclusion that the limitation was reasonable.

  • Palmetto’s owner testified that it wanted the 150-mile restriction included in the purchase and sale agreement because, although Knight Systems did mortuary transport business in only two South Carolina counties, Palmetto was considering an expansion of the territory.  The appellate tribunal held that this testimony did not justify a restriction encompassing parts of three states, especially since there was insufficient “evidence of definitive planning, acquisitions, or other overt acts” in support of possibly enlarging the service area.
  • A Knight Systems owner testified that the company did not object to including the restriction in the agreement because, at that time, Knight Systems had not intended to get back into the business after the sale to Palmetto.  The court said Knight Systems’ “intention of not returning to the mortuary transport business is [not] a relevant factor for analyzing whether a territorial restriction is reasonable.”

Lastly, the Court of Appeals addressed the possibility of “blue penciling” the 150-mile restriction. That would be permissible under South Carolina law, the judges said, only if the agreement authorized redrawing the provision.  The Palmetto-Knight Systems contract did not so authorize.  Accordingly, blue penciling would mean inserting “an arbitrary term” as to which the parties neither negotiated nor agreed.

Takeaways. Many judicial opinions state that restrictive clauses in a non-compete contained in an employment agreement must be reasonable or they are subject to being invalidated. Palmetto makes the same point regarding restrictions in an assets sale contract.

Palmetto also teaches that when drafting a non-competition and/or a non-solicitation clause for an employment or sales agreement, consider authorizing a decision-maker to modify unreasonable geographic and duration provisions.  However, trade secret confidentiality clauses — not involved in the Palmetto case — rarely are invalidated because of allegedly unreasonable territorial or time restrictions (such clauses are subject to being stricken in their entirety by a court holding that there is no substantial risk of disclosure).