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Singin’ the Blues About the “Blue Pencil”

Posted by Frank Steinberg | Jun 16, 2015 | 0 Comments

I just stumbled across this post from the Franchise Law Update blog. It deals with a recent decision from the Nebraska Supreme Court that invalidated the non-compete provision of a franchise agreement.  The court in Unlimited Opportunity, Inc. v. Waadah threw out the entire non-compete agreement because one part of it was geographically unreasonable. And that provision was not even relevant to the dispute between the parties!  But that's the law in Nebraska: if any part of a non-compete is invalid, the whole agreement is invalid, and the employee whose conduct is sought to be restrained can do as he wishes in competition with his former employer.

Now let's be clear.  Nebraska takes a distinctly minority view of this issue, and it most certainly does not reflect the law of New Jersey, where the “blue pencil” rule is in effect.  If a New Jersey court finds part of a non-compete to be invalid it will modify the parties' agreement to cut out the offending provision and leave the rest of the agreement intact.  That's called “blue penciling.”

So why bother discussing the Nebraska case on the New Jersey Employment Law Blog?  What caught my eye was the title of the aforementioned blog post: “Too Much Protection Can Be No Protection At All.” Put another way, under the Nebraska standard, if an employer overreaches in an effort to keep former employees from competing, it runs the risk of being deprived of any protection at all.  Or, to put it still another way, “pigs get fat; hogs get slaughtered” is the rule enforced in Nebraska.

This is relevant in NJ because in our employment law practice we see employers demanding increasingly restrictive — in many cases I might say oppressive — non-compete agreements from employees, agreements that often have little to do with meaningful competitive harm that the employer actually risks. Since the employee usually has no true bargaining power, if she wants the job there is no choice but to sign on to the non-compete.

One of the reasons employers can take this approach with impunity is the blue pencil rule.  If the non-compete is challenged, the worst that will happen is a cutback in the scope of the non-compete. If the time restriction is reduced from two years to one, so what?  The employee is still out of the industry for a year and faces an uphill climb trying to get back in.  If the geographic restriction is cut back from the continental U.S. to, say, states east of the Mississippi, so what?  The employee is either going to have to move, or spend much of her life on an airplane commuting to the next job.  This in turn encourages employers to write in more protection than they realistically need, knowing that their worst case scenario in court is that they will still be protected.  If, instead, they ran the risk of having the entire non-compete thrown out, would they not be more careful about demanding just the protection they truly need?

Lest I be criticized of sweeping too broadly, I cheerfully acknowledge that no small number of companies act responsibly and with fairness in crafting non-competes.  A distressing number do not, however.

So NJ employers wait for the courts to “blue pencil” instead of invalidate hoggish restrictions, and NJ employees trying to support their families are left singin' the blues.  Isn't it about time for the New Jersey Legislature to look at changing the tune?

About the Author

Frank Steinberg

Frank is the founder and principal of Steinberg Law, LLC. A Jersey boy born and bred, he focuses on employment litigation and counseling, business litigation,  and aviation law. Following law school and a clerkship in the federal district court Frank spent his early career with large litigation ...

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