Reformation Clause Can't Save Noncompetition Agreements

• Pages: 22-22
• Date: 01 July 2021
• Author: Josephine M. Bahn
• Subject Matter: Civil Law

Published in Litigation News Volume 46, Number 4, Summer 20 21. © 2021 by the American Bar A ssociation. Repro duced with permissi on. All rights reser ved. This informati on or any portion the reof may not be copie d or disseminated in any

form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.

Reformation

Clause Can’t Save

Noncompetition

Agreements

By Josephine M . Bahn, Litigation News

Associa te Editor

An overbroad noncompetition agree-

ment cannot b e saved by the agree-

ment’s reformation clause, according

to a state supreme cou rt, even when

the provision express ly grants a court

the authority to refo rm the agreement

to make it enforceable . The decision

is a stark remind er to practitioners

that states that app ly the “blue pencil”

doctrine will n ot add terms to non-

competition agreements to make them

enforceable.

In Heraeus Me dical, LLC v. Zimmer,

Inc., an employee lef t his position

to work for a competitor an d began

recruiting other e mployees from his

former employer. Bec ause of a non-

compete agreement, the former

employer sued the former employee,

relying on the non solicitation clause

in the agreeme nt. The nonsolicitation

clause stated tha t the former employee

could not solicit o r employ any individ-

ual employed by the for mer employer

to work for a competitor. The agre e-

ment also contai ned a reformation

clause giving the c ourt the authority

to reform any provisions “ to make it

enforceable un der applicable law.”

Following a hearin g, the trial court

granting a preliminary injunction,

enjoining the former employee from

recruiting from h is former employer.

The former employee then appealed

to the Indiana Court of Appeals. The

court held tha t the language of the

nonsolicitation clause was too broad

and unenforcea ble as written. But,

relying on the refor mation clause, it

limited the nonso licitation covenant

to apply to “those e mployees in which

the former emp loyer had a legitimate

protectab le interest.”

The former employer appealed

again, to the Indiana Supreme Court,

arguing that the l ower court had erred

by adding limiting language, which

violated the blue p encil doctrine. That

court held tha t since noncompetition

agreements a re a restraint on trade

they should be enfo rced only if the

terms of the agreem ent are reason-

able. Furthe r, Indiana appli es the blue

pencil doctrine. Under that doctrine,

the court may remove un reasonable

terms, but it may not a dd language to

make agreements reasonable.

The court hel d that even though

the agreement contained a reforma-

tion clause allowi ng the court to add

language, th e blue pencil doctrine bar s

a court from add ing any language to

clarify the ter ms. The court found that

the blue pencil d octrine protects par-

ties by not subjecti ng them to agree-

ments they did not i ntend to make.

The court reas oned that allowing the

addition of lang uage under the blue

pencil doctrine would encourage par-

ties to draft overbroa d or unreason-

ably restrictive coven ants in contracts.

ABA Litigation Sec tion leaders note

that a majority of ju risdictions do not

follow the blue pen cil doctrine. “As

of last count, 29 s tates are ‘reforma-

tion’ states, me aning that courts are

empowered to reform overb road cov-

enants to make the m reasonable, and

14 states are ‘blu e pencil’ states, mean-

ing that any overbroad re strictions will

be stricken,” opi nes Erik W. Weibust,

Boston, MA , chair of the Litigation

Section’s Busi ness Torts & Unfai r

Competition Committee’s Restrictive

Covenant Subcommittee.

Weibust explains th at the remain-

ing states are eithe r “red pencil” states,

meaning that if a ny portion of a cov-

enant is overbroad th e entire covenant

will be stricken, o r the issue has not

been def‌initive ly resolved, and even in

those states that do p ermit reformation

or blue pencil ing, there can be nuances .

“Despite having th e power of ref-

ormation, we have see n a number of

courts in ‘refo rmation’ states decline

to do so because em ployers some-

times draft unreasonable restrictions

expecting that a co urt will save the

agreement an d make it reasonable,”

says Christophe r S. Hennessy, Chicago,

IL, the Secti on’s Employment & Labor

Relations Law Com mittee newsletter

edi tor.

Hennessy advises that parties

should artic ulate the meanings of each

covenant of their non solicitation or

noncompete agreements to ensure

that agreed- upon restrictions are spe-

cif‌ic and reason able. The failure to do

so, he says, leaves ope n the door for

the possibilit y that a court may strike

an entire re strictive covenant .

Expert Testimony

Rule Strictly

Enforced for Bench

Tri a l

By Stephen Car r, Litigation News

Associa te Editor

District cour ts must apply the Federal

Rules of Evidence as s trictly in bench

trials as in jury tr ials, according to a

recent appella te decision. Reversing a

trial judge’s adm ission of “anecdotal

experience” to prove pro perty value

during a bench tr ial, the U.S. Court

of Appeals for the T hird Circuit casts

doubt on the “rela xed” standard for

admission of expe rt testimony when

courts are ac ting as fact f‌inder. Trial

courts must a ct as the “gatekeeper”

even during bench t rials to uphold

the reliable, o bjective methodology

required by Rule 702 .

The plainti in UG I Sunbury LLC v.

Permanent Easement obtained ease-

ments for a 34- mile pipeline over the

defendants ’ property. To prove the

amount of compe nsation they were

owed, the landown ers oered testi-

mony from a land-va lue expert whose

opinions were ba sed on a “damaged

goods theor y,” which he develope d

“drawing on his experi ence working in

his grandfath er’s appliance shop.” The

trial court adm itted the testimony, cit-

ing “a strong prefere nce” for admitting

expert testimo ny and explaining that it

would be acting as f act f‌inder and able

to properly asses s the expert opinion.

On appeal, th e Third Circuit found

the trial court h ad abused its discre-

tion in relying on the ex pert’s opinion.

The court emp hasized that the expert’s

methodology wa s based mainly on his

subjective impression that properties

with pipelines we re treated as “dam-

aged goods” by p urchasers and would

continue to have “long -term stigma on

the overall marketab ility and market

value.” The only c ase studies refer-

enced in the exper t’s report were seri-

ous environmen tal impact cases with

no bearing on th e facts of this case.

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