Unreasonable Restrictive Covenants, Securities Arbitration Attorney

QUESTION

Will the courts modify the terms of an unreasonable restrictive covenant to make it enforceable?

ANSWER

In most jurisdictions courts are allowed to modify an unreasonable restrictive covenant. Such courts will consider the general fairness of the agreement when they decide whether to modify an invalid portion of it. If a covenant not to compete is reasonable in the scope of the activities it prohibits and in its duration, but it extends beyond the area where the employer does business, a court may limit its geographic reach and enforce it. For instance, a covenant restricts a broker from selling mutual funds for 12 months in a four-county area may be unreasonable if the Broker-Dealer only sells mutual funds in two of the four counties. Under these circumstances, a court may enforce the restrictions, but only in the two counties where the Broker-Dealer does business. Other courts refuse to re-write a contract and will not enforce a restrictive covenant if any portion of it is invalid.

The courts are more likely to modify an unreasonable restrictive covenant if the parties' agreement expressly authorizes a court to modify or "Blue-Pencil" it in the event the court finds that a portion of it is unreasonable. The courts will not, however, modify terms described in the parties' agreement as "essential" - even when the agreement has a "Blue-Pencil" provision. Appellate courts will not disturb a trial court's decision concerning the modification of a restrictive covenant unless the trial court has abused its discretion.

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