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Clarification for Covenants not to Compete: Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC

In a recent North Carolina Supreme Court case, Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, the Court upheld a trial court's decision not to enforce a covenant not to compete that was entered in to after the sale of a North Carolina Business.

Plaintiff, Beverage Systems of the Carolinas, was a business that was created after its owner, Mark Gandino, purchased two beverage supply and dispensing companies from Thomas Dotoli, Kathleen Dotoli, and the couple's son, Loudine Dotoli. As part of the negotiations to purchase the businesses and their assets, the two sides negotiated and executed a "Non-Competition, Non-Solicitation and Confidentiality Agreement."

This agreement required the defendants not to compete with the newly formed Beverage Systems of the Carolinas, LLC in either North or South Carolina for a period of five years. The agreement also included a clause that would allow a trial court in North Carolina to revise the time or geography limitations of the covenant if the court found such limitations to be unreasonably broad.

In 2011, two years after the signing of the non-compete agreement, Loudine Dotoli's wife, Cheryl Dotoli, formed Associated Beverage Repair, LLC. With Loudine's help, Associated Beverage Repair began to compete with Beverage Systems of the Carolinas in the same geographic locations in North Carolina. Mark Gandino, owner of Beverage Systems of the Carolinas, filed suit in order to enjoin Associated Beverage Repair from operating in competition with him in either North or South Carolina.

The trial court found that the covenant not to compete was overbroad in its geographic scope, and despite the included clause that purported to allow a court to rewrite the clause to become reasonable, the court refused to rewrite the geographic clause because of North Carolina's 'Blue Pencil Doctrine' in regards to non-competes. According to the Supreme Court, the 'Blue Pencil Doctrine' allows a court of equity to "take notice of the divisions the parties themselves have made [in a covenant not to compete], and enforce the restrictions in the territorial divisions deemed reasonable and refuse to enforce them in the divisions deemed unreasonable." Associated Bev. Sys. of the Carolinas, LLC v. Associated Bev. Repair, LLC, No. 316A14, slip op. at 9 (N.C. Mar. 18, 2016). In other words, courts may delete certain geographic terms and enforce the remaining geographic areas, but it cannot rewrite or add in additional areas.

After the plaintiff appealed, the Court of Appeals agreed that the geographic scope was overbroad, but thought that the contract provision that allowed for a trial court to rewrite the covenant was valid. The Supreme Court disagreed, reaffirming their previous case law that "courts will not carve out reasonable subdivisions of an otherwise overbroad territory." Id. at 9 (citing Welcome Wagon Int'l, Inc. v. Pender, 255 N.C. 244, 251 (1961) (Bobbitt, J., dissenting)). Even further, the Court ruled that "parties cannot contract to give a court power that it does not have." Id. at 10 (citing Welcome Wagon, 255 N.C. at 248).

The message from the Supreme Court is clear: when addressing problems with non-compete agreements, North Carolina Courts may only follow the Blue Pencil rule. This means that courts can delete provisions of a non-compete that it finds to be unreasonable, but if such deletions render a covenant unenforceable, the court is powerless to further revise it to include reasonable restrictions.

When creating non-competes, businesses should be careful to list geographic areas in which the non-compete with bill enforceable with specificity, and these specific areas should be the areas where there are existing customers and business relations. Furthermore, any clauses in the contract that purport to give the courts more power than they are authorized to use will be unenforceable, which could mean that the entire covenant becomes unenforceable, as was the result in this case.

For help drafting covenants not to compete, contact Miller Law Firm for a free initial consultation.

To read the Supreme Court's opinion in its entirety, visit https://appellate.nccourts.org/opinions/?c=1&pdf=34272.

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