COLORADO COURT HOLDS THAT COURTS ARE NOT OBLIGATED TO REWRITE NON-COMPETE AGREEMENT THAT IS OVERLY BROAD EVEN IF AGREEMENT CONTAINS “BLUE PENCIL” PROVISION.
In 23 LTD. v. Herman, 2019 COA 113 (Colo. App. July 25, 2019), the Colorado Court of Appeals considered whether an employment agreement with an overly broad non-solicitation provision (which is a type of noncompete provision) could obligate a trial court to “blue pencil,” or modify, the provision to make it reasonable under Colorado law. The Court held that parties to a contract “cannot contractually obligate a court to blue pencil noncompete provisions that it determines are unreasonable” and that the trial court did not abuse its discretion in deciding not to modify the provision.
In this case, the employer, 23 LTD, d/b/a Bradsby Group (Bradsby), sued former employee Tracy Herman for breach of noncompete and nonsolicitation provisions in her employment agreement. The nonsolicitation provision stated, in pertinent part, that Herman would not contact or solicit “the business of any person, entity, applicant, client, employer or prospective employer” who Bradsby has contacted or solicited during the twelve (12) months prior to the [her] termination . . . .” within 30 miles of Bradsby’s principal place of business, which was in Denver.
A jury determined that Herman had not breached the noncompete provision. The jury returned a verdict (and awarded nominal damages of one dollar) in favor of Bradsby on the nonsolicitation claim, but the district court set aside that verdict and entered judgment in favor of Herman because the nonsolicitation provision was overly broad and therefore unreasonable under Colorado law. Specifically, the trial court found the scope of the restriction (precluding contact of any person or entity that any employee of Bradsby contacted in any industry) to be overly broad. On appeal, Bradsby relied on the severability provision of the Employment Agreement, which stated that unenforceable portions of the Agreement will not affect the validity of enforceable portions and further stated that any time or geographical restriction deemed overly broad would be enforceable to the extent a court deemed appropriate, to argue that the trial court erred by failing to “blue pencil” the overly broad nonsolicitation provision.
The Court of Appeals rejected Bradsby’s argument. First, the Court of Appeals rejected the proposition that contracting parties, by inclusion of language in a contract, may ever compel a court to blue pencil an agreement that violates the public policy of this State. Second, the Court of Appeals held that the contract did not actually require the Court to blue pencil the provision where, as here, the time and geographical limitations were not the cause of the overbreadth. Finally, the Court of Appeals held that the trial court had plenty of reasons to refrain from blue penciling the provision, including the general Colorado public policy against noncompete provisions and the fact that the provision was so overly broad that “significant modification” would have been required to make it enforceable under the law.
The 23 LTD case highlights the importance of drafting noncompetition and nonsolictiation provisions to conform to the reasonableness requirements imposed by Colorado law. The provisions must be narrowly tailored to protect the employer’s legitimate business interests. This typically requires specific and narrow limitations on the scope, time frame and geographic region restricted. If a provision is found to be overly broad, an employer may not require a court to modify the provision so it is reasonable under Colorado law. Whether a court chooses to modify the provision is discretionary. In light of the holding of the 23 LTD case, employers are encouraged to review their noncompetition and nonsolicitation provisions to ensure that they are narrowly tailored to their legitimate business interests.