Colorado and the Blue Pencil Rule
In most, if not all states, any restriction imposed by a non-compete must be reasonable. Restrictions as to geographic area or duration must be no greater than necessary to protect the employer's legitimate business interests. States follow different rules, however, once a court determines that a restriction is unreasonable.
In at least a few jurisdictions, a non-compete is voided if a restriction is found to be unreasonable. Courts in these states refuse to re-write the terms of the agreement once they determine that a term is unreasonable.
Most states follow a version of the "Blue Pencil" doctrine under which a court will enforce the non-compete after the offending term is stricken or modified. Some states only allow their courts to remove unreasonable provisions and then enforce the agreement as to the remaining, reasonable provisions. This approach can be problematic because it ensures that difficult issues will arise about which terms are truly severable from the agreement.
Colorado follows a third approach under which court are granted the authority to modify any unreasonable terms and enforce the agreement with the modified terms. This approach has long been followed in Colorado. In 2008, the Court of Appeals again affirmed this approach as it stated "the court had the authority to limit the reach of its injunction to an area considered by it to be reasonable". Using this approach, a court can reduce the geographic area in which the employee may be employed or it can reduce the duration of the restriction. A two year non-compete over a fifty mile area, for example, could be reduced to one year over a twenty five mile area.
This authority, however, is discretionary. A Colorado court is not obligated to exercise its authority to modify an agreement. The court can decline to modify an unreasonable term and, based on the unreasonable restriction, refuse to enforce the non-compete. This discretion serves to discourage employers from overreaching. If employers could rely on courts to modify any unreasonable restriction, they might include restrictions that were broader than were reasonably necessary.
Little guidance has been provided by Colorado appellate courts on when and how this discretionary authority should be exercised. Courts in other jurisdictions, however, have often focused on the fairness of the restraint imposed by the employer in the agreement. "Clear overreaching" or "circumstances indicating bad faith" are grounds for a court to decline to exercise its authority to modify unreasonable terms.
The lesson for employers is that they should refrain from imposing restrictions broader than they can justify. A court could decline to re-write unreasonable terms in a non-compete if it concludes that the employer knowingly imposed restrictions that were too broad under the circumstances. The lesson for employees is that they need to carefully evaluate whether any restrictions in a non-compete are unreasonable and, if they are, whether the employer acted in bad faith in seeking to impose the restriction.
