Employee non-compete agreements have long played an important role in employers’ ability to protect confidential and trade secret information. However, recognizing the distinct advantage employers often enjoy in negotiating such agreements, there has been a well-documented trend in recent years toward greater scrutiny of—and even hostility toward—employee non-competes.
One of the best examples of this trend is Hassler v. Circle C Resources, a February 25, 2022 decision of the Wyoming Supreme Court, in which the court overruled its own, decades-old precedent establishing the “blue pencil” rule as a means of saving unreasonably broad employee non-competes.
Hassler involved a typical dispute between an employer and its former employee over breach of a non-compete with a two-year term that covered “any geographic area in which employer markets or has marketed its services during the year preceding separation from employment, including but not limited to” various Wyoming counties. Though the trial court found the non-compete was unreasonable as drafted, it applied the blue pencil rule to limit the restrictions to one year in time and two counties in geographic scope. Ultimately, the court awarded almost $100,000 in damages to the employer. The employee appealed.
On appeal, the Wyoming Supreme Court requested supplemental briefing on the blue pencil rule, which Wyoming had recognized since a 1993 Wyoming Supreme Court decision called Hopper v. All Pet Animal Clinic Inc. adopted it.
In its opinion overturning Hopper, the court acknowledged its original rationale was that the “blue pencil rule was intended to be a tool to prevent former employees from unfairly competing with employers who had provided them valuable information and training and to promote certainty in the business environment.” However, the court reasoned that it, in fact, was a departure from ordinary contract principles that a court will not “rewrite” a poorly drafted contract for the parties.
The court went further, stating “in practice, the blue pencil rule places an unfair burden on employees and creates uncertainty in business relationships,” based on the general imbalance of power between employer and prospective employee at the time of hiring (when non-compete agreements are typically executed). The court continued that the “blue pencil rule further tips the scales toward employers by encouraging them to draft noncompete agreements with overly broad and unreasonable trade restraints.” The employer therefore gets a “free ride on a contractual provision that the employee is aware … would never be enforced.” Ultimately, “neither employers nor employees can rely, with any assurance, on the specific terms of the agreements they execute.”
To the Hassler court, these considerations were sufficient to overcome stare decisis, and it therefore overruled Hopper’s adoption of the blue pencil rule. Notably, the court rejected the blue pencil rule even in instances where the contract explicitly allows a court to reform the non-compete.
Hassler is just the latest development in a well-documented trend disfavoring non-competes—though most of this hostility has been confined to the legislative and executive branches. Since 2020, several jurisdictions, including Nevada, Virginia, Oregon, Illinois, and the District of Colombia have all passed legislation restricting which employees may be subject to non-competes or adding additional requirements for enforceability. Colorado recently went a step further and made violations of its statutory non-compete restrictions a class 2 misdemeanor (Senate Bill 21-271, section 81). At the Federal level, the Biden administration has “encouraged” the FTC to consider a rulemaking “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” and there were at least three bills introduced in Congress in 2021 that would limit non-competes—though it is not clear if any of these Federal efforts will succeed.
In short, employers should be aware of these developments and ready to adapt accordingly.