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School of Law
1045 W. Maple St.
Robert A. Leflar Law Center
Waterman Hall
University of Arkansas
Fayetteville, AR 72701

Phone: (479) 575-5601

Blue Penciling Noncompete Agreements in Arkansas and the Need for a Public Policy Exception

By · March 16, 2017 · 2017 Ark. L. Notes 1954
In categories: Business Law, Extended Article, Labor and Employment Law, Post Types

I. INTRODUCTION

In today’s workplace environment, there is increasing pressure for employees to sign noncompete agreements.[1] Depending on a state’s laws or noncompete jurisprudence, these agreements may or may not be enforceable, regardless of the presence of overbroad language that may be harmful to employees. As employers seek to protect their business interests, more businesses are using noncompete agreements to assert control over employees at all levels of the business employment structure.[2] This means that these agreements will restrict the mobility of even low-wage employees, unless otherwise stated.[3]

Within the past few years, it was discovered that two large corporations were requiring its employees to sign noncompete agreements: Jimmy Johns and Amazon. While the idea of requiring employees to sign noncompete agreements is not offensive by itself, the terms of the agreement caused public outrage, especially in Congress.[4] In particular, Jimmy Johns was requiring low-wage hires to agree to a noncompete that restricts employees from having any interest in or performing services for :any business which derives more than ten percent of its revenue from selling submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches and which is located within three miles [of any Jimmy John’s location.]”[5] This noncompete applied to low-wage sandwich makers and delivery drivers in addition to higher level management, and was most recently challenged when an assistant manager and delivery driver both filed a class action lawsuit to challenge the agreement.[6]

Similar to Jimmy Johns, Amazon required employees to agree to a noncompete for warehouse workers, including temporary workers, that restricted the employees from “directly or indirectly” working at a competing company for a year and a half.[7] Because Amazon could still discourage workers from seeking employment elsewhere, even if the company never enforced the noncompete agreement, a company spokesperson announced that Amazon would be removing the noncompete agreement from its contracts amid public outcry regarding the overly-broad scope of the agreement.[8]

Unfortunately, in both cases, it remains unknown whether or not these two noncompete agreements will ever be enforceable.[9] But consider the overly-broad nature of these noncompete agreements that Amazon and Jimmy Johns required their employees to sign. Now, imagine if a court was required by a state legislature to modify these overly-broad restrictions and enforce the modified noncompete agreement against the employee. The resulting product would just simply use more “reasonable” terms to continue the effect of restricting employee mobility.

This process is called blue penciling, which is now mandated in Arkansas. It is a method of enforcing overly-broad noncompete agreements without providing the necessary public policy considerations to protect the interests of employees and the state economy when a court is required to enforce these agreements as modified.[10]

II. BACKGROUND

During the course of employment, employees may have access to business information, trade secrets, and customer lists.[11] Because this information could potentially benefit competitors, employers may seek the enforcement of a non-compete agreement.[12] Noncompete agreements[13] are contractual agreements between employers and employees that bar the employee from engaging in employment that competes with the employer after termination.[14] Traditionally, courts have been hesitant to enforce noncompete agreements both because they restrain trade and because they bar employees from using their skills to support themselves.[15]

Generally, to be enforceable, these agreements must be supported by sufficient consideration, protect a legitimate business interest, and must be reasonable in duration, geographic limitation, and the scope of prohibited employment.[16] When it comes to the enforcement of noncompete agreements, courts may reach varying conclusions of reasonableness depending on the particular facts of each case.[17]

For example, in Bendinger v. Marshalltown Trowell Co., the Supreme Court of Arkansas held that the failure of the employer to include a geographic restriction in its noncompete agreement made it overbroad and unenforceable, regardless of the fact that the employer competed on a nationwide basis.[18]  Because the courts in Arkansas review cases involving noncompete agreements on a case-by-case basis, the Bendinger court was not persuaded by the employer’s reliance on Girard v. Rebsamen Ins. Co., in which the Arkansas Court of Appeals upheld a covenant not to compete even though it lacked a geographic limitation.[19]

In using this reasonableness test, courts are concerned with balancing the interests of the employer and the employee.[20] Specifically, courts want to protect an employer from unfair competition, but they do not want to impose unreasonable restrictions on the employee.[21] Simply because a noncompete agreement contains unreasonably broad restrictions as to time or geography, does not mean that agreement itself is unenforceable.[22]

While most states typically inquire into the degree of reasonableness of the noncompete agreement,[23] other factors may be taken into consideration to determine enforcement. Perhaps the most important factor is the type of enforcement approach a state has adopted, whether by statute or court precedent. The enforceability of these noncompete agreements vary from state to state,[24] and the type of enforcement approach adopted will determine how an agreement may be enforced, in terms of what a court is allowed to do. For example, in some states, a court may not rewrite a noncompete agreement to make it enforceable.[25] This is the first type of enforcement approach known as the no-modification approach.[26] In no-modification jurisdictions, a state will not enforce an agreement that is unreasonable in any part.[27] This is essentially an all-or-nothing approach to enforceability, in which a court may not rewrite an overly broad noncompete agreement.[28] Therefore, if the agreement is unreasonable as written, then a court will not enforce it at all.[29]

A second approach is known as the blue-pencil rule, in which a court modifies the noncompete agreement and enforces the agreement as modified, rather than taking the all-or-nothing approach.[30] Depending on the jurisdiction, the blue-pencil rule varies in application and is either strictly or liberally applied.[31] A strict application of the blue-pencil rule limits what courts may do to alter the noncompete agreement.[32] For example, in North Carolina, a court may choose not to enforce a distinctly separable part of a covenant in order to render the provision reasonable, but it may not otherwise revise or rewrite the covenant.[33]

In other blue-pencil jurisdictions, states adopt a liberal application of the blue-pencil rule, which allows courts to rewrite an overbroad noncompete agreement to reasonably limit the restrictions found in the agreement.[34] For example, in Florida, a court may not refuse to enforce a noncompete agreement solely because the geographical area is unreasonable, but rather must modify an unreasonable restriction and enforce the agreement as modified.[35] While the Florida statute requires courts to use the blue-pencil approach in all circumstances of unreasonable noncompetes, other liberal blue-pencil states direct their courts to use this re-writing approach, unless the court should find that the agreement was drafted in bad faith.[36]

Regardless of whether a state chooses to adopt the no-modification approach or the varying blue-pencil approaches, it is important for all states to discourage employer overreach in the drafting of noncompete agreements.[37] Perhaps more important is affording courts with the discretion as to whether to use its equitable powers to modify the agreement, as there are some circumstances in which a noncompete agreement may be drafted in bad faith or continues to violate public policy even after modification.[38]

A. The Enforcement of Noncompete Agreements in Arkansas: Then and Now

Historically, Arkansas courts have not favored noncompete agreements formed out of employment and declined to vary the terms of such agreements for the purposes of enforcement.[39] In Arkansas, noncompete agreements must be valid as written and the court “will not apportion or enforce a contract to the extent that it might be considered reasonable.”[40] Therefore, should an employer fail to define a geographical restriction, the court is powerless to do anything except rule it overly-broad and unenforceable. From this traditional approach in Arkansas, courts essentially precluded the use of the blue-pencil tool. However, this has changed with the enactment of Act 921.

Effective September 2015, Act 921 adopts the liberal blue-pencil enforcement approach for noncompete agreements formed out of employment.[41] As is the case in other blue-pencil jurisdictions, the lack of a specified or defined geographic limitation will not make the noncompete agreement overly-broad.[42] Instead, under Act 921, “the court shall reform” the noncompete agreement to make the overly broad provisions reasonable or to impose a forgotten or non-existent restraint and enforce the noncompete agreement as modified.[43]

While this mandatory liberal blue-pencil enforcement approach may work in other jurisdictions, the enactment of Act 921 in Arkansas is problematic, as written. For example, this new law fails to take into consideration any public policy concerns that Arkansas courts have identified in their noncompete jurisprudence.[44] More importantly, this statute does not adopt other liberal blue-pencil schemes that provide courts with the discretion to use the liberal blue-pencil approach to modify noncompete agreements, should the court identify potential bad faith or the violation of a state public policy. This article discusses the important pubic policy concerns enforcement of noncompete agreements raises and recommends the revision of Act 921 to provide for a public policy exception to the mandatory enforcement of the modified noncompetes that will result from the adoption of the liberal blue-pencil approach.

III. BALANCING INTERESTS

The employment relationship between employees and employers is one of the most complicated in society.[45] So, it is understandable that the ending of the employment relationship will cause “anxiety for all involved,” especially given the different interests at stake.[46] To protect each other’s interests, the employer will seek enforcement of a noncompete agreement and the employee will often seek limited enforcement, taking into consideration the public policy interests that may be harmed by the agreement’s enforcement.[47]

A. The Interests of the Employer

The interests of the employer in seeking the enforcement of the noncompete agreement is to protect their business information, customer lists, and even to recover the investments they have made in their employees.[48] Employers seek the enforcement of a noncompete to help minimize possible unfair competition as a result of misused information, in which the business has a proprietary interest.[49] These business interests must be classified as protectable,[50] and the restriction imposed by the noncompete agreement may not be greater than what is reasonably necessary to protect such interests.[51]

For example, Delaware has adopted the liberal blue-pencil approach and its courts tend to enforce noncompete agreements provided such agreements are reasonable with respect to geographical scope and duration, and are deemed necessary to protect a legitimate interest of the former employer.[52] In exercising this liberal blue-pencil approach to protect legitimate business interests, Delaware and other similar blue-pencil states have the flexibility to modify an unreasonable noncompete agreement to the extent it is reasonable to do so; or the courts may refuse to modify the agreement should it find that the agreement was drafted in bad faith.[53] Unlike these states, with the enactment of Act 921, Arkansas did not grant its courts with this flexibility and discretion by making the liberal blue-pencil enforcement approach mandatory.[54]

Because the blue-pencil doctrine is based in large part on the understanding that there is not necessarily a “sinister purpose” behind an overbroad noncompete agreement, it is evident that courts often presume the employer’s good faith in drafting the agreement when utilizing the blue-pencil tool to modify an unreasonable term or provision.[55] This presumption undoubtedly leads to the conclusion that the blue-pencil tool and the enforcement of a noncompete agreement will benefit employers and their interest in protecting their business information.[56]

While the protection of business information is justifiable, the concern for mandatory blue-pencil modification in Arkansas is that such blanket enforcement of noncompete agreements will have the effect of allowing employers to deprive employees of the value of their “human capital.” [57] To prevent this unjust employment restriction, Arkansas courts must consider the impact mandatory enforcement will have on the overall mobility of employees and more importantly, the impact that this liberal blue-pencil enforcement approach will have on the state economy and society as a whole.

B. The Interests of the Employee and the State Economy

Protecting the business interests of employers often conflicts with the interests of employees and the society’s economic interests.[58] From the employee’s perspective, the enforcement of noncompete agreements can limit an employee’s ability to find future employment and can be seen as a “blatant attempt to monopolize the employee’s competence, skill, and expertise.”[59] This monopolization of the employee’s skill and expertise has a direct effect on the state economy when it deprives the public and local communities of the benefits from business competition and entrepreneurship.[60]

This perspective highlights the need for courts to have the ability to strike a balance between the employer’s need for protection of its legitimate business interests and an employee’s right to work for a different employer.[61] Courts must look beyond the mere contracting parties, presumably the employer and employee, to protect the interests of all three entities at stake: the employer wishing to protect itself from unfair competition; the employee wishing to protect his or her mobility; and society as a whole, wishing to achieve an employment system that provides incentives for the development and training of employees, while also promoting economic opportunities.[62]

1. Interests of Employees

With the employer’s basic understanding of the huge impact that good employees can have on the bottom line, “the competition for good employees is becoming as fierce as it is for good customers.”[63] This competition for employees, coupled with a highly mobile workforce has caused many employers to require, with “unprecedented frequency,” that their new hires and existing employees execute noncompete agreements.[64] The enforcement of these noncompete agreements through the liberal blue-pencil method, however, will likely harm the interests of the employee, particularly if the employee faces a loss of livelihood.[65]

It is no secret that Arkansas courts do not favor noncompete agreements formed out of employment, especially with the state courts’ noncompete jurisprudence centering around public policy concerns and the perceived negative effect that enforcement has on Arkansas employees.[66] While noncompete agreements are not a per se violation of Arkansas public policy, these agreements do violate public policy when the enforcement will result in prohibiting ordinary competition and trade,[67] and unreasonably restricts an employee’s right to make a living.[68]

For example, in Quality Liquid Feeds, Inc. v. Plunkett, the Arkansas Court of Appeals held that a two-year limitation in a noncompete agreement would severely restrict a former employee’s ability to earn a living and, therefore, was unenforceable.[69] In this case, the employer executed the noncompete agreement with a provision that specifically stated that the “[e]mployee understands these covenants…do not create any hardship on Employee and the Employee agrees to abide thereby.”[70] Even with this provision that the employee presumptively agreed to, the court still found that the employee would be unable to work in his chosen profession without extreme hardship.[71] Thus, this case demonstrated a clear violation of Arkansas public policy when the court found the enforcement of the noncompete agreement would be an unreasonable restriction of the employee’s right to make a living.[72]

This case is only one example of the widely accepted notion that a noncompete agreement violates public policy when it negatively affects a person’s potential employment and ability to earn a living.[73] The need for an employee to find employment commensurate with their capabilities is a basic interest of an employee that must be considered by courts utilizing the liberal blue-pencil enforcement approach.[74] In using this blue-pencil tool, courts must ensure that neither the agreement as written nor the judicial modification of an unreasonable noncompete agreement will deprive an employee of their only means of livelihood.[75]

The concern with the mandatory liberal blue-pencil enforcement method and the controlling statutory schemes in these states[76] is that courts are precluded from considering whether an employee will suffer an undue hardship as a result of enforcement.[77] Instead, these liberal blue-pencil states take the position that there is no undue hardship if the employee can find work elsewhere.[78] This thinking is misguided and is not in the best interests of Arkansas employees. Merely because an employee can obtain work elsewhere does not mean that the employee did not face an undue hardship in finding new employment.

The mandatory blue-pencil enforcement of noncompete agreements undoubtedly places heavy burdens on employees and leads to undue hardships.[79] The enforcement of noncompete agreements diminishes an employee’s “means of procuring livelihoods”; harms employees who may be less financially savvy, causing them to deprive themselves of the “power to make future acquisitions… for the sake of present gain”; and tends to deprive the public of the talents and services of employees.[80] These undue hardships are even more likely to occur when the enforcement of noncompete agreements applies to all employees, not just executives.[81]

This across-the-board application of noncompetes to all employees is becoming more evident, especially when they are being enforced against minimum wage workers, such as “low-level tech people, hairdressers, payroll processors,” and even “maids and nail stylists.”[82] One human resources executive even admitted that companies are enforcing noncompete agreements “for just about every position,” with the thought process of most employers being “why not make your employees subject to a noncompete agreement.”[83] However, with increasing economic development, this seems to be the new way of thinking by most employers and businesses. According to the director of the Center for Advanced Human Resources Studies at Cornell University “from 2008 to 2013, you didn’t hear anything about this stuff, because people weren’t mobile.”[84]

Regardless of the type of employment industry or the location of the business, it is evident that noncompete agreements are “popping up in more and more low-wage sectors.”[85] Even though these noncompete agreements may not completely restrict an employee from finding new employment, they certainly act as a considerable deterrent.[86] The liberal blue-pencil enforcement of these agreements discourages employee mobility and places an undue hardship on employees when these agreements force an employee “to the sidelines for a year or more,” which makes them “considerably less desirable to another employer.”[87]

Whether or not employers intend to limit the economic options of their employees by seeking the enforcement of a noncompete agreement, the blue-pencil legal device could still have the result of placing undue hardships on employees even by the mere modified enforcement of these agreements. As such, the courts in Arkansas should, at the very least, consider the effect that the geographical and time restrictions may have on the interests of the employee, regardless of the reasonableness of the provisions in the agreement. Perhaps even more important with a mandatory blue-pencil enforcement approach, the interests of the employees must be guarded, especially when the employee’s interest in future employment, mobility, and expertise acquired prior to employment are interests mirrored by society as a whole and are vital to the continued success of the state economy.[88]

2. Interests of Society and the Greater State Economy

Although noncompete agreements involve private parties, presumptively the employer and the employee, some are not enforceable because of the negative impact they would have on society.[89] Specifically, noncompete agreements usually adversely affect the public policy that favors competition in the economy by restraining the mobility of former employees.[90] The concern with the liberal blue-pencil enforcement is that even if the restraint is reasonable between the parties, it could still “conceivably damage the public interest” and negatively impact the state economy, especially if the agreement “unreasonably shackles commercial intercourse.”[91]

Throughout the last couple of decades, the United States economy has shifted towards being based on information and knowledge.[92] With this shift, there is now an increased focus on mobility,[93] and the increasing perception that a noncompete agreement’s limitation on former employees’ mobility is a restraint on trade that harms the economy, violating public policy.[94] While injury to the public and the overall state economy does not often get examined by courts when looking to enforce noncompete agreements,[95] these agreements “deprive society of the benefit of the employee’s labor and of the increased competition that results from the unconstrained movement of labor.”[96]

According to some scholars, a state’s legal regime that strictly enforces noncompete agreements, like that of a liberal blue-pencil enforcement approach in Arkansas, is “inconsistent with the current state of the economy and the new realities of the employment model” that is “comprised of job instability and increased employee mobility.”[97] While it is argued that a state’s successful enforcement of noncompete agreements creates a “more attractive forum for businesses,”[98] there is evidence that suggests that strict or even mandatory enforcement of noncompete agreements “may not be in the best interest of all businesses or overall economic development.”[99]

For example, in studying the economic effect of the enforcement of noncompete on the state economy, researchers at MIT and Harvard Business School concluded that the enforcement of noncompete agreements led to the migration of employees out of the enforcement states and into “states that continued not to enforce such contracts.”[100] Specifically, these researchers argue that “highly-skilled technical professionals (such as inventors)” who live in states that enforce non-competes “have incentives to relocate to states where such agreements are not enforced.”[101] In examining the affect of noncompete enforcement, the researchers concluded that noncompete enforcement appears to “drive away inventors with greater human and social capital.”[102]

The conclusions of these researchers regarding the economic affect of noncompete enforcement is quite concerning for Arkansas under Act 921.[103] Before this law,[104] Arkansas’s economy has shown signs of increasing economic development and growth.[105] According to the Arkansas Small Business Profile, the state’s economy grew at a faster rate than the United States in 2013, and the overall employment picture in the state has continued to improve, with the unemployment rates declining from 7.6 percent in October 2013, to 4.9 percent in October 2015.[106]

With a state-wide area of only 53,187 miles, 9,740 of which are streams, Arkansas is a predominantly rural, agricultural state.[107] This means that the affect Act 921’s liberal blue-pencil enforcement approach could have an unprecedented effect on the state economy when the enforcement of noncompete agreements will result in geographical restrictions that limit employee mobility and could potentially force employees to move out of state.[108]

In predicting the impact of blue-pencil enforcement of noncompete agreements on the Arkansas small business community, take into consideration how small businesses employ more than 477,046 Arkansas employees, thereby making up 96.6 percent of all employers in the state.[109] If a noncompete agreement is drafted without a geographical restriction and a court must modify the restriction, what would a reasonable restriction look like for a rural state like Arkansas? Furthermore, will an Arkansas court be able to create a reasonable geographical restriction to protect an employer’s legitimate business interest, while also keeping that restricted employee from leaving the state due to undue hardships on his livelihood and mobility? Arkansas courts have not answered these questions.

While the reasonableness of the modification is key, these questions highlight the importance of finding a mutually beneficial balance of the employer’s interest to protect legitimate business interests with that of the employee’s interest in mobility and livelihood, and the public’s interest in the development of jobs and economic growth. To do this, Arkansas courts must consider the public policy concerns identified throughout its noncompete case law in recognizing the undue hardships that an employee will suffer as a result of Act 921.[110]

IV. THE LEGITIMATE CONTRACTUAL CONCERNS OF BLUE PENCILING

The relationship between the employer and the employee is largely governed by contract,[111] and following termination, the enforcement of noncompete agreements are governed by contract law.[112] The controversy over the contractual provisions found in noncompete agreements is at least several hundred years old.[113] Before the noncompete agreement became a “popular tool[] in American business,”[114] courts traditionally viewed them as contractual instruments used to “negatively impact competition, encourage monopolies, and drive up prices.”[115] Even though states have increasingly accepted noncompete agreements in contract law, these earlier concerns remain legitimate.[116]

With more employers requiring their employees to sign noncompete agreements, the American business industry has seen a substantial rise in noncompete litigation, specifically with departing employees being sued by their former employers.[117] While these agreements were traditionally between a business and its high-level executives, these noncompete agreements are now impacting even lower-level, minimum wage employees with “relatively little sophistication, bargaining power, or economic wherewithal.”[118]

A troubling effect of enforcement is that most states do not treat noncompete agreements like ordinary contracts, and even fewer courts look at the “fairness of the agreement at the time of formation.”[119] The treatment of noncompete agreements, especially in blue-pencil jurisdictions, encourages the exploitation of an employee’s unequal bargaining power and the purposefully overbroad drafting by employers.[120]

A. The Exploitation of an Employee’s Unequal Bargaining Power

The employment relationship between an employer and his employee is the paradigmatic example of inequality of bargaining power in contract law, especially when the employee’s livelihood and well-being are determined by the existence of a paying job.[121] The employee is not always a free and equal bargainer when entering noncompete agreements and these contracts place “everyday workers in difficult positions in deciding whether to accept a job or not.”[122]

The enforcement of noncompete agreements create problems that are well-documented with many employees feeling that enforcement is “particularly unfair because their employers had only mentioned the agreements after they had accepted the job and begun [to] work.”[123] Some supporters of noncompete agreements argue that most noncompete agreements involve business executives and sophisticated employees at higher education levels and salaries, which makes the agreements “benign for employees with bargaining power, since they wouldn’t sign them” it didn’t serve their best interest.[124]

However, with the enforcement of noncompete agreements against low-wage employees increasing,[125] the concern of unequal bargaining power by these employees is much more relevant. Even when formed by employees with higher education levels and more bargaining experience, noncompete agreements are still executed with very little, if any, negotiation between the employer and the employee.[126]

To further illustrate the problem of an employee’s unequal bargaining power and how courts fail to consider the unfairness of these agreements, 25 percent of workers have signed noncompete agreements in their lifetime.[127] Of those 25 percent, only about 10 percent “ever try to argue over it, with most assuming that it’s either not negotiable or that doing so would cause tension with an employer.”[128] This problem of unequal bargaining and the employee’s uncertainty in his or her contractual right to negotiate is furthered by a court’s use of the blue-pencil enforcement method.

Considering employees lack the bargaining leverage or experience negotiating noncompete agreements, the blue-pencil doctrine further confuses employees as to their contract rights.[129] For example, an employee wishing to leave his employer for a better paying job in the same industry will not know the actual terms of his noncompete agreement. Even if the agreement appears unreasonable and unenforceable, the employee may remain at his position, fearful that the blue-pencil would not help his case.[130] This uncertainty of blue-pencil enforcement creates undue hardships for the employee when it unreasonably restricts mobility and the right to make a better living to support themselves and their family.[131] The effects of blue-pencil enforcement will undoubtedly contravene Arkansas public policy, especially when allowing employers to exercise their unequal bargaining power while relying on a court’s mandated utilization of the blue-pencil tool.[132]

B. The Encouraged Overly Broad Drafting by Employers

With superior bargaining power “wielded by the employer” in the formation of most noncompete agreements, there continues to be a strong presumption of unfairness that accompanies the enforcement of these contracts.[133] This is especially problematic when contracts like noncompete agreements, frequently contain unenforceable clauses.[134] The legitimate concern of courts blue-penciling and modifying these unenforceable agreements, as written, is that it encourages and rewards employers that draft overly broad provisions by simply modifying the agreement to make it reasonable.[135]

For employers in blue-pencil states, it is beneficial for employers to “err on the upper side of a time limit” and purposefully draft an overly-broad noncompete agreement because “employers can be confident that a court interested in reformation of the agreement[s] will simply amend” the overbroad restriction.[136] Moreover, the liberal blue-pencil rewriting approach does nothing to discourage employers from “seeking the broadest possible protections at the commencement of the noncompete agreement because the employer can rely on the court to rein in any excesses.”[137]

With the enactment of Act 921 in Arkansas, the potential problem of employers purposefully drafting overly-broad noncompete agreements is legitimate, especially when the liberal blue-pencil modification is now mandatory.[138] This judicial writing of a contract provides an “eventual remedy of sorts,” where employers are now effectively encouraged to enter into overly-broad, unenforceable noncompete agreements that will unquestionably harm employees.[139] The seriousness of the blue-pencil approach encouraging the drafting of unenforceable agreements, as written, was identified by the Georgia Supreme Court over forty-years ago in Richard P. Rita Personnel Services International, Inc. v. Kot, when it recognized the concern of “employers… fashion[ing] truly ominous covenants with confidence that they will be pared down and enforced when the facts of a particular case are not unreasonable. This smacks of having one’s employee’s cake, and eating it too.”[140]

With this opinion, the Georgia Supreme Court only further legitimized the contractual concern that blue-penciling will have the effect of encouraging employers to draft overly-broad noncompete agreements. Should Arkansas employers embrace unreasonable drafting methods now that Act 921 is in full effect,[141] employees will suffer from unequal bargaining power at the time of formation, and more importantly, enter an agreement that “may prevent an employee from changing positions, from starting a new business, or from seeking more compensation.”[142] This is bound to harm the interests of employees, the public, and the greater economy of Arkansas, and the spread of business skills through the blue-pencil enforcement will directly “interfere with [the] operation of the competitive economy.”[143]

V. CONCLUSION AND RECOMMENDATION

While noncompete agreements, in theory, are not meant to punish the former employee,[144] the liberal blue-pencil enforcement approach is likely to have that very effect when it fails to consider the undue hardship that enforcement places on employees, the public, and the state economy. Shifting to a liberal blue-pencil enforcement approach is bound to cause concerns and perhaps even confuse Arkansas employers, employees, and courts. The enactment of Act 921, exposes the public to great potential harm and encourages predatory business practices of employers in restricting employee mobility and drafting overly-broad noncompete agreements.[145]

The failure to consider basic public policies leads to the inability to successfully balance all three interests and to promote economic growth and business opportunities. The Arkansas General Assembly must amend Act 921 to include a public policy provision that would give Arkansas courts the discretion to not use the blue-pencil enforcement method,[146] particularly when it would cause undue hardship, therefore violating state public policy. It is essential that the Arkansas General Assembly ensure that employees are not “victims of significant imbalances in bargaining power, captives of an unreasonably broad [noncompete agreement], or casualties of the evils of unfair competition.”[147]

In amending Act 921, the Arkansas General Assembly must find a healthy balance between a no-modification approach that creates a hostile environment for employers seeking to protect legitimate business interests and a liberal blue-pencil approach that ultimately creates higher unemployment, a lower standard of living, and diminishes wages for employees.[148] As a rural state with thousands of small businesses and even more employees, Arkansas must appear judicially attractive to both employers and employees. The best way to achieve this balance of interests is to amend Act 921 to protect the legitimate business interests of employers and the state public policies favorable to employees and society as a whole.


Notes

[1] Matt Marx & Lee Fleming, Non-Compete Agreements: Barriers to Entry … and Exit? 12 Innovation Pol’y & Econ. 39, 59 (2012).

[2] Orly Lobel, Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids, and Free Riding 51 (2013).

[3] See id.

[4] Allen Smith, Jimmy John’s Noncompete Probably Isn’t Widely Enforced, Society for Human Resource Management, Oct. 27, 2014, https://www.shrm.org/legalissues/stateandlocalresources/pages/sandwich-shop-noncompete.aspx.

[5] Dave Jamieson, Jimmy John’s Makes Low-Wage Workers Sign ‘Oppressive’ Noncompete Agreements, Huffington Post, Oct. 15, 2014, http://www.huffingtonpost.com/2014/10/13/jimmy-johns-non-compete_n_5978180.html.

[6] Brunner v. Liautaud, No. 14-C-5509, 2015 WL1598106, at *2 (N.D. Ill. April, 8 2015).

[7] Josh Lowensohn, Amazon Does an About-Face on Controversial Warehouse Worker Non-Compete Contracts, The Verge, Mar. 27, 2015, http://www.theverge.com/2015/3/27/8303229/amazon-reverses-noncompete-contract-rules.

[8] Jana Kasperkevic, Amazon to Remove Non-Compete Clause from Contracts for Hourly Workers, The Guardian, Mar. 27, 2015, http://www.theguardian.com/technology/2015/mar/27/amazon-remove-noncompete-clause-contracts-hourly-workers.

[9] See Brunner, 2015 WL 1598106 at *11.

[10] Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[11] See Brian D. Mielcusny, Loosening the Rust Belt: Why Ohio Should Re-Examine Its Current Standard for Determining the Enforceability of Covenants Not to Compete Contained in Employment Agreements, 63 Clev. St. L. Rev. 707, 714 (2015) (“Information relating to the established clients of a particular business, such as a customer list, is acquired by an employee only through their employment with the company.”).

[12] Id. at 713 (“[T]he conduct addressed by the covenant not to compete relates to the use by a former employee of company property or information that could be valuable in the hands of a competitor within the industry.”).

[13] Also known as a covenant not to compete, a restrictive covenant or a non-compete clause. See Griffin Toronjo Pivateau, Preserving Human Capital: Using The Noncompete Agreement to Achieve Competitive Advantage, 4 J. Bus. Entrepreneurship & L. 319, 331 (2011) (“The noncompete agreement is known by other names … these terms are interchangeable.”).

[14] Peggie R. Smith, et. al., Principles of Employment Law 145 (West 2009).

[15] Id.

[16] Id. at 146.

[17] See John Vering and David Jermann, The Road Ahead: “Kansas Noncompete Agreements An Updated Overview,” 77 J. Kan. B. Ass’n 22, 25 (2008) (“[N]oncompete cases are highly fact specific, and even within the same profession, courts may reach varying conclusions as to what constitutes a reasonable restriction based on the unique facts of a particular case”); see also Advanced Environmental Recycling Technologies, Inc. v. Advanced Control Solutions, Inc., 275 S.W.3d 162, 172 (Ark. 2008) (finding that whether a restraint provision in a non-compete agreement is reasonable or unreasonable is a question to be determined under the facts of each case).

[18] Bendinger v. Marshalltown Trowell Co., 994 S.W.2d 468, 472 (Ark. 1999).

[19] See Bendinger v. Marshalltown Trowell Co., 994 S.W.2d 468, 472 (Ark. 1999); see also Girard v. Rebsamen Ins. Co., 685 S.W.2d 526 (1985).

[20] See Smith et al., supra note 14 at 148 (West 2009) (“[A]n agreement will be enforced if it is limited to the time necessary to protect the employer’s interest, does not prevent the employee from earning a living for too long.”).

[21] William M. Corrigan, Jr., Non-Compete Agreements: An Overview, 54 J. Mo. B. 140, 142 (1998).

[22] Id.

[23] Sye T. Hickey, To Compete or Not to Compete: Is That the Question?, A.B.A. Sec. of Litigation, Sept. 16, 2014, http://apps.americanbar.org/litigation/committees/businesstorts/articles/summer2014-0914-to-compete-or-not-to-compete.html.

[24] Kenneth R. Swift, Void Agreements, Knocked-Out Terms, And Blue Pencils: Judicial and Legislative Handling of Unreasonable Terms in Noncompete Agreements, 24 Hofstra Lab. & Emp. L.J. 223, 225 (2007).

[25] Pivateau, supra note 13 at 338 (“Courts adhering to this approach refrain from either rewriting or striking overbroad provisions in noncompete agreements”).

[26] Id.

[27] See Smith et al., supra note 14 at 150 (“Some states will not enforce an agreement that is unreasonable in any part . . . [o]ther states allow judicial modification.”).

[28] Pivateau, supra note 13 at 338.

[29] Robert J. Orelup & Christopher S. Drewry, Judicial Review and Reformation of Noncompete Agreements, 29 The Construction Law. 29, 32 (Summer 2009).

[30] Pivateau, supra note 13 at 338.

[31] Id. (discussing strict blue-penciling and the liberal form of the blue-pencil doctrine).

[32] Id. (discussing what courts can do for each approach).

[33] Hartman v. W.H. Odell Assocs., Inc., 450 S.E.2d 912, 920 (N.C. Ct. App. 1994).

[34] Pivateau, supra note 13 at 338-39 (discussing the liberal blue pencil approach, which is otherwise known as the “reasonable modification approach”).

[35] See Health Care Financial Enterprises, Inc. v. Levy, 715 So.2d 341 (Fla. Dist. Ct. App. 1998); see also Orelup & Drewry, supra note 29 at 34 (the state-by-state judicial approach for Florida).

[36] See Orelup & Drewry, supra note 29 at 33-34 (the state-by-state judicial approach for Alaska and Delaware); see also Michael Selmi, Trending and the Restatement of Employment Law’s Provisions on Employee Mobility, 100 Cornell L. Rev. 1369, 1384 (2014-2015) (citing Restatement of Emp. L. § 8.06(b) (2015)), (a noncompete agreement is enforceable unless the employer acted in bad faith in requiring or invoking the agreement).

[37] See Orelup & Drewry, supra note 29 at 32 (“Whether governed by statute, case precedent, or even public policy, it is important that any noncompete agreement be narrowly tailored and customized to each employee”).

[38] See Restatement of Emp. Law § 8.07 (2015).

[39] See Bendinger, 994 S.W.2d at 472.

[40] Id. See also Borden v. Smith, 478 S.W.2d 744, 747 (Ark. 1972).

[41] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[42] See Ark. Code Ann. § 4-75-101(c)(1) (2015).

[43] See Ark. Code. Ann. § 4-75-101(f)(1) (2015).

[44] See generally Dawson v. Temps Plus, Inc., 987 S.W.2d 722, 727 (Ark. 1999) (“Public policy favors competition and…The test is whether the restraint imposed is greater than is reasonably necessary to protect the covenantee and whether it injures the public interest”); see also Fla. Stat. Ann. § 542.335 (West 2015).

[45] Alan Frank Pryor, Balancing the Scales: Reforming Georgia’s Common Law in Evaluating Restrictive Covenants Ancillary to Employment Contracts, 46 Ga. L. Rev. 1117, 1123 (2012).

[46] Peacefully Ending the Employment Relationship—It’s Complicated, 5 Inside Track 1 Sept. 18, 2013, http://www.wisbar.org/newspublications/insidetrack/pages/article.aspx?Volume=5&Issue=18&ArticleID=11044.

[47] See Nat Stern, Enforceability of Restrictive Covenants in Employment Contracts, 17 Ga. St. B.J. 110, 110 (1981).

[48] Mielcusny, supra note 11 at 714-715.

[49] Id. at 714.

[50] See Ark. Code Ann. § 4-75-101(b) (2015).

[51] See Jaraki v. Cardiology Associates of Northeast Arkansas, P.A., 55 S.W.3d 799, 804 (Ark. Ct. App. 2001) (finding that the restraint imposed upon one party must not be greater than reasonably necessary for protecting the other party).

[52] See Pollard v. Autotote, Ltd., 852 F.2d 67, 72 (3d Cir. 1988).

[53] See Orelup & Drewry, supra note 22 at 33-34.

[54] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[55] See Pivateau, supra note 13 at 337.

[56] See Smith et al., supra note 14 at 132.

[57] Id. at 133.

[58] Id.

[59] See Angie Davis, et al., Developing Trends in Non-Compete Agreements and Other Restrictive Covenants, 30 A.B.A. J. Lab. & Emp. L. 255, 255 (2015); see also Richard Marcus, Contracts in Restraint of Trade: The Role Of Public Policy, 2 Juta’s Bus. L. Rev. 33, 35 (1994).

[60] William T. Rosenbaum, Ohio Puts Away Its Blue Pencil, 5 Cap. U. L. Rev. 99, 99 (1976).

[61] See Davis, supra note 59 at 255.

[62] See Pivateau, supra note 13 at 333.

[63] Michelle Nichols, Great Employees Make a Great Business, Bloomberg Business (Mar. 30, 2006), http://www.bloomberg.com/news/articles/2006-03-30/great-employees-make-a-great-business.

[64] N. James Turner, Successfully Defending Employees in Noncompete and Trade Secret Litigation, 78 Fla. B.J. 43, 43 (Apr. 2004).

[65] Id.

[66] See Quality Liquid Feeds, Inc. v. Plunkett, 199 S.W.3d 700, 705 (Ark. Ct. App. 2004).

[67] See Federated Mut. Ins. Co. v. Bennett, 818 S.W.2d 596, 598 (Ark. 1991) (finding that the law will not enforce a contract merely to prohibit ordinary competition).

[68] See Dawson v. Temps Plus, Inc., 987 S.W.2d 722, 727(Ark. 1999) (finding that the court is less likely to uphold a restriction that negatively affects a person’s potential employment and ability to earn a living).

[69] See generally Quality Liquid Feeds, Inc. v. Plunkett, 199 S.W.3d 700 (Ark. Ct. App. 2004) (holding that the evidence supported the trial court’s finding that the two-year limitation in the non-compete agreement would severely restrict the former employee’s ability to earn a living).

[70] Id. at 702.

[71] Id. at 704.

[72] Id.

[73] See Dawson, 987 S.W.2d at 727.

[74] Carroll R. Wetzel, Employment Contracts and Noncompetition Agreements, 1969 U. Ill. L.F. 61, 66 (1969).

[75] Gary P. Kreider, Trends in Enforcement of Restrictive Employment Contracts, 35 U. Cin. L. Rev. 16, 19 (1966).

[76] See Orelup & Drewry, supra note 29 at 33-34.

[77] See William G. Porter II & Michael C. Griffaton, Using Noncompete Agreements to Protect Legitimate Business Interests: Carefully Drafted Agreements Will Prevent Former Employees From Using and Disclosing Proprietary and Confidential Information, 69 Def. Counsel J. 194, 200 (2002); see also Edward Elgar, Business Innovation and the Law: Perspectives from Intellectual Property, Labour, Competition and Corporate Law 382 (2013).

[78] See Porter & Griffaton, supra note 77 at 200.

[79] See Pryor, supra note 45 at 1125.

[80] Id.

[81] See Jamieson, supra note 5.

[82] See Lydia DePillis, Can the Senate Stop Low-Wage Employers From Tying Up Workers With Non-Competes?, Washington Post, June 2, 2015, https://www.washingtonpost.com/news/wonk/wp/2015/06/02/can-the-senate-stop-low-wage-employers-from-tying-up-their-workers-with-non-competes/; See also DePillis, infra note 83.

[83] Lydia DePillis, The Rise of the Non-Compete Agreement, From Tech Workers to Sandwich Makers, Washington Post, Feb. 21, 2015, http://www.washingtonpost.com/blogs/wonkblog/wp/2015/02/21/the-rise-of-the-non-compete-agreement-from-tech-workers-to-sandwich-makers/?tid=a_inl.

[84] See DePillis, supra note 82.

[85] See DePillis, supra note 83 (regarding the rise of noncompete agreements).

[86] See Pivateau, supra note 13 at 331.

[87] Id. at 332.

[88] Victoria J. Malony, Employment Law–The Elusive Enforceability of Employment Covenants Not to Compete in Arkansas, 34 UALR L. Rev. 593, 596 (2012).

[89] Kenneth W. Clarkson, et. al., Business Law: Text and Cases: Legal, Ethical, Global, and Corporate Environment 263 (12ed. 2012).

[90] Id.

[91] See Marcus, supra note 59 at 35.

[92] See Elgar, supra note 77 at 396; see also Pryor, supra note 45 at 1140.

[93] See Elgar, supra note 77 at 396.

[94] See Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319, 327 (Tex. 2014).

[95] See Elgar, supra note 77 at 385.

[96] See Smith et al., supra note 14 at 133.

[97] Benjamin I. Fink, Is Strict Enforcement of Non-Competes Good Policy? Substantial Evidence Suggests It Is Not, Berman Fink Van Horn P.C., http://www.bfvlaw.com/wp-content/uploads/2012/03/Is-Strict-Enforcement-of-Non-Competes-Good-Policy-Substantial-Evidence-Suggests-it-is-Not-00603446xAF83B.pdf.

[98] See Pryor, supra note 45 at 1142.

[99] See Fink, supra note 97.

[100] Matt Marx, Jasjut Singh, & Lee Fleming, Regional Disadvantage? Non-Compete Agreements and Brain Drain, 3 Inst. of Governmental Aff. (Feb. 2012), http://www.iga.ucdavis.edu/Research/All-UC/conferences/berkeley-2012/fleming-paper-1.

[101] Id.

[102] See id.; see also supra note 97.

[103] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[104] Id.

[105] Kim Souza, Economic Gains Expected for Arkansas, U.S. Economy in Back Half of 2015, The City Wire, July 27, 2015, http://talkbusiness.net/2015/07/economic-gains-expected-for-arkansas-u-s-economy-in-back-half-of-2015/.

[106] See U.S. Small Bus. Admin., Off. of Advocacy, Arkansas Small Business Profile (2015), https://www.sba.gov/sites/default/files/advocacy/AR_1.pdf; see also U.S. Dep’t Labor, Bureau of Lab. Stat., Economy at a Glance–Arkansas (Mar. 25, 2016), http://www.bls.gov/eag/eag.ar.htm#eag_ar.f.1.

[107] Ark. Dep’t of Parks & Tourism, Facts About Arkansas Geography (2015), http://www.arkansas.com/things-to-do/history-heritage/facts/.

[108] See Marx et al., supra note 100.

[109] See U.S. Small Bus. Admin., supra note 106.

[110] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[111] Cynthia L. Eastlund, Between Rights and Contract: Arbitration Agreements and Non-Compete Covenants As A Hybrid Form of Employment Law, 155 U. Pa. L. Rev. 379, 379 (2006).

[112] See Porter & Griffaton, supra note 77 at 382.

[113] Norman D. Bishara, Fifty Ways to Leave Your Employer: Relative Enforcement of Covenants Not To Compete, Trends, and Implications For Employee Mobility Policy, 13 U. Pa. J. Bus. L. 751, 756 (2011).

[114] H. William Constangy, Enforceability of Employment Contract Covenants Not to Compete in North Carolina’s Changing Business Environment, 15 Wake Forest J. Bus. & Intell. Prop. L. 424, 426 (2015).

[115] Jon P. McClanahan & Kimberly M. Burke, Sharpening the Blunt Blue Pencil: Renewing the Reasons for Covenants Not to Compete in North Carolina, 90 N.C. L. Rev. 1931, 1933 (2012).

[116] Id.

[117] Ruth Simon & Angus Loten, Litigation Over Noncompete Clauses is Rising, Wall St. J., Aug. 14, 2013, http://www.wsj.com/articles/SB10001424127887323446404579011501388418552.

[118] See Estlund, supra note 111 at 392.

[119] Id. at 402 (citing Rachel S. Arnow-Richman, Bargaining for Loyalty in the Information Age: A Reconsideration of the Role of Substantive Fairness in Enforcing Employee Noncompetes, 80 Or. L. Rev. 1163, 1168 (2011)).

[120] Rachel Arnow-Richman, Cubewrap Contracts and Worker Mobility: The Dilution of Employee Bargaining Power Via Standard Form Noncompetes, 2006 Mich. St. L. Rev. 963, 964-65 (2006).

[121] Id. at 963-964.

[122] See Hickey, supra note 23 at 19.

[123] James Bessen, How Companies Kill Their Employees’ Job Searches: The Increasing Reach of Noncompete Agreements and Trade-Secret Laws Leaves Workers with Few Options When Looking for a New Gig, The Atlantic, Oct. 17, 2014, http://www.theatlantic.com/business/archive/2014/10/how-companies-kill-their-employees-job-searches/381437/.

[124] See DePillis, supra note 82 (regarding the rise of noncompete agreements).

[125] Id.

[126] See Davis et al., supra note 59 at 262.

[127] See DePillis, supra note 82 (regarding the rise of noncompete agreements).

[128] Id.

[129] Griffin Toronjo Pivateau, Putting the Blue Pencil Down: An Argument for Specificity in Noncompete Agreements, 86 Neb. L. Rev. 672, 691 (2007).

[130] Id. at 692.

[131] Id.

[132] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[133] Jon H. Sylvester, Validity of Post-Employment Non-Compete Covenants in Broadcast News Employment Contracts, 11 Hastings Comm. Ent. L.J. 423, 427 (1989).

[134] Charles A. Sullivan, The Puzzling Persistence of Unenforceable Contract Terms, 70 Ohio St. L.J. 1127, 1128 (2009).

[135] See Pivateau, supra note 129 at 690-91.

[136] See Pivateau, supra note 13 at 340.

[137] See Swift, supra note 24 at 254.

[138] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[139] See Pivateau, supra note 129 at 690-691.

[140] Richard P. Rita Personnel Services International, Inc. v. Kot, 191 S.E.2d 79, 81 (Ga. 1972) (identifying the risk of the blue pencil’s encouragement for employers to draft an overly broad noncompete and concluding that even the good reasons in support of the blue pencil doctrine are not sufficient enough to “offset the reasons for refusing to apply the doctrine”).

[141] See Ark. Code Ann. § 4-75-101 (2015) (formerly Act 921).

[142] See Pivateau, supra note 129 at 691.

[143] See Kreider, supra note 75 at 19.

[144] See Pivateau, supra note 13 at 331.

[145] See Pryor, supra note 45 at 1127.

[146] One example of a public policy exception to the mandatory blue-pencil enforcement is Florida’s statute providing that “[n]o court may refuse enforcement of an otherwise enforceable restrictive covenant on the ground that the contract violates public policy unless such public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interests or interests established by the person seeking enforcement of the restraint.” See Fla. Stat. Ann. § 542.335(i) (2015).

[147] See Pryor, supra at 1145.

[148] Id. at 1146.

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