Blue Pencil Rule: Everything You Need To Know
With a blue pencil rule the judicial system decides whether to invalidate an entire contract or only the unenforceable parts.4 min read
2. A Quick State-By-State Guide on the Blue Pencil Rule
3. The Application of the Blue Pencil Rule
4. Post Termination Restrictions Via the Blue Pencil Rule
Updated November 3, 2020:
What is a blue pencil rule? A contract is an agreement between two or more individuals or parties to perform specific acts, creating a legal obligation for all involved to perform the specified duties. However, a party may be faced with a situation where part of the contract even though legal and valid, is unenforceable.
In such situations, the dilemma is whether to deem the entire contract invalid or to discard only the unenforceable parts. This decision is made through a blue pencil rule, where the judicial system decides whether to invalidate the entire contract or only the unenforceable parts. The below write-up will help understand the intricacies governing the rule.
A Legal Definition of the Blue Pencil Rule
A blue pencil rule is a judicial standard that a governing body uses to decide whether to invalidate a contract or only the unenforceable or offending parts of the said contract.
In situations where the blue pencil rule is applied, the unenforceable or offending parts of the contract are invalidated either by deleting them or striking them off with a blue pencil by a court. However, recently numerous courts have discarded the blue pencil rule in favor of reasonableness, that allows courts to examine, deliberate and determine the restrictions in the contract, depending upon the available evidence and prevailing situation.
The way in which reasonableness differs from the blue pencil rule is through the extent and manner of modifications allowed in the contract.
A Quick State-By-State Guide on the Blue Pencil Rule
As the blue pencil rule is not a complete law it is subject to numerous variations under multiple jurisdictions. Courts are allowed to alter and modify the unenforceable or unreasonable parts of a contract and make it reasonable under the prevailing law across the states as below:
- In Arkansas, Georgia, Nebraska, Virginia, and Wisconsin, courts will not reform the covenant.
- In Arizona, Indiana, North Carolina, South Carolina, and Oklahoma, courts will only reform the covenants that are activity restraints or non-solicitation covenants.
- In Alabama, Alaska, Colorado, Connecticut, Delaware, Illinois, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Tennessee, Vermont, Washington, West Virginia, and Wyoming, courts will only reform the equitably parts of the covenant
- In Idaho, Florida, and Texas, the courts are bound to reform covenants.
- In California, Montana, and North Dakota, the blue pencil rule is not applicable.
- In District of Columbia, Louisiana, Maryland, Hawaii, New Mexico, Rhode Island, South Dakota, and Utah, the approach to the blue pencil covenant is unclear.
The Application of the Blue Pencil Rule
A court can apply the blue pencil rule in case of an overly broad non-compete contract that could be divided into two distinct parts, where one is reasonable and enforceable while the other is unenforceable and offensive. It has been recently clarified by the Indiana Court of Appeals that the blue pencil approach cannot be used in case of a non-compete provision that is expressed as an indiscrete whole, where it is difficult to modify or separate the terms without altering the meaning of the clause.
In situations where the non-compete is reasonably divisible, a court may apply the blue pencil rule by striking out an unacceptable clause and enforcing the acceptable and enforceable clauses. However, a court is only allowed to strike out the unreasonable portions but not allowed to add or modify any part of the contract.
Post Termination Restrictions Via the Blue Pencil Rule
One of the most sensitive examples of the blue pencil test is in case of employment contracts, which allows striking out any unreasonable provisions in an employment contract. However, if the contract does not allow divisibility, then the entire contract stands void.
Employers understand the basic principles of post-termination restrictions and ensure to provide substantial proof in case the exceptions in the contract are in the interest of the business. Employees understand that post-termination restrictions are much wider than what can be enforceable and thus some restrictions are simply ignored. In such instances, a court may apply the blue pencil rule to modify post-termination restrictions to make them enforceable to the departing employee. However, the court is banned from redrafting or rewriting any clause of a contract.
There is an exception to the post-termination restrictions of blue pencil rule where a contract even when containing unenforceable clauses remains effective if:
- The unenforceable part can be removed without the need to modify.
- The remaining part is supported by adequate consideration.
- The removal of the unenforceable part does not change the character of the contract.
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