"Blue Penciling" by Courts
“Blue Pencil” is a legal term that refers to a court's right to modify an unreasonable contract clause to make it enforceable.
In Delaware — a corporate haven that is home to 2 million companies and two-thirds of the S&P 500 — courts have recently been refusing to "blue pencil" overbroad restrictive covenants. Instead, the courts are striking these provisions entirely.
In the recent case of Sunder Energy, LLC v. Tyler Jackson, the Delaware Supreme Court reinforced its stance that “blue penciling” of expansive restrictions is at the court’s discretion. More helpful, though: the Court’s analysis provides a roadmap of “dos-and-don’ts” for businesses looking to employ restrictive covenants.
The Sunder Energy Case: Background
In Sunder Energy, the plaintiff, a solar energy company (hereafter “Sunder”), sought to enforce a noncompete clause against one of its original founders, Tyler Jackson, after he departed to work for a competitor. As holder of “incentive units” in Sunder, Jackson was subject to a noncompete agreement that barred him and his “affiliates” from engaging in any door-to-door sales activities in markets where Sunder operated or planned to operate.
The Delaware Court of Chancery found the clause overbroad for two key reasons.
First, its scope was so broad that it could even prevent Jackson’s daughter from selling Girl Scout cookies—a clear overreach.
Second, the duration of the noncompete was effectively indefinite. The two-year restriction began only after Jackson no longer held his incentive units. However, Jackson could not freely transfer those units; only Sunder could decide when, or if, to repurchase them. This gave Sunder unilateral control over when the noncompete would end, leaving Jackson bound indefinitely. The court further emphasized that, as a minority member, Jackson lacked the rights of a typical owner, such as voting power or access to company information. In the court’s view, Jackson resembled an employee more than a partner.
Sunder argued that the court should simply narrow (or "blue pencil") the noncompete to make it enforceable, noting that Jackson’s conduct would have violated even a reasonable restriction. The Chancery Court declined to do so and denied Sunder’s motion for a preliminary injunction.
The Delaware Supreme Court’s Decision
On appeal, the Delaware Supreme Court upheld the lower court’s ruling: it reasoned that if courts routinely fixed overly broad covenants, employers would be less motivated to draft reasonable agreements from the outset – thereby creating “perverse incentives for employers drafting restrictive covenants.”
The court clarified that its analysis on whether to “blue pencil” depends on the covenant’s terms and the circumstances under which it was adopted—not on the employee’s actions.
Delaware courts have, on occasion, modified restrictive covenants: such as, when the parties (i) shared equal bargaining power, (ii) negotiated the terms, (iii) exchanged valuable consideration, or (iv) when the restrictions arose from a business sale. In Sunder, none of these factors applied:
Inadequate Consideration: Jackson received little to no separate compensation for agreeing to the noncompete. He was given incentive units, but these could not be freely transferred. When Jackson departed without “good reason”, Sunder repurchased the units for $0.
Pressure to Sign: On New Year’s Eve, Sunder sent the operating agreement to Jackson and other minority members for electronic signature, urging them to sign “before midnight.” Jackson signed less than an hour later.
Lack of Negotiation: Jackson played no role in negotiating the restrictive covenants. Sunder’s attorneys explained the operating agreements only to majority members, which Jackson was not. He was excluded from this discussion and did not receive legal counsel.
The court emphasized that Sunder was seeking more than just simple, minor tweaks to the noncompete’s scope. Instead, the relief sought would have required the court to rewrite the covenant entirely—a step the court viewed as inconsistent with Delaware’s strong principles favoring freedom of contract.
Key Takeaways for Employers
The Sunder decision underscores a growing trend in the courts: judges are increasingly reluctant to fix overly broad restrictive covenants. Instead, they may strike these agreements entirely, leaving employers without protection.
To help avoid this outcome, employers can take the following precautions:
Provide Meaningful Consideration: Make sure that the restricted party receives fair compensation in exchange for agreeing to the covenant.
Allow Time for Review: Give the party sufficient time to review the agreement and fully understand its terms.
Narrowly Draft Restrictive Covenants: Limit noncompetes and other restrictions to what’s essential to protect the company’s legitimate business interests.
Encourage Legal Consultation: Provide an opportunity for the restricted party to consult with their own legal counsel.
Resist the temptation to draft overly aggressive restrictive covenants. Courts are far more likely to enforce a well-crafted, reasonable restriction than to fix one that overreaches. By focusing on fairness and precision during the drafting process, employers can better protect their business interests while avoiding costly litigation.
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Disclaimer: the foregoing is for informational purposes only and should not be considered legal advice. The content is provided as-is and no representation is made that it is error-free. Readers should contact a licensed attorney to obtain advice with respect to their specific legal matter.
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