Data Management, Inc. v. Greene
757 P.2d 62 (1988)
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Rule of Law:
A court may reasonably alter an overly broad covenant not to compete to render it enforceable, provided the covenant was drafted in good faith, the burden of which is on the employer.
Facts:
- Data Management, Inc. employed James H. Greene and Richard Van Camp.
- Greene and Van Camp signed an employment contract that included a covenant not to compete.
- The covenant provided that for five years after termination, the employees would not perform similar services for any other person or firm within the State of Alaska.
- The employment of Greene and Van Camp with Data Management was terminated.
Procedural Posture:
- Data Management, Inc. filed suit against former employees Greene and Van Camp in the trial court, alleging breach of the covenant not to compete.
- The trial court granted a preliminary injunction in favor of Data Management.
- Subsequently, the trial court granted summary judgment in favor of Greene and Van Camp, finding the covenant not to compete was overbroad and wholly unenforceable.
- Data Management, the appellant, appealed the grant of summary judgment to this court.
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Issue:
If a covenant not to compete is overly broad, must a court find it wholly unenforceable, or may the court modify the covenant to make it reasonable and enforceable?
Opinions:
Majority - Matthews, Chief Justice
No, an overly broad covenant not to compete is not wholly unenforceable; a court may modify it to make it reasonable and enforceable. The court rejects two other approaches: the strict rule that an overbroad covenant is entirely void, and the 'blue pencil' rule which only permits deletion of grammatically severable words. Instead, the court adopts the modern rule of reasonableness, which allows a court to alter an overbroad covenant to make it enforceable, consistent with the parties' original intent. This approach is favored by the majority of jurisdictions and the Restatement (Second) of Contracts. To counteract the risk of employers overreaching, the court conditions modification on a finding that the employer drafted the covenant in good faith, and places the burden of proving good faith on the employer. If the court finds the employer willfully overreached, it should refuse to modify the covenant.
Analysis:
This decision establishes the governing standard in Alaska for evaluating overly broad non-compete agreements, aligning the state with the modern trend in contract law. By rejecting the more rigid 'all-or-nothing' and 'blue pencil' doctrines, the court favors a flexible, equitable approach that preserves the core of the parties' bargain. The crucial element is the addition of a good-faith requirement, which serves as a deterrent against employers who might otherwise draft intentionally overbroad covenants with the expectation that courts will simply pare them back to an enforceable scope. This places a significant burden on employers to draft non-competes reasonably from the outset.
