Will an Alaska court enforce this non-competition covenant, and can the court narrow it if it's overbroad?
Yes, an Alaska court can reform (rather than void) an overbroad covenant, but only if the party enforcing it drafted in good faith. No Alaska statute read for this rule speaks to covenants not to compete at all, so the answer is judicial. Data Management, Inc. v. Greene surveyed three approaches used across jurisdictions (voiding any overbroad covenant outright; the mechanical "blue pencil" rule of deleting only offending words) and adopted a third: "if an overbroad covenant not to compete can be reasonably altered to render it enforceable, then the court shall do so unless it determines the covenant was not drafted in good faith." Critically, "[t]he burden of proving that the covenant was drafted in good faith is on the employer." The court anchored the remedy in statute by analogy, saying in its own words that "[t]his approach is consistent with U.C.C. § 2-302, as codified in Alaska under AS 45.02.302," under which a court finding a contract or clause unconscionable "may refuse to enforce the contract, enforce the remainder of the contract without the unconscionable clause, or so limit the application of an unconscionable clause as to avoid an unconscionable result."
The trap
The reformation remedy is not automatic relief for a drafter who overreached: Data Management expressly warns that "employers are encouraged to overreach" under this rule because a court will normally just narrow what they wrote, and the court's answer to that risk is to make good faith the gatekeeper, not a formality. If the trial court finds the employer "overreached willfully," "the court should refuse to alter the covenant": meaning a covenant drafted in obvious bad faith (not merely one that turns out to be too broad) can lose the reformation remedy entirely and be struck down whole, the outcome the court otherwise rejected as too harsh. The opinion remanded for exactly that good-faith determination and did not itself decide where the line falls between an honest overreach and bad-faith drafting. Two limits on how far this answer travels. Data Management is an employment covenant not to compete; no Alaska decision read for this rule applies the reasonable-alteration rule to a standalone customer or employee non-solicitation covenant, or to a sale-of-business covenant, so neither extension is established here. And the factor list the opinion reproduces when it explains the reasonableness approach is quoted from an Ohio decision, not adopted as Alaska's own test, so it is not stated as the standard a drafter will be measured against.
8 authorities
The words that state the rule
The first approach is to hold that a covenant which is overbroad, and hence unconscionable, will not be enforced.
The words that state the rule
The second approach is to hold that if words in an overbroad covenant not to compete can be deleted in such a way as to render it enforceable then the court may do so. This is the so-called “blue pencil” rule.
The words that state the rule
The third approach, and the one we adopt, is to hold that if an overbroad covenant not to compete can be reasonably altered to render it enforceable, then the court shall do so unless it determines the covenant was not drafted in good faith.
The words that state the rule
The burden of proving that the covenant was drafted in good faith is on the employer.
The words that state the rule
One criticism of this position is that employers are encouraged to overreach; if the covenant they draft is overbroad then the court redrafts it for them. While we recognize that the problem of overreaching exists, we think it can be overcome by stressing the good faith element of the test. The trial court must determine whether an employer has overreached willfully and, if so, the court should refuse to alter the covenant.
The words that state the rule
Accordingly, we REMAND this case to the trial court so it can determine whether Data Management acted in good faith, and if so, whether the covenant not to compete can be reasonably altered.
The words that state the rule
This approach is consistent with U.C.C. § 2-302, as codified in Alaska under AS 45.02.302, which states: (a) If the court as a matter of law finds the contract or a clause of the contract unconscionable at the time it was made, the court may refuse to enforce the contract, enforce the remainder of the contract without the unconscionable clause, or so limit the application of an unconscionable clause as to avoid an unconscionable result. (b) If it is claimed or appears to the court that the contract or any clause of the contract may be unconscionable, the parties shall be given a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.
- statuteAS 45.02.302enactment date not established
The words that state the rule
If the court as a matter of law finds the contract or a clause of the contract was unconscionable at the time it was made, the court may refuse to enforce the contract, enforce the remainder of the contract without the unconscionable clause, or so limit the application of an unconscionable clause as to avoid an unconscionable result.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.