Court of Appeals Adopts Doctrine of Equitable Reformation
On February 1, 2018, the District of Columbia Court of Appeals decided Steiner v. American Friends of Lubavitch (Chabad), Nos. 14-CV-1427 & 15-CV-1203, slip op. (D.C. Feb. 1, 2018), in which it considered whether to enforce a restrictive covenant; specifically, a non-compete and non-interference clause in an employment contract. Slip op. at 1-2. In considering that issue, the Court of Appeals adopted the doctrine of equitable reformation. Id. at 19-35.
The Court of Appeals stated that “[m]ost courts take one of three approaches to restrictive covenants containing unenforceable provisions.” Id. at 20. “One approach is simply to refuse to enforce an overbroad covenant.” Id. However, the Court of Appeals previously rejected that approach. Id.
Another approach is the so-called “‘blue-pencil’ rule, which allows courts only to sever overbroad terms where the severable character of the restriction is evident from the terms of the agreement.” Id. at 21 (internal quotation marks omitted). Under that approach, a court has discretion to “cross out” overbroad, unreasonable provisions and enforce the remainder. Id. “[T]he court is limited to deleting unreasonable terms or provisions to narrow the scope and enforcing the remaining language, so long as the language remains grammatically coherent.” Id. The approach has been criticized as “overly formalistic.” Id. at 22.
The other approach “is sometimes called the equitable reformation doctrine, which allows courts to enforce a covenant to the extent that its terms are reasonable, regardless of grammatical severability.” Id. at 21 (internal quotation marks omitted). The Court of Appeals decided to adopt this approach on the grounds that it “affords greater flexibility to make reasonable modifications when necessary and is thus the better approach.” Id. at 23.
In adopting the doctrine of equitable reformation, the Court of Appeals stated that it is cognizant that courts should be reluctant to “rewrite” contracts. Id. at 23. And it noted various principles that courts may use to guide their exercise of discretion in applying the doctrine. Id. at 24-26.