S.C. Non-Compete Law

A non-compete clause (often NCC), or covenant not to compete (CNC), is a term used in contract law under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). Some courts refer to these as "restrictive covenants." As a contract provision, a CNC is bound by traditional contract requirements including the consideration doctrine. The use of such clauses is premised on the possibility that upon their termination or resignation, an employee might begin working for a competitor or starting a business, and gain competitive advantage by exploiting confidential information about their former employer's operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.

A non-compete clause  or covenant not to compete  is a term used in contract law under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). Some courts refer to these as “restrictive covenants.” 

“Noncompetes aren’t worth the paper they’re written on,” says your relative who talked to someone who has a cousin who is a lawyer.  “This is a right to work state,” he adds.  Well, maybe once upon a time, but today, South Carolin Courts will enforce a narrowly tailored noncompetition agreement (also known as a “covenant not to compete”) as well as a properly drafted non-solicitation agreement.  It gets even a little dicier for former employees when you add in non-disclosure agreements, the South Carolina Trade Secrets Act, and the evolving inevitable disclosure doctrine.   Good news is that many employers do not narrowly draft their restrictive covenants, but want something to completely shut former employees out of competing.  This opens the door to beating your non-compete.

First, South Carolina provides that “[c]ovenants not to compete contained in employment contracts are generally disfavored and will be strictly construed against the employer. A restriction against competition must be narrowly drawn to protect the legitimate business interests of the employer.  A covenant not to compete will be upheld only if it is:

(1) necessary for the protection of the legitimate interest of the employer;

(2) reasonably limited in its operation with respect to time and place;

(3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood;

(4) reasonable from the standpoint of sound public policy; and

(5) supported by a valuable consideration.

* * * *

If a covenant not to compete is defective in one of the above referenced areas, it is totally defective and cannot be saved. Faces Boutique, Ltd. v. Gibbs, 455 S.E.2d 707, 708-09 (Ct. App. 1995) (citations omitted). “We must uphold the covenant as written or not at all, it must stand or fall integrally.” Id. (emphasis added). Whether or not such a non-compete is reasonably limited in its operation is a question of law. See Stringer v. Herron, 424 S.E.2d 547 (Ct. App. 1992).  So, non-competes can be attacked for failing to meet any of the above requirements, but most of the time, the non-compete is geographically overly broad, does not protect a legitimate interest of the employer or is not supported by valuable consideration.

A.   Geographically Limited

The law of South Carolina could not be clearer: “Any covenant should have been limited to the area where he worked.” Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (1961) (citations omitted) (emphasis added).  “It is well settled that while contracts in general restraint of trade are against public policy and void, yet those in partial restraint, founded upon a valid consideration and reasonable in their operation, are valid and binding.” Reeves v. Sargeant, 200 S.C. 494, 21 S.E.2d 184 (1942) (internal citations omitted).  “To be considered reasonable, a territorial restriction must not cover an area any broader than is necessary to protect the employer’s legitimate interest.” Stringer v. Herron, 309 S.C. 529, 424 S.E.2d 547 (Ct. App. 1992), citing Standard Register Co. v. Kerrigan, 238 S.C. 54, 119 S.E.2d 533 (1961). “If . . . the territorial scope of restraint is unreasonable. . . no inquiry need be made as to the presence or absence of other necessary requirements.” Stringer, 424 S.E.2d at 548 (citation omitted).

The South Carolina Supreme Court has held that a state-wide prohibition was overly broad when the employee’s dealings with customers occurred in only two counties. Oxman, 239 S.C. 218, 122 S.E.2d 559. “Any covenant should have been limited to the area where he worked. Extending it to the entire State render[s] it unenforceable.” Id.; see also Rental Uniform Serv. v. Dudley, 278 S.C. 674, 301 S.E.2d 142 (1983) (“A geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”); Caine & Estes Ins. Agency, Inc. v. Watts, 278 S.C. 207, 293 S.E.2d 859 (1982 ) (enforcing prohibition limited to territory where clients are located). “The principle of customer-contact protection finds its expression in the general rule that the territorial restraint in a covenant not to compete will, generally speaking, be considered reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.” Standard Register Company v. Kerrigan, 238 S.C. 54, 119 S.E.2d 533 (1961). Thus, South Carolina does not enforce statewide non-competes merely because an employee has done business in a few counties.

B.  No Legitimate Interests

The best case related to the “protect a legitimate interest” prong is  Faces Boutique, Ltd. v. Gibbs, 455 S.E.2d 707, 708-09 (Ct. App. 1995)   There the court was faced with a “covenant [that] seeks to prevent [Gibbs] from being associated in any capacity with any business which gives facials, sells cosmetics, etc.  Such a prohibition goes far beyond the protection of any legitimate business interest [Faces] may be able to articulate. This broad prohibition also prevents [Gibbs] from earning a livelihood through legitimate means.”  Consider that the former employee (Gibbs) would be unable to work for any of the various department stores which sell cosmetics, even if she worked in an area of the store not involved in the sale of cosmetics.  The trial court further noted “[b]ecause the restrictive covenant at issue here is so broadly drafted, [Faces] can, and does contend that [Gibbs] is contractually prohibited from holding her present position, even though [Gibbs] does not compete with [Faces] in any way.”

Face Boutique argued that it would not attempt to enforce the clause in a manner which would exceeded the “spirit” of the agreement.  However, the court noted that “it is not enough for a party to rely on the “spirit” of a noncompete clause. Here, the contract, when read in its entirety, not only restricts Gibbs from becoming employed at an establishment which offers esthetician services, the contract also prevents Gibbs from becoming employed at any establishment which sells cosmetics. The apparent willingness of Faces to accept an interpretation of the covenant which would render the covenant proper in scope does not aid the invalidity of the covenant as written.”
 C.  Not Supported by Valuable Consideration

As noted in Faces Boutique, a non-compete agreement, like all contracts, must be supported by valuable consideration. 455 S.E.2d at 708-09. Initial employment can be sufficient consideration. See Riedman Corporation v. Jarosh, 289 S.C. 191 (1986). However, the Supreme Court of South Carolina has previously considered the following question: “[W]hether continued at-will employment is sufficient consideration to enforce a covenant entered into days, months, or even years after the initial employment offer.” Poole v. Incentives Unlimited, Inc., 345 S.C. 378, 382, 548 S.E.2d 207, 209 (2001) (emphasis added). The court held that continued employment was not sufficient consideration for a non-compete entered into after the initial offer of employment, and it determined that “when a covenant is entered into after the inception of employment, separate consideration, in addition to continued at-will employment, is necessary in order for the covenant to be enforceable.” Id.

Of course, there are other avenues of attack, and each case is unique.  The facts matter.  Language that may be overly broad in one context may not be overly broad in another.  And at the trial court level, decisions can be unpredictable, especially when appearing before judges the first time.   It is wise to seek out qualified legal counsel at the earliest possible opportunity before you get to far down a oneway street.

 

Be Sociable, Share!