Introduction: The General Rule
Under South Carolina law “[i]t 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) (emphasis added).
The South Carolina Court of Appeals has summarized the law governing non-competes as follows:
Covenants 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 (S.C. Ct. App. 1995) (citations omitted)(emphasis added). Whether or not such a non-compete is reasonably limited in its operation is a question of law. Stringer v. Herron, 424 S.E.2d 547 (S.C. Ct. App. 1992).
1. Protection of a Legitimate Interest
The South Carolina case that offers a simple examination of the “protection of the legitimate interest” prong is Faces Boutique, Ltd. v. Gibbs, 318 S.C. 39, 455 S.E.2d 707 (S.C. App. 1995). In Face Boutique the former employee (Gibbs) had performed facials for her employer, which had filed an action seeking an injunction to enforce the following non-compete:
For a period of three (3) years after the termination of this agreement, the Employee will not, WITHIN THE TOWN OF HILTON HEAD ISLAND, SC, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, advertisement or control of any business in direct competition with the type of business conducted by [Faces]. It is understood and agreed that this prohibition applies to FACIALS, SELLING OF COSMETICS, AND ALL APPLICATION OR FACIAL SPA RELATED SERVICES.
The lower court found this to be overly broad: Not only did this provision prohibit Gibbs from performing facials, but the plain meaning prohibited her from working for any business that sold cosmetics even if she did personally sell cosmetics. For example, Gibbs could not have worked in the Belk’s men’s department just because Belk’s also sold cosmetics. The Court held that “the terms of the covenant restrict Gibbs’s employment opportunities beyond what is necessary for the protection of [Face’s Boutique’s] legitimate business interests.”
Interestingly, even if the Plaintiff-employer agrees not to enforce the non-compete to its full extent, the Court will still invalidate the non-compete:
“[Faces Boutique testified it] would not attempt to enforce the clause in a manner which would exceed the “spirit” of the agreement. Although Faces does not go so far as to expressly advance this argument on appeal, we note it is not enough for a party to rely on the “spirit” of a non-compete 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.
Bottom line: If the plain meaning of the non-compete prevents the employee from working in a capacity that is not competitive with their former employer, the non-compete is too broad.
2. Limited in Time
First, it should be pointed out that limited in time depends on the facts. Courts have upheld one year, two year, three year and even a five year. The longer the duration the more suspect the non-compete will be. If your non-compete is one or two years, you should assume that it is enforceable. However, it may be that your industry or your age presents unique arguments, although there are no cases in South Carolina that provide much guidance. But, there must be some time limitation.
3. The Geographic Scope
“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, 24 S.E.2d at 548 (citation omitted).
The South Carolina Supreme Court has held that a state wide prohibition when the employee’s dealings with occurred in only two counties was overly broad. Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (1961)(citations omitted). “Any covenant should have been limited to the area where he worked. Extending it to the entire State rendered it unenforceable.” Id. (emphasis added). See also Rental Uniform Serv. v. Dudley, 278 S.C. 674, 301 S.E.2d 142 (1983)(citation omitted)(“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 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).
The Court in Oxman v. Sherman relied on its decision in Delmar Studios of Carolinas v. Kinsey, 233 S.C. 313, 104 S.E.2d 338 (S.C. 1958). In that case, the defendant-employee was employed to potentially work in a territory larger than he actually worked. The plaintiff-employer’s business extended to in parts of North Carolina and Georgia and included the entire state of South Carolina. Defendant-employee signed a non-compete which prohibited employment in the entire territory in which the plaintiff-employer did business. However, defendant-employee only had contact with customers to about ten counties in South Carolina and six in Georgia.
Defendant-employee terminated his employment and went to work with another employer and solicited some business in counties in which he previously worked. Plaintiff-employer sued to enforce the non-compete agreement. The court found the non-compete overly broad and held that the appropriate territorial restriction were those geographic areas in which the defendant-employee actually solicited business not the geographic areas in which plaintiff-employer had business. The court noted that just having the ability to assign defendant-employee to work anywhere within the plaintiff-employer’s territory was not sufficient to extend a non-compete’s geographic prohibition beyond the area in which the defendant-employee actually worked.
In Sermons v. Caine & Estes Ins. Agency, Inc., 275 S.C. 506, 273 S.E.2d 338 (1980) both parties moved for summary judgment on plaintiff’s declaratory judgment action involving a non-compete. The lower court had denied summary judgment, and the Supreme Court reversed, noting that both parties had essentially stipulated that only legal issues remained. The court held that a state-wide prohibition was unreasonably broad where plaintiff only came in contact with clients within a 50 mile radius of Greenville. The Court concluded “[t]here is no good reason for limiting the activity of the employee throughout the entire state of South Carolina.”
4. Non-Solicitation Of Clients.
A customer-specific non-solicitation/non-compete agreement can be enforceable in South Carolina. While “the general test is that contractual prohibitions must be geographically limited to what is reasonably necessary to protect the employer’s business …[p]rohibitions against contacting existing customers can be a valid substitute for a geographic limitation.” Wolf v. Colonial Life and Acc. Ins. Co., 309 S.C. 100, 420 S.E.2d 217 (S.C. App. 1992) citing Caine & Estes Ins. Agency, Inc. v. Watts, 278 S.C. 207, 293 S.E.2d 859 (1982)(emphasis added). However, there is not one South Carolina case that permits prohibitions against contacting prior customers and prospective customers to substitute for a geographic limitation.
In Wolf the plaintiff-employee had been employed in insurance sales and had signed a non-compete agreeing not to solicit any “existing policyholders and payroll deduction accounts.” Id. However, significantly, the agreement did not contain any geographic-based restrictions or a “blanket prohibition against competition,” such as exists here, but only applied to existing customers of the employer. The court upheld this narrowly tailored. In Caine, the limitation was limited to current customers. In Oxman v. Profitt, 241 S.C. 28, 126 S.E.2d 852 (S.C. 1962) the court upheld a non-solicitation which was limited to existing policyholders.
Even in cases that evaluate geographic limitations, the court has expressly stated that “principle of customer-contact protection” is what is reasonable. Standard Register Company v. Kerrigan, 238 S.C. 54, 119 S.E.2d 533 (1961). Thus not only is the focus of customer specific limitations “existing customer” protection but the focus in geographic areas must be limited to areas in which the employee during his employment had contact with customers. See Rental Uniform Serv. v. Dudley, 278 S.C. 674, 301 S.E.2d 142 (1983)(citation omitted)(“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 located). Defendant could have very easily drafted this agreement to cover only those counties in which Defendant had clients and still protected any legitimate interest that might exist); Sermons v. Caine & Estes Ins. Agency, Inc., 275 S.C. 506, 273 S.E.2d 338 (1980) (declaratory judgment action in which Supreme Court held that a state-wide prohibition was unreasonably broad where plaintiff only came in contact with clients within a 50 mile radius of Greenville.)
5. Supported by Valuable Consideration.
The requirement is that there be a benefit conferred upon the employee in exchange for signing the non-compete. If the agreement is presented to the employee at the “inception of employment” then just hiring an employee is enough of a benefit, even if the job is “at-will.” If it is an existing employee, the employer needs to give the employee a promotion, a pay raise, expanding an employee’s territory, or confer some other benefit.
In Poole v. Incentives Unlimited, Inc. 345 S.C. 378, 382, 548 S.E.2d 207 (S.C. 2001)(emphasis added), the South Carolina Supreme Court 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.” The court held that continued employment was not sufficient consideration for a non-compete entered into after the initial offer of employment. Id. “Therefore, we adopt the rule 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.
The court in Poole expressly acknowledged that it had been “persuaded by jurisdictions, such as North Carolina” in coming to its decision. It specifically cited Kadis v. Britt, 224 N.C. 154, 29 S.E.2d 543 (1944). The North Carolina appellate courts have had ample opportunity to apply the holding of Britt (and thus Poole) to circumstances much closer to the case at hand. Several cases, including Young v. Mastrom, Inc., 99 N.C.App. 120, 392 S.E.2d 446 (N.C.App.,1990), have held that a non-compete agreement entered into a few days after employment is accepted is unenforceable if no new consideration is given. In Young, plaintiff Carpenter accepted employment in February 1976, reported for work on 1 March 1976, and signed a non-compete agreement the next day. Id. at 122, 447. Plaintiff Beith signed a non-compete agreement four days after accepting employment and plaintiff Young signed a non-compete six days after accepting employment. Id. In no case did the employee receive a pay raise or other benefit. Id. at 121-22, 447.
Given this, the court “concluded as a matter of law that the covenants were not supported by adequate consideration” and were “invalid and unenforceable” notwithstanding the fact that they had been entered into only a few days after acceptance of employment. Id. at 122, 448. “The terms of a verbal covenant which is later reduced to writing must have been agreed upon at the time of employment in order for the later written covenant to be valid and enforceable.” Young v. Mastrom, Inc., 99 N.C. App. 120, 392 S.E.2d 446 ( N.C.App.,1990) citing Stevenson v. Parsons, 96 N.C. App. 93, 97, 384 S.E.2d 291, 293 (1989). Mere discussion of a non-compete in “general terms” at the inception of employment will not suffice. Id.