As we’ve previously noted on this blog, the basic rule is that for a non-compete agreement to be enforceable in South Carolina, it must be (1) necessary for the protection of the legitimate interests of the employer or purchaser, (2) reasonably limited 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 valuable consideration. The same standards that govern the enforceability of non-competes for an employee/employer relationship also apply to the use of non-competes in the sale of a business.
In Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the South Carolina Court of Appeals recently reviewed the enforceability of a non-compete in the sale of a business context. This non-compete prevented seller Knight Systems, a mortuary transport business based in Lexington County, from competing against new buyer Palmetto Mortuary anywhere within 150 miles of Lexington County, which is where the Knight’s business was located, for a period of ten years. Four years later, Knight began competing against Palmetto in Richland County (adjacent to Lexington County) in violation of the non-compete. Palmetto sued Knight for breach of the non-compete provisions (among other claims as well). Palmetto won at the lower court level, but Knight appealed.
The Court of Appeals, upon reviewing the case, determined that the 150 mile geographic restriction was overly broad and unenforceable. The court noted that the original business only operated in Lexington and Richland counties, but the 150 radius purported to keep Knight from competed in a much wider area (i.e., much of South Carolina and parts of surrounding states). Because Palmetto Mortuary had no legitimate business purpose in keeping Knight from competing in areas that Knight had never done business before, the court struck down the entire agreement, and refused to re-write the contract (or “blue pencil” it) to make it more reasonable.
This case should encourage employers and those selling their business to draft their non-competes with a more reasonable geographic scope (or else risk a court throwing the non-compete out altogether). But those who are asked to sign a non-compete should keep in mind that even if their non-compete is probably unenforceable, an employer can still sue to enforce it and cause the employee a lot of stress and attorneys’ fees.
We always recommend that you have an attorney review your non-compete (or non-solicitation or non-disclosure) BEFORE you sign it, but if you’re in a situation where you’ve already signed one and are facing a pending lawsuit, then you should speak with an experienced South Carolina non-compete attorney immediately.
In its first non-compete case involving a physicians, the South Carolina Court of Appeals used mostly well-trodden commercial case precedent to reverse a bench trial holding that the agreements were unenforceable and awarding relief under the Wage Payment Act in Baugh v. Columbia Heart Clinic, P.A., 2013 S.C. App. LEXIS 5, 20 Wage & Hour Cas. 2d (BNA) 202 (S.C. Ct. App. Jan. 16, 2013). Baugh involved two cardiologists who left Columbia Heart in 2006 and, within one month, established their own cardiology practice approximately 300 yards from Columbia Heart’s then-new Lexington County facility. The doctors sought an injunction preventing enforcement of no-compete agreements based on forfeiture and liquidated damages clauses that were intended to prohibit them from practicing or assisting in the practice of cardiology for one year within 20 miles of Columbia Heart offices where they had routinely practiced.
The Court of Appeals upheld the non-compete in a set back for all employees as well as consumers of medical services. Non-competes in the medical field (like many others) limit choices and limit supply for services. However, Baugh ignored robust debate in other states– including a pronouncement by the American Medical Association — concerning what some consider the injurious public impact of physician non-compete agreements. Among the other holdings in Baugh, Court of Appeals held the following:
- the non-compete agreements at issue in the case were supported by consideration (a $5,000-per-month/ $60,000 total for compliance with the non-compete agreement) ;
- liquidated damages for each doctor of one year’s W-2 income of roughly $591,710 and forfeiture by each doctor of $240,000 — in a combination earned but unpaid salary, pro rata shares of accounts receivable, and the $60,000 noted above — were not penalties; and
- unpaid salary and accounts receivable, along with director’s fees, were not wages “due” under South Carolina’s Wage Payment Act (on the rationale that the doctor’s forfeited their rights to these items).
There were several issues that deserved greater consideration–for more in-depth treatment click and read on. Continue reading
The most recent reported South Carolina case involving a non-compete is Team IA, Inc. v. Lucas, 717 S.E.2d 103 (S.C. Ct. of App. Oct. 2011). The case provides only modest insight into the legal landscapes of non-compete agreements, and in some ways creates a bit of uncertainty. In Lucas, the Court of Appeals struck down the nationwide non-compete as being overly broad, but left open the possibility of enforcing the alternative geographic restriction “defined as the states of South Carolina, North Carolina, Georgia and Alabama.” Not unlike the last Supreme Court case on the subject, this case is curious for the issues not addressed in more detail and the cases not cited. But, I get ahead of myself: First the facts. Continue reading
The more non-compete matters I review and litigate the more certain I am that geographically based non-competition covenants should be per se unenforceable. What is the logic of preventing an employee from selling widgets in Greenville County just because he has sold widgets to certain customers located in Greenville County? (There is none.) How are such non-competes ever reasonable in a post-employment covenant? (They are not.) Isn’t such a non-compete always broader than it needs to be to protect the former employer’s legitimate interest? (Yes.) Continue reading
Many non-competes will prohibit a former employee from competing with in a certain defined radius. Drawing a circle and declaring it a non-compete zone makes for a good target for employees looking to hit the bulls-eye when attacking a noncompete. One of my favorite cases is Stringer v. Herron, 309 S.C. 529, 424 S.E.2d 547 ( S.C. App. 1992). In Stringer, Herron and Stringer had entered into a written employment contract on July 1, 1985. The contract, which was to begin on July 1, 1986, and to end on July 1, 1991, contained the following covenant:
During a period of three years from the termination of the employee’s employment … the employee will not associate himself or engage in, directly or indirectly, any business or practice which exists for the practice of veterinary medicine within fifteen miles of any veterinary practice operated by the employer … at the time of termination of employment.
As far as noncompetes go, seems fairly reasonable on its face, wouldn’t you say? Well, consider the following facts: ” The practice locations were so situated within the county that the 15-mile radius around each one overlapped with the others and together they created a proscribed area that embraced nearly all of Anderson County, parts of Abbeville, Greenville, Pickens, and Oconee Counties, and, indeed, a small part of Georgia. Although 96 per cent of Stringer’s 14,326 clients lived within 15 miles of at least one of the three practice locations, 55 per cent or about 7,879 of them lived within 5 miles and 84 per cent or about 12,034 of them lived within 10 miles of at least one of these locations.”
The court held that considering that a “overwhelming majority” of the customers live much closer than 15 miles of one of the three practice locations that the non-compete was overly broad and unenforceable. The radius made the issue an all or nothing, winner take all. The former employee was permitted to practice veterinary medicine wherever he chose.