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.
I have tried three cases in the last 12 months, but none more difficult than a non-compete case in Lexington County. The judge did not grant summary judgment on the non-compete or non-solicitation provisions, and my client had conceded he breached the non-compete. The defendant was permitted to argue he was entitled to $2.7 million in lost profits, which encompassed a 5 year period although the non-compete was 1 year long. A jury deliberated 5 hours before asking for a calculator, and another couple doing math. When it was all said and done, the defendant will receive a breach of contract remedy that is 10% of the lost profits sought and one-half of the first settlement offer. But the motion for attorneys fees’ is still pending. (Defendant asked for a figure in excess $700,000.).
Well. This case has a lot of “boots on the ground” experience to dissect. Couple if quick take aways for now:
1. It is cliche, but you never know what a jury is going to do. This verdict appears to be an inconsistent verdict; it may be a compromise verdict; it is likely a confused verdict. But, do the parties really want to try this one all over again? Cost-benefit says “no.” However, rationality gets lost in the passion for revenge that can infect these cases.
2. Judges do not wade very deep into non-competes that often. The appellate law in the state of South Carolina is not as clear as it could be. The law has evolved slowly over the last 50 years, and sometimes in ways that appear to be inconsistent. This lends itself to variability and lack of predictability at the trial court level.
3. There is a fairness standard that seems to underpin much of what drives juries, and in the present political and cultural environment, juries in certain locales and/or in response to certain fact patterns are not as hostile to non-competes as one might guess. Whoever wins the fairness battle, wins the war. And, if there is a split decision in the fairness equation, then verdicts tend to reflect that through a compromise verdict.
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 →
It is happening. Slowly, states are making it easier for employers to enforce non-competes. Recently, the Texas Supreme Court abandoned a decade of precedent when it expanded the basis for supporting non-compete enforcement. Check out Michael P. Maslanka’s Work Matters blog on this topic. Maslanka states “[w]hile the employer won this case, many employers will lose in the long run. Noncompetes tie up talent, and it is the movement of talent that creates what the concurrence calls “economic dynamism.” Amen.
Next door in Georgia, the state has amended the constitution to change its non-compete law. How much so? The Georgia Non-Compete and Trade Secrets News blog says this: “This new law makes it significantly easier for employers to enforce non-competes and other restrictive covenants against former employees, at least with respect to restrictive covenants in contracts that are signed from this point forward and are thus governed by the new law.” Here is a blog post by Trade Secret/Non-Compete that provides a brief description of the law. The change went into effect in May 2011. However, the Georgia constitution now grants courts to blue pencil non-competes, which South Carolina courts still refuse to do.
Too many employees who have signed a non-compete agreement fail to take notice that they have agreed to be sued in another state. These provisions are known as “forum selection clauses.” The costs of going to another state to defend yourself can be significantly higher than litigating in your home state. At least half of the agreements I review state that the parties have agreed to having another state’s court will decide any dispute. 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 →
“A recent study byShepherd Law Group shows that noncompete litigation nationwide has continued to trend upward, despite a slowing economy and legislative attempts to curb noncompetes. The latest study shows that noncompete litigation has more than doubled since 1995, and has increased by 61 percent from 2004 to 2009.” For more on this trend visit Gruntled Employees.
My personal experience is consistent with the trends noted by the Shepherd Law Group study. More employers are seeking non-competes from new employees, existing employees and even employees who have been fired (and offered severance).
In Bimbo Sues the Muffin Man, I briefly discussed the inevitable disclosure case filed by Bimbo Bakeries against a former manager, who had ran one of its English muffins facilities. To prevent disclosure of its trade secrets, Bimbo asked a judge to keep the former manager from working for a competitor, even though the manager had never signed a non-compete. In a follow-up post, Judge Sides with Bimbo, I provided a link to Judge Barclay’s 37-page opinion in Bimbo Bakeries USA Inc. v. Botticella, which granted the preliminary injunction. Botticella appealed to the 3rd Circuit Court of Appeals, which just issued an opinion upholding the preliminary injunction.Continue reading →
Here’s an articleabout an inevitable disclosure case recently filed in federal court in Pennsylvania. Bimbo Bakeries sued a former manager at one of its english muffins facilities, saying “he is one of fewer than 10 people in the world who know how to make the muffins with the special ‘nooks and crannies.'” To prevent disclosure of its trade secrets, Bimbo asked a judge to keep the former manager from working for a competitor. Although, he had not even signed a noncompete. Read the rest of the article on Law.com.