Non-Solicitation Provisions: Existing Customers

by Andy Arnold on December 19, 2008

As previously discussed, the most basic requirement of an enforceable non-compete is that it be “reasonably limited in its operation with respect to time and place.” However, more and more, non-competes are substituting customer specific limitations (”non-solicitation” provisions) for geographic limitations. The provisions generally state that a former employee cannot contact customers of the company to solicit (”directly or indirectly”) the business of that customer. South Carolina, like most (if not all) other states have generally endorsed such a substition. But, the argument is always in the details: The details of the contract language and/or the details of the court’s statement of the law. Let’s look at the details of several statements of South Carolina law.

A general statement of South Carolina law: 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)(emphasis added). (The “detail” is in bold.) What about “former customers” and “prospective customers”? The only South Carolina cases upholding customer specific limitations have all involved existing clients, existing policyholders, and existing customers.

Consider this from the Supreme Court: “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). So, the logic behind geographic limitations makes the “existing customer” limitation a natural extension of that logic. However, protecting former clients is much harder to justify. If they are former clients, then they are no longer doing business with the entity and protecting those contacts from competition is much harder to justify, if it can be justified at all. Opening the non-solicitation exception up to prospective customers would be so broad as to be no limitation at all.

So, examine your non-solicitation and determine if it is limited to existing customers. If not, then without a geographic limitation, it is a good bet that the provision is unenforceable under South Carolina law, at least until the Supreme Court changes its mind.

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