South Carolina Supremes Take a Side in Blue Pencil Fight

by Andy Arnold on June 2, 2010

blue pencilThe South Carolina Supreme Court has issued a new non-compete case, which overturned a lower court decision that enforced a non-compete after it modified (i.e., blue penciled) the agreement’s overly broad provisions.  The case of Poynter Investments v. Century Builders (Op. No. 26821 May 24, 2010) is skinny on the details, but on the surface, the opinion suggests that “blue-penciling” is dead in South Carolina.  However, the opinion fails to acknowledge and/or discuss language in older opinions suggesting an openness to blue penciling (discussed below) and completely ignores a federal court case permitting blue-penciling under South Carolina law (discussed below).  Accordingly, there is still some room for a stubborn employer to argue for a limited reading of Poynter. Nonetheless, this case is important precedent for those seeking to invalidate a non-compete.

In Poynter Investments v. Century Builders, the Appellant/Rector sold his business to Respondent/Poynter and on the same day entered into a one year “Employment and Non-Competition Agreement.”  Under the terms of this Agreement, Rector agreed to a 4 year non-competition clause, which included the following territorial restrictions:

1. Definitions.  In addition to other terms defined elsewhere in this Agreement, unless the context shall expressly or by necessary implication indicate to the contrary, as used herein, the following terms shall have the following meanings:

(a)     “Business” is as defined hereinabove.

(b)     “Restricted Territory” means:

(i)  An area encompassing seventy-five (75) miles in any direction from the Premises.

(ii)  In the event the preceding subparagraph (i) shall be determined by judicial action to be unenforceable, the “Restricted Territory” shall be Greenville County, South Carolina and any county that borders Greenville County, South Carolina.

(iii)  In the event the preceding subparagraph (ii) shall be determined by judicial action to be unenforceable, the “Restricted Territory” shall be Greenville County, South Carolina.

Poynter sued Rector alleging a breach of the non-compete and seeking a preliminary injunction. The trial judge found that Poynter would suffer irreparable harm unless the agreement was enforced, but, without further explanation, ordered:

the [appellants], including any entity associated with [appellants], to be enjoined and restrained from violating the terms of the non-compete covenant within Greenville County, South Carolina and within an area encompassing fifteen miles in any direction from [the Premises].

Rector appealed.

One issue considered by the S.C. Supreme Court on appeal was whether the trial judge erred by rewriting the territorial limitation in the non-compete clause. The Supreme Court reversed the trial judge and held as follows:

…[I]n South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms. We hold, therefore, that the trial judge erred in rewriting the territorial restriction in the parties’ contract.

The holding appears clear enough, and maybe it is.

However, the opinion is interesting for the cases not discussed or even mentioned by the Supremes.  One such case is Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344 (1958), in which the South Carolina Supreme Court considered whether to blue-pencil (modify, rewrite) an otherwise overly broad provision.  In Somerset, the Court stated:

A majority of the courts apply the so-called ‘blue pencil test’, that is, if the excessive restraint is severable in terms, it may be disregarded and the remaining part of the contract enforced; but if the contract is not severable in terms, the entire covenant falls.

*            *            *

The covenant here is clearly indivisible. It covers the entire State of South Carolina and furnishes no basis for dividing this territory. Not only does the contract show that it was the intent of the parties that this covenant be treated as indivisible, there is no basis for drawing a sharply defined line separating the excess territory. We cannot make a new agreement for the parties into which they did not voluntarily enter.

The second case in which our Supreme Court considered blue-penciling divisible covenants was Eastern Business Forms, Inc. v. Kistler, 258 S.C. 429, 189 S.E.2d 22,(1972). The Eastern Business Forms case was similar to Somerset, and the opinion in fact quoted the above language, before deciding:

The restrictive covenant here is clearly indivisible because it provides a 100-mile radius of the City of Greenville or of the central city where the appellant performs his services as a salesman, and furnishes no basis for dividing this territory. The contract shows upon its face that it was the intent of the parties thereto that this covenant be treated as indivisible. It follows, that there is no basis for drawing a sharply defined line separating the excess territory.

Of course, there is nothing about the holdings of Somerset and Eastern Business Forms that are inconsistent with the holding of Poynter.  However, the Supreme Court did at least consider the notion of blue-penciling divisible covenants, and those decisions at least suggested that if the covenants had been divisible, the Court would have blue-penciled.  Why not discuss the language from these two cases?

The suggestions contained in these two opinions were the basis for the holding of the United States District Court in Rockford Mfg., Ltd. v. Bennet, 296 F.Supp.2d 681 (D.S.C. 2003).  In Rockford, the Court noted Eastern and Somerset delineate two important principles for determining the enforceability of non-solicitation clauses. First, as stated, the contract must be severable. Second the severability must be apparent from the contract itself–in language and subject matter.” However, in Rockford, the District Court concluded that the covenant was divisible (i.e., “severable”) and that because the contract contained a severability clause, the overly broad non-compete could be blue-penciled/modified.  Rockford is the only reported decision in which South Carolina law has been applied to blue-pencil (and save) an overly broad non-compete; the Supreme Court did not even mention or cite this case in its Poynter decision.

So what gives?  The Supreme Court in Poynter seems to have clearly rejected blue-penciling.  It appears clear that the covenant not to compete considered in Poynter was in fact divisible, and the agreement expressly stated that the various provisions are included as alternatives in the event a court found any provision to be overly broad. (There is no discussion as to whether there is a separate severability provision.)  Nonetheless, the Court chose to ignore the trio of cases suggesting the availability of blue-penciling of divisible covenants.

And so, perhaps Poynter by its application to the non-compete in dispute can be said to definitively rejected blue-penciling once and for all.  This will certainly be my position when I cite Poynter. However, because the court did not take on Rockford “head on,” I am certain opposing counsel will argue otherwise.

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