South Carolina Lawyer
SC Lawyer, May 2008, #5.
Battle-Worthy Non-Competes: Lessons from the Wreckage of Recent Cases
South Carolina LawyerMay 2008Battle-Worthy Non-Competes: Lessons from the Wreckage of Recent CasesBy Phillip Kilgore and Jeff Dunleavy"Meeting of the minds?" "Benefit of the bargain?"
South Carolina courts are more likely to use other phrases to describe their default view of non-compete covenants in employment agreements, such as:
"looked upon with disfavor,"
"contrary to the public interest" or
"harsh and oppressive."
E.g., Moser v. Gosnell, 334 S.C. 425, 430, 513 S.E.2d 123, 125 (S.C. Ct. App. 1999); Almers v. South Carolina Nat'l Bank, 265 S.C. 48, 54, 217 S.E.2d 135, 138 (S.C. 1975).
Judicial skepticism toward employer efforts to restrict the activities of departing employees is the factor that most controls the direction of drafting counsel. When drafting or revising non-compete provisions in an employment agreement, a lawyer must craft language that can withstand high scrutiny. There is no shortage of lessons to be derived from lawyers who went before and failed.
The S.C. Supreme Court's basic requirements an employer must meet to enforce a non-compete provision are that such provision:
(1) not be detrimental to the public interest;
(2) be reasonably limited as to time and territory; and
(3) be supported by valuable consideration.
Poole v. Incentives Unlimited, Inc., 345 S.C. 378, 381, 548 S.E.2d 207, 209 (2001). Another familiar formulation of the test for enforcement is that 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 valuable consideration.
Rental Uniform Serv. of Florence, Inc. v. Dudley, 278 S.C. 674, 675-76, 301 S.E. (2d) 142, 143 (1983). Mere continuation of at-will employment is not valuable consideration, and the covenant will not be sustained if it is executed after the inception of such employment. Id.
Enforcement of non-compete agreements in South Carolina's courts under these malleable and subjective standards continues to be a frustrating and unpredictable venture. Recent cases, however, clarify some of the steps employers may take to implement effective and enforceable non-compete agreements. This article identifies four important lessons from recent non-compete cases and suggests suitable planning and implementation strategies to account for them.
1. Do not count on South Carolina courts to enforce choice of law provisions.
Businesses operating in multiple states frequently rely on choice of law clauses in written agreements to provide some certainty as to the standards for interpreting and enforcing such agreements. Choice of law clauses generally are viewed with approval, and upheld pursuant to relatively lenient standards, with courts acknowledging that parties are entitled to choose applicable law as a matter of contract. See, e.g., Equitable Bldg. & Loan Ass'n v. Corley, 72 S.C. 404, 52 S.E. 48 (1905). This lenient standard is, for all intents and purposes, inapplicable to non-compete agreements.
The S.C. Supreme Court recently was asked to address a question certified from the federal district court regarding the enforceability of a New Jersey non-compete covenant in Stonhard, Inc. v. Carolina Flooring Specialists, 366 S.C. 156, 621 S.E.2d 352 (2005). The Court concluded that the covenant was overly broad as to territorial scope and, under New Jersey law, was not subject to "blue penciling" to reform the territory. Despite this seemingly dispositive interpretation of New Jersey law, the Court went on to explain that South Carolina law also prohibited enforcement:
Even if the agreement could be reformed [to include an acceptable geographic scope] under New Jersey law, the agreement would be unenforceable in South Carolina because the very act of adding a term not negotiated and agreed upon by the parties violates public policy.
Id., 366 S.C. 156, 161, 621 S.E.2d 352, 354.
The Stonhard decision affirms a long-standing principle in this area of law: South Carolina courts will construe the terms in a...