Defining the Non-Compete Agreement
Non-compete agreements are contracts between an employer and an employee that typically restrict the employee’s ability to work for a competing business following the termination of employment. In South Carolina, a non-compete agreement is only enforceable if it meets certain conditions, including that the agreement is limited by (1) duration; (2) geographical area; or (3) scope of services or products.
The general purpose of a non-compete agreement is to prevent an employee from using information or knowledge that they acquired during their employment with the business to compete against the business. In other words, the purpose is to prevent unfair competition. For instance, a non-compete, if valid, may prevent an employee from starting a similar business or joining a competing business if the employee possessed confidential information used for the operation of the business or its customers, trade secrets, or other special knowledge unique to the business.
By way of example, it is not unusual for a medical practice to restrict its doctors’ abilities to leave the practice and immediately start competing practices up. In such a case, the medical practice may lock the doctors into employment with a non-compete that limits their ability to join a competing practice for a period of time or within a certain distance.
Other examples include the restriction imposed on business owners, senior executives or sales personnel. In this situation, these employees would have unfettered access to confidential information relevant to the business or customers. Therefore, a non-compete would prevent the employee from joining a competitor and using that information in the new employment.
Non-compete agreements will often state the duration of time that the employee is restricted from joining the competitor . For instance, the agreement may restrict the employee for two years from the date of termination. In today’s climate, the courts do not generally allow non-compete agreements that are without limit. For example, a non-compete that restricts the employee for ten years would very likely be considered overbroad, and, therefore, unenforceable.
In addition to duration, non-compete agreements may specify a geographical area in which a restricted person cannot work in a competing business. In other words, a person may be prevented from working in a competing business anywhere in the state, but not in the surrounding states.
It is important to note that a non-compete agreement is often part of an employment contract, which may also contain other restrictive covenants, such as non-solicitation and confidentiality provisions. A non-solicitation agreement prevents the employee from soliciting former clients or customers. On the other hand, a confidentiality agreement may prevent the employee from working with a competitor, but without restricting the employee’s ability to solicit former clients or customers. Thus, these agreements may serve a very similar purpose, but one may be more palatable to the employee because it is less restrictive in nature.
The South Carolina Supreme Court has stated that in a "proper case" a non-compete agreement with no geographic limitation, but with a duration of one year, is not necessarily invalid per se. While some of the factors that an employer must demonstrate for a non-compete to be enforceable are specific to each case, the employer generally must show that the agreement is supported by consideration, the agreement is necessary to protect the employer’s legitimate business interests, the agreement does not unduly restrict the employee’s ability to earn a living, and the agreement is reasonable.
When Is One Enforceable in SC?
The enforceability of non-compete agreements, also known as covenants not to compete or employment contracts, in South Carolina is contingent upon a number of factors that must be considered in light of the specific situation.
The courts have held South Carolina restrictions on former employees and other business owners are enforceable only if they are no greater than necessary to protect the employer’s or legitimate business interests. A business has a legitimate interest when the value of the business would be damaged or destroyed by the absence of the restrictive covenant. While generally divided into three categories (protecting trade secrets, protecting customer lists, and protecting other confidential information), the cases suggest that South Carolina courts will carefully consider how enforceable a non-compete agreement is given the circumstances. For example, the appellate court upheld an agreement limiting a medical doctor’s right to compete with his former employer following a business sale, but only because the agreement protected the seller’s legitimate business interest in retaining its customer base, goodwill, or future business.
The duration of a noncompete agreement in South Carolina can vary, but must be reasonable in both time and area restrictions. For example, there is no bright-line rule governing how much space must be encompassed by an area restriction. Rather, the reasonableness of an area restriction depends on the nature of the business involved. A blue light disco had an area limit of 50 miles surrounding the night club, which included all of Charleston County and part of Berkeley County. The appellate court upheld the area restriction because the nature of the business made the area restriction a needed element to protection. In a subsequent case involving a jewelry store, the appellate court upheld a covenant with a 50 mile area restriction because the business was one frequently subject to customer poaching. In contrast, a 25 mile area restriction with a one year duration previously had been held unenforceable because, in the context of a motel business, it was overly broad.
Finally, the South Carolina appellate courts will not enforce a restrictive covenant if it entirely precludes an employee or other business owner from earning a livelihood or practicing that trade in the geographic area.
Components That Make It Valid
Essential Components of a Valid Agreement
The first essential to an enforceable covenant not to compete is that there actually be a contract. A contract is considered formed when there’s an offer and an acceptance. The non-competition agreement is itself typically the offer. The worker accepts by continuing working for the employer under, typically, the circumstances of continued at-will employment. That is, the worker accepts by, well, working.
However, there are some exceptions to this doctrine, i.e., that an employee accepts a non-competition agreement by continuing employment. Namely, there may be an issue as to whether there’s adequate consideration for the agreement. While non-competition agreements are typically void, unless part of the hiring process, somewhat older case law suggests that they can be as an ancillary agreement to a prior contract. In other words, while the "ongoing at-will employment" scenario is preferred, if the non-compete agreement is issued in conjunction with consideration for a new contract, such as a promotion, that would also be acceptable.
The reason for this requirement is that someone cannot be bound into the covenant without agreeing to it. While the most extreme argument that will typically be rejected is that the employee did not sign and was coerced into accepting the employment, there can be hardship, nonetheless, in applying the covenant and courts will consider these factors. In some cases, the hardship may be equivalent to allowing the employee to work for a direct competitor without concern.
Although the covenant typically might also be void because it seeks to bind an employee that has not accepted, it is of no consequence if the worker actually works and abides by the agreement. In other words, while it is preferable that the agreement be made an express term of the employment, even if it is not and the worker does not speak up or otherwise object to it, a business might be able to enforce it, anyway. Yet, this can be difficult, at times, because of the potential for a court to hold that the worker may have been coerced into agreeing to the contract.
The key elements of a valid agreement in South Carolina are, essentially, the same as other states, in that they are typically geographic scope, duration, and whether the agreement otherwise protects a legitimate business interest. While these cannot be separated, ideally, as part of the assessment, if one of these factors is substantially greater than another, this will be of significance, especially as to the issue of whether something is otherwise reasonable. A worker may typically object more to geographic scope and duration than otherwise and so this could have the effect of either a court holding these factors as reasonable and going to the interest enforcement and then the issue of the means, or it might be that, because of an extreme in one of these two factors, the court might simply hold that the agreement as a whole is not enforceable, instead.
Exceptions and Limitations
Exceptions And Limitations On Non-Compete Agreements In South Carolina
There are, however, some exceptions or limitations to this general rule. The first we will discuss is the public policy exception. Public policy in South Carolina will render a covenant not to compete unenforceable, "if it is injurious to the public or contravenes the public good." A restrictive covenant contravenes the public good if it unreasonably fixes the price and character of service in such a way as to put the public at a disadvantage. The mere fact that a covenant in restraint of trade might otherwise be reasonable does not indicate that enforcement would necessarily contravene the public good. Rather, the party resisting enforcement must show that both the enforcement of the covenant and the restraint imposed would constitute a clear violation of public policy. A second exception is an occupational restriction. In 2008 the South Carolina Supreme Court recognized that there is a general consensus among courts in other jurisdictions that "a noncompetition agreement between an employee and employer in an employment contract is unenforceable as a matter of public policy if it restricts the employee’s ability to practice certain health care professions." This is probably a reference to physicians desiring to create a monopoly and squeeze out other medical providers from operating in the area. The Court states further – "Such an adverse impact on an important economic interest in public health is sufficient to outweigh the employer’s right to require its employee to sign a noncompetition agreement." Assuming this is correct, the Court’s public policy reasoning in this case should have relevance for other regulated industries such as legal, engineering, and accounting practitioners. Occupational restrictions may also be applied to trades such as Electrical, Wastewater, Construction, Plumbing and HVAC, however these restrictions may not be upheld in cases where the occupation is closely related to the general public.
How to Write an Effective Agreement
Employers should take the following steps to ensure their non-competition agreements are enforceable and do not run afoul of South Carolina law:
- Plaintiffs typically have the burden of establishing that a Restrictive Agreement is unenforceable. Employers have the upper hand in defining the parameters of the agreement and plain language goes a long way – more on this shortly.
- While not required, it is a best practice for parties to execute a non-compete agreement at the time an employee starts employment with a company. This avoids the question of whether a contract existed while the employee worked for the employer and whether that contract represented consideration for the new restrictive covenant. Such issues are more likely to arise if the Restrictive Agreement comes long after employment has begun.
- A non-compete agreement must be supported by valid consideration. In the employment context , that consideration consists of "something more than mere performance of services for a term of employment." At the beginning of employment, the additional consideration supporting the Restrictive Agreement may be nothing more than an offer of employment, assuming there is nothing about the job being offered that is so unique that it would suffice as valid consideration.
- Restrictive Agreements and employment contracts are two separate things. An employee may have a standing, current employment relationship with an employer and still be required to consider a Restrictive Agreement.
- The restrictive terms of any agreement entered into must be reasonably necessary for the protection of the employer and must be reasonable in duration. The reasonableness of the terms can vary according to the facts of each case. It is, however, a good idea to keep the duration reasonable by keeping the Restrictive Agreement short in duration and with limited geographic reach.
How to Challenge a Non-Compete
There are several ways an employee can challenge the enforceability of an otherwise valid and enforceable covenant not to compete. One way is to argue that, as written, the restrictive covenant does not protect a legitimate business interest or that the restrictions therein are greater than necessary to protect the employer’s purported interest. Whether the covenant protects a valid interest can be a fact-specific analysis requiring consideration of whether: (1) the restriction was necessary to protect the employer’s interest; and (2) the benefit to the employer outweighs the hardship to the employee and the impact on the public. (See our more in-depth discussion of this test, here). The reasonableness of the restrictions in a restrictive covenant not to compete is also a fact-specific analysis. One of the factors a court will consider is how long the restrictions in the covenant had previously been in place, if the terms of a previously existing covenant were changed, and if so, why.
Another way that a restriction in a covenant not to compete may be found unenforceable is if the agreement itself is not supported by valuable consideration or is an illusory promise. In other words, if the consideration exchanged for the covenant not to compete insufficiently supports the covenant, it may be found unenforceable. Consideration is more than a mere peppercorn exchange of some form of nominal value, and, if no longer employed, a promise of future employment is not enough to support a covenant not to compete. Under South Carolina law, continued at-will employment is sufficient consideration for a restrictive covenant, as is a bonus, new or additional job responsibilities, or a raise. How much consideration is required to support a non-compete is a fact-based question that turns on the what consideration was provided by the employer to the employee in exchange for the promise. For example, in one case, a signing bonus where an employee signed a covenant not to compete during employment was held to be sufficient consideration for the entire length of time the covenant was to be enforced. Another possible ground upon which an employee may be able to avoid enforcement of a non-compete is if the employer breaches the agreement by itself not complying with the terms. For example, if the agreement is contingent on the employer making certain payments or providing certain additional benefits and it breaches the contract first, then the employee would usually be within his/her rights to demand payment of the funds or services or discontinue the contract.
In addition to being able to get a covenant not to compete invalidated, in most cases an employee may also be entitled to recover attorneys’ fees and costs incurred in that action. This means that it is possible for an employee to leave his/her employer without being subject to the terms and conditions of the covenant not to compete or suffering any financial detriment incurred to defend a lawsuit for breach of the same.
Recent Cases and Trends to Know
Enforceability of non-compete agreements has long been a favorite topic of judiciary in South Carolina. Recent cases indicate an intent to do away with restrictive language broadening or having general ‘cookie-cutter’ non-compete agreement terms that apply to all businesses and employees. This notion was recently emphasized in the case of Club Gitmo v. Rowe, 2013 U.S. Dist. LEXIS 47133. There the employee was required to sign a non-compete prior to being hired, however, the language of the non-compete was found to be overly burdensome because it restricted all of Rowe’s skills rather than just those that were truly trade secrets.
Businesses should pay close attention to these court rulings because an overly restrictive non-compete is at risk of being enforced. Employers should consider hiring an attorney to draft their non-competes so that it is tailored to their specific business and the needs of their employees. An overly broad non-compete could end up costing you money in the long run if a judge views your company as having acted unreasonably by seeking an overly broad restricted area and/or duration of time.
An emerging trend in the South Carolina courts is one of deference to the parties’ contract. The general trend is that a court will enforce the parties’ contract as long as it is not too broadly written. This would suggest that non-competes are more likely to be enforced when they are not a ‘one size fits all’ and instead based on the specific business model of the employer.
Advice for Employees and Employers
Employees are well advised to pay close attention when asked to sign any agreement during their term of employment, especially an agreement with non-competition or non-solicitation provisions. It is also advisable to consult with experienced counsel regarding any potential non-compete agreement that an employee is asked to sign. Even if the agreement appears reasonable, there still may be language that can be improved or shortened to make the agreement more likely to be enforced. If an employee is a new hire, the employer may be willing to waive compliance with a lengthy restrictive covenant if provided with notice of the restriction.
Employers should avoid attempting to stretch the enforceability of a non-compete agreement. If a non-compete agreement is overly broad in any respect, it likely will not be enforced. Instead, employers are encouraged to be reasonable in limits on restrictive covenants and to include a geographic limitation , especially if an employee is located far from the geographic area where a non-compete will be enforced. If a company only has a regional presence, there may be a tendency to require a statewide, political division, or one of the few county-wide non-competes. However, if a company has a national presence, enforcement of a non-compete agreement on a statewide or county-wide basis may be able to be justified, although such precedents have been limited in South Carolina.
Finally, it is important to note that non-compete provisions are governed by the laws of the jurisdiction where the contract was entered into (when signed) or where the services are rendered (where one is performed). Therefore, a contract signed when one is in North Carolina but has worked in South Carolina for years may likely be enforceable in North Carolina even it is unreasonable under South Carolina law.