Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In South Carolina
South Carolina courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect a legitimate business interest of the employer. Courts generally will uphold a non-competition agreement when it is:
- necessary to protect legitimate business interests of the employer such as customer contacts;
- ancillary to a lawful contract;
- reasonably limited with respect to time and place;
- not unduly harsh and oppressive; and
- supported by valuable consideration.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. South Carolina courts have determined that the offer of initial employment or a change in employment status is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. It is unsettled whether or not continued employment alone is adequate consideration for an agreement entered into after employment has begun.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement using what is known as the “blue pencil rule” by deleting the unreasonable parts of the agreement. If the remainder of the agreement is valid on its own, then the court may enforce it.
Examples of non-compete agreements that South Carolina courts have found to be reasonable include:
- A restriction prohibiting competition within a territory that was narrower than the are for which the employee was responsible during his employment.
- A 3-year restriction against an industrial laundry delivery person from competing within the area to which he had been assigned.
- A 2-year restriction against a sales person from soliciting business from customers or dealers of the former employer.
The courts have found the following restrictive covenants unreasonable:
- A restriction with no restrictions as to duration or geography, against a former employee from using “trade secrets” of the former employer. The definition of “trade secrets” was so broad it would have covered nearly all of the information the employee learned during his employment.
- A restriction against a former employee of a flooring company with no geographic restriction. The court could not “blue pencil” the agreement because it would mean adding a term to the agreement that was not part of the original bargain between the employer and employee.
- A 3-year restriction against a veterinarian from competing within 15 miles of any of the former employer’s three practice locations because nearly all of the employer’s clients lived much closer than 15 miles.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.