As business and contract lawyers in Charleston, we reviewed many covenants not to compete in South Carolina for both employees and employers. In this article, we will explain what you need to know about covenants not to compete, whether non-compete agreements are enforceable in South Carolina, how to get out of a non-compete agreement, whether you need a non-compete to protect trade secrets in South Carolina, and more.
What are Covenants Not to Compete in South Carolina?
A covenant not to compete, also known as a non-compete agreement, restrains or prevents a person from performing a profession, trade, or business. Non-compete agreements protect persons or organizations from competitive practices. They can be a non-compete clause in a broader contract or a stand-alone agreement. Covenants not to compete are typical in employment agreements to keep an employee from setting up a competing business or working for a competitor.
Is a Covenant Not to Compete in South Carolina Enforceable?
Yes. However, covenants not to compete are disfavored in South Carolina. Specifically, South Carolina’s courts do not like restricting a person’s ability to earn a living or restricting a lawful business enterprise from competing in the marketplace. Therefore, in South Carolina, a covenant not to compete may be enforceable if the following five criteria are met:
1) The covenant is necessary for the protection of the legitimate interest of the employer/business. There is no legitimate interest in simply avoiding competition. However, protecting against losing existing business contracts and customers may be a legitimate interest. Yet, a prohibition that prevents an employee from being associated “in any capacity” with a competing business goes “far beyond the protection of any legitimate business interest an employer may be able to articulate.”
2) The covenant is reasonably limited in its operation with respect to time and place. This is perhaps the most widely discussed of all the requirements. The likely reason for this is that the remaining three requirements are less measurable. If a covenant is too broad with respect to time or place, it will not be necessary to protect the employer’s interests, will burden the employee, or will be against public policy. In other words, the remainder of the factors are encompassed within this one.
- Time/Duration – A covenant that restricts an employee from competing “at any time” will be invalid under most circumstances. However, covenants for a specified reasonable number of years may be permissible. So far, our courts have found covenants ranging from one to three years permissible. That is not to say, however, that a one to three-year restriction will be reasonable in all cases. Overall, such reasonableness depends upon the parties’ business, industry, or profession.
- Place/Territorial Limitation – A territorial limitation may not be broader than necessary to protect the business of employer. A limitation may be considered reasonable if the area covered by the restraint is limited to the territory in which the employee worked or was able, while employed, to establish contact with his employer’s customers. Employers in South Carolina may also validly restrict competition with certain customers, without marking out any territorial restrictions at all. However, if the territorial limition is too broad, it may be unenforceable. For example, in Stringer vs. Herron, the court held that veterinarian’s covenant not to compete in an employment contract was unreasonable where it prohibited the vet from competing against former employer “within fifteen miles of any veterinary practice operated by the employer … at the time of termination of employment” because the 15 mile radius when the “overwhelming majority” of the practice’s clients “lived much closer than 15 miles” to the former employer’s vet clinic.
3) The covenant is not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood. Because a covenant not to compete impairs an employee’s ability to make a living, it must not be overly oppressive. In deciding whether such covenant is enforceable, South Carolina’s courts typically analyze this element by examining the duration and geographic limitations imposed on the employee. Ultimately, whether a covenant not to compete is unduly harsh and oppressive depends upon the facts of each case.
4) The covenant is reasonable from the standpoint of sound public policy. Public policy in South Carolina requires the enforcement of contracts “freely entered into by the parties.” Thus, in determining this factor, a court must balance the policy against restraints on trade with that of the enforcement of freely negotiated contracts. The argument that a covenant violates public policy is most routinely advanced in cases involving physicians, but this element is typically not one that South Carolina courts use to strike down a non-compete agreement.
5) The covenant is supported by valuable consideration. “Consideration” is something of value given in exchange as part of an agreement. Thus, the employer must give something of value to an employee in exchange for the employee’s agreement not to compete. In South Carolina, an offer of employment to the employee is sufficient consideration to enforce a covenant not to compete. However, if an employment relationship already exists before the employee is asked to sign a covenant not to compete in an agreement, then this agreement must be based upon some new consideration (such as the payment of money) and not simply continued employment.
It is difficult for any court to determine whether the above-mentioned factors are reasonable, and there are no “hard and fast” rules regarding covenants not to compete. Courts decide such issues on a case-by-case analysis because each case is unique. If a court finds that any of the five factors listed above are not satisfied, it will strike the entire covenant. In other words, the court will not rewrite an agreement, or any portion thereof, which was entered into by the parties.
What Other Restrictions Against Competition Are There in South Carolina?
What Other Factors Do South Carolina Judges Consider Regarding a Breach of a Covenant Not to Compete in South Carolina?
Based on our experience, in addition to the 5 factors listed above, South Carolina judges also consider other “real-world” factors in determining whether to enforce a non-compete agreement such as:
- Was the employee fired or did the employee quit;
- Is there evidence to show that the employee tried to “steal” business from his or her employer;
- Whether the non-compete agreement is limited to customers or clients that the employe dealt with or is the employer trying to restrict against new business;
- How much experience and knowledge the employee gained during their employment or whether the employee was already famlliar and knowledgable about their job prior to the employment at issue; and
- Was the employee “disloyal” while they were still employed such as setting up a new company, copying customer lists, or soliciting customers or clients to take their business to the employee’s new employer.
As a side note, if you act “disloyal” while you are on-the-clock, you may be required to disgorge (pay back) all of the pay you received while you were spending time doing something that was against your employer’s interest. In Futch v. McAllister Towing of Georgetown, Inc., our supreme court wrote “an employee who breaches the common law duty of loyalty to an employer, often described as a ‘faithless servant,’ forfeits the right to compensation.” As an example, if you took two hours from work to go to a bank to set up your new, competitng business account, then the employer can seek disgorgement (a return of), the two hours of pay you received while acting disloyally.
What Happens if I Breach My Covenant Not to Compete in South Carolina?
Essentially, three things may happen. First, you may getted sued for money damages. Money damages may include a loss in business (actual damages) and damages that are not directly caused by a breach of contract but still result from the breach (consequential and special damages). Money damages can also include punitive damages which, as the name implies, are designed to punish someone for their actions.
Second, and usually in combination with a claim for money damages, you may get sued for an injunction to stop you from working in violation of your agreement. Under South Carolina law, an injunction is an order from the court commanded you to do or stop doing specific acts. The purpose of an injunction is to maintian the “status quo” while the lawsuit winds its way through the legal system. Our courts will use an Injunction when money damages will not fix the alleged harm for breach of the non-compete.
Third, your new employer may get sued for intentional interference with contractual relations. Under South Carolina law, your new employer could get sued if: (1) you have a non-compete contract; (2) your new employer knows you have a non-compete; (3) your new employer intentionally encourages you to breach your non-compete; (4) your new employer’s actions were unjustified; and (5) your former employer suffers damages such as financial losses resulting from your breach of the non-compete.
How Can I Get Out of My Covenant Not to Compete in South Carolina?
Essentially, there are four key issues that may help you get out of a non-compete agreement in South Carolina:
1) Your Former Employer Breached Your Contract: Under South Carolina law, if you materially breach a contract that includes a covenant not to compete, then the court is not likely to enforce the contract. A common breach we encounter is failure of the employer to pay wages or commissions. For more information on unpaid wage claims in South Carolina, click here to read our article on the subject.
2) Lack of Legitimate Business Reason for Your Non-Compete: If the non-compete agreement does not serve a legitimate business interest, such as protecting trade secrets or customer relationships, then it may be unenforceable.
3) Unenforceable Terms in Your Non-Compete: If your non-compete agreement isn’t reasonable in terms of duration, geographic scope, and activity restrictions, it may be unenforcable.
4) Lack of Consideration for Your Non-Compete: As mentioned in this article, you must be given something of value (consideration) in exchange for your agreement not to compete. In some cases, employers have forced employees to sign a covenant not to compete after the employee starts working or risk termination. So, if you signed your covenant after you already took the job, then it may be unenforceable.
Do I Need a Covenant Not to Compete in South Carolina to Protect My Trade Secrets?
No. Even if there is no written agreement, such as a non-compete agreement, employer’s trade secrets are protected under South Carolina law. The South Carolina Trade Secrets Act defines a trade secret as:
[I]nformation including, but not limited to, a formula, pattern, compilation, program, device, method, technique, product, system, or process, design, prototype, procedure, or code that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by the public or any other person who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
A trade secret may consist of a simple fact, item, or procedure, or a series or sequence of items or procedures which, although individually could be perceived as relatively minor or simple, collectively can make a substantial difference in the efficiency of a process or the production of a product, or may be the basis of a marketing or commercial strategy. The collective effect of the items and procedures must be considered in any analysis of whether a trade secret exists and not the general knowledge of each individual item or procedure.
The South Carolina Trade Secrets Act protects trade secrets even without a written agreement:
Every employee who is informed of or should reasonably have known from the circumstances of the existence of any employer’s trade secret has a duty to refrain from using or disclosing the trade secret without the employer’s permission independently of and in addition to any written contract of employment, secrecy agreement, noncompete agreement, nondisclosure agreement, or other agreement between the employer and the employee.
Charleston Business & Contracts Law Attorneys
The business and contracts attorneys at Futeral & Nelson have handled numerous cases involving covernants not to compete. If you are under a covenant not to compete, considering whether to sign a contract that has a covenant, or looking to enforce a non-compete agreement, contact us to advise you on your legal rights.