As an employment law firm in South Carolina, our labor lawyers advise businesses regularly on keeping trade secrets secret, confidential client lists protected, and unique business practices proprietary. Many businesses in South Carolina use covenants not to compete to safeguard all of these things. A covenant not to compete, or a restrictive covenant, is an agreement between a business and a person where a person agrees to avoid working in a specific field for a period of time in a specific geographic region upon separation from the business. Non-compete agreements are essentially restrictions on a person’s ability to work and earn a livelihood, so the agreement must be written within the confines of South Carolina law. While non-competition agreements, non-solicitation agreements and non-disclosure agreements are all types of restrictive covenants frequently used in business settings, this journal entry will detail specifically covenants not to compete.
What is a Covenant Not to Compete?
A covenant not to compete, also known as a restrictive covenant or a non-competition agreement, is a contract between a business and a person, usually an employee, where the person agrees not to perform his or her trade for a period of time after the relationship between the business and the person has ended. The goal of a covenant not to compete is usually to avoid the cultivation of competitors in the form of previous employees. Generally, businesses like covenants not to compete because employees agree to not work for a competitor or to start a competing business within a certain time frame and within a specific area after separating from the business. Non-compete clauses or agreements are usually intended to safeguard the business from unfair competition from former employees that have special knowledge of the business’s operations.
You may have heard that a non-compete agreement “isn’t worth the paper it’s written on” because South Carolina is a “right to work” state. It is true that South Carolina has a “right to work” law; however, the law deals with employees’ ability to decline participation in a union and not to pay dues to a union. The “right to work” law says that any contracts between employers and unions cannot require union membership. The “right to work” law has nothing to do with whether an employee can contract away his or her rights to continue to practice his or her trade after terminating an employment relationship, as an employee might do when he or she signs a non-compete agreement.
Are Restrictive Covenants Enforceable in South Carolina?
Generally speaking, South Carolina courts do not favor covenants not to compete. Restrictive covenants that limit a person’s ability to practice his or her trade tend to be strictly construed against the employer by courts because of how restrictive covenants force people either not to work in their trade practice or to leave the geographic area to continue to earn a living. However, South Carolina law does set forth criteria for when a covenant not to compete may be enforceable against a former employee. While the criteria may seem clear, each case seeking to enforce a non-compete agreement is determined on its own particular facts.
South Carolina courts may enforce covenants not to compete if they meet all of the following five criteria:
- Necessary for the protection of the legitimate interest of the business – Simply avoiding competition or the loss of a trained employee are not legitimate business interests. Nor will a court enforce an agreement that appears to punish the employee for leaving the employer.
- Supported by valuable consideration – Continued employment is not sufficient consideration when asking a current employee to enter into a non-compete agreement; additional consideration is required, such as a financial bonus, elevated title and raise, etc. However, an offer of employment to a prospective employee could be sufficient consideration for a non-compete agreement.
- Not unduly harsh or oppressive in curtailing the legitimate efforts of the employee to earn a livelihood – Because a covenant not to compete restricts the employee’s ability to earn a living, the court will look for proof that the agreement is not too oppressive. The court will likely consider the agreement’s limitation in time and space when examining this criterion. The South Carolina Supreme Court expressed concern “with the right of a person to use his talents to earn a living” in a 1980 case where the court struck down a covenant not to compete.
- Reasonably limited in time and geography – A non-compete agreement may not cover too large a geographic area and may not be for too long a duration. For example, a restriction preventing a former employee from practicing his or her trade in South Carolina and North Carolina for 10 years after separation from the employer would likely not be enforceable. A South Carolina court found that a reasonable area restriction was a 20-mile radius surrounding an office where a doctor routinely provided services. South Carolina courts have found varying time restrictions reasonable, up to five years. The time and geography factors are very fact-specific and the circumstances surrounding the particular business, occupation, and the employee’s particular activities must all be considered.
- Reasonable from a public policy standpoint – Public policy arguments arise when a covenant not to compete is unreasonable in time or geographic scope. They also arise when non-compete agreements restrict professionals with a unique trade from providing a service, such as lawyers or doctors. Public policy arguments against enforcement also arise when the party seeking to enforce the non-compete agreement asks the court to impose a more reasonable restriction than what is in the agreement. For example, where a geographic limitation was unreasonable, the party seeking to enforce the agreement asked the court to amend the geographic limitation to make it reasonable. The court held this was against public policy and the agreement must stand or fall as written.
Are Your Covenants Not to Compete Enforceable?
South Carolina courts do not have a bright line rule for the enforceability of covenants not to compete. If you are in a position to enforce your covenant not to compete against an employee, the court will consider all of the circumstances surrounding the covenant and the alleged breach. South Carolina courts will not follow a “blue pencil rule” for covenants not to compete. This means the court will not construe the agreement so as to make it enforceable – it must be enforceable on its face.
There are many intricacies to writing enforceable covenants not to compete; a boilerplate paragraph in an employment contract will likely be inadequate. The experienced employment lawyers at Gignilliat, Savitz & Bettis LLP can help you properly tailor your non-compete agreements to your business’s needs, or assist your business if it must enforce a covenant not to compete. Contact our office today for a consultation.