Covenants Not to Compete ▪ Charleston Business Lawyers
A covenant not to compete, also known as a non-competition agreement, is an agreement that restrains or prevents a person from performing a profession, trade, or business. Generally speaking, covenants not to compete are disfavored in South Carolina. Essentially, South Carolina’s courts do not like to restrict a person’s ability to earn a living or to restrict a lawful business enterprise from competing in the marketplace. So, in South Carolina, a covenant not to compete may only be enforced 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 loss of existing business contracts and existing customers may be a legitimate interest. Yet, a prohibition which 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, and 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 be against public policy. In other words, the remainder of the factors are encompassed within this one.
- 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.
- 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.
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 agree to a covenant not to compete, 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.Covenants Not to Compete ▪ Charleston Business Lawyers by Stephan Futeral