After working in the same factory for nigh on 15 years, Johnny Paycheck sang, he wanted nothing more than to work up the nerve to tell his bosses to take this job and shove it, because he wouldn’t be working there no more. (He never actually goes through with it, though.)
Alas, the 1970s were a simpler time. Today, Johnny’s employment contract likely might contain a non-compete clause restraining his ability to go work for a competing company. Courts look upon such covenants not to compete unfavorably—after all, they restrict Johnny’s ability to secure gainful employment, and thus his ability to quit his hated job, or even negotiate for higher pay. But companies are using them more frequently than ever.
In South Carolina, noncompete clauses are generally enforceable if they’re necessary for the protection of the company’s legitimate business interests, but unreasonably broad clauses are not. Unlike in some other states, the courts aren’t permitted to re-write a contract to make it enforceable, and so will enforce them either as they’re written or not at all. That raises the stakes of overreach, since companies that try to restrict their departing employees too much may end up unable to limit them at all.
Lawyers Weekly spoke with several experienced employment attorneys about the most common mistakes that they see companies make when using noncompete clauses, ones that ultimately render them unenforceable. Call it the seven best ways to ensure that the courts take your noncompete clause and, well … shove it.
Shasta, Nebraska, Alaska…
The law imposes several restrictions on noncompete clauses. One of the most important is that they must be reasonable in terms of the scope of the geographic territory that they cover.
Traditionally, such clauses were typically imposed upon salespeople, based on the reasonable concern that an employee might jump ship to a competitor and take all of the old company’s best customers with her. (But read item number six to see how widely they’re being applied today.) But if a clause prevents an employee from taking a sales job even in territory he never covered for the prior employer, courts are likely to toss it out.
“In South Carolina, the law is that the geographic area in which an employee is prohibited from working should be limited to the area where he or she worked. But what you see many times is the noncompete agreement will cover the geographic area in which the employer does business,” said Andrew Arnold of Horton Law Firm in Greenville.
“The employee may work in Greenville County, for example, and the employer does business all over the state and the noncompete covers the entire territory of the state. I would say the geographic area not being limited to where the employee worked would be the number one problem that I see.”
A three-year ache
Noncompete clauses are also limited in that they can only endure for a limited period of time. Multiple attorneys noted that this is less frequently an issue in litigation since South Carolina law is fairly clear that an agreement lasting for three years or less is likely going to be enforceable. But those attorneys also cautioned that companies can potentially do themselves disservice by trying to push a restriction all the way out to three years, especially if they’re also trying to aggressively draw the boundaries of its geographic reach.
“The broader your geographic restriction is, then the more difficulty you’re going to have enforcing something in that outer range of the time period of three years,” said Cherie Blackburn of Nexsen Pruet in Charleston. “The courts are going to look at the totality of the covenant. If you want a broader geographic restriction, you’re probably better off with a shorter period of time.”
All taking and no giving
In South Carolina companies can’t just call their existing employees into the office, hand them a noncompete clause, and tell them they need to sign it. In order for a noncompete clause to be enforceable, the employee must have received some form of consideration in exchange for signing it—that is, they got something of value above and beyond what they were already getting. In some states continuation of at-will employment is sufficient consideration, but in South Carolina that’s not the case.
“The first issue is always whether there is adequate or sufficient consideration to support the agreement,” said Andy Satterfield of Jackson Lewis in Greenville. “That will be the first thing we look at.”
Satterfield also cautioned that it’s important to monitor and update each employee’s noncompete agreement over time to make sure that it still reflects the work that the employee is currently doing for the company. Any time an employee receives a promotion, that’s a great time to update their noncompete agreement, since a promotion will satisfy the requirement that the employee must receive consideration.
“Oftentimes I’ll have a situation where in 2018 we’re looking at a noncompete agreement that was signed in 1995, and the employee’s duties may have changed substantially over time,” Satterfield said. “You might get them under an agreement when they start, but it might be 10 or 15 years before that employee leaves, and if you haven’t been updating that agreement, you may be left with very little that’s enforceable.”
Going places they have never been
Attorneys agreed that while courts cast a skeptical eye toward noncompete clauses, they tend to look much more favorably upon nonsolicitation agreements. Rather than preclude employees from working for competitors, these agreements prevent departing employees from soliciting the company’s clients in the future, and thus are much more limited.
“An employer’s interest in protecting that relationship is much more defensible than the idea that it can just wall off an entire state and claim that nobody can compete against it,” said Brian Murphy of Stephenson + Murphy in Greenville. “You’ll have companies that may have barely even a sliver of the market in those states. But say that have a particularly important customer that happens to be in Atlanta. That’s a much different issue.”
Blackburn noted that even though courts prefer nonsolicitation clauses, even these should only restrict employees from soliciting those customers that they actually interacted with in the course of their work, and not all of the company’s clients generally.
Just to try and save a dollar
A common theme running through all of these pitfalls is that attorneys are, not shockingly, not fans of companies downloading a blanket, one-size-fits-all noncompete clause off the internet and trying to impose it on all of their employees. The cost of custom-drafting clauses that spell out each employee’s specific duties will still be small compared to the expense of litigation over a faulty covenant, as such disputes tend to be costly.
“The two situations we run into are when a company tries to use a noncompete that was drafted for another state, or when people just pull forms off the internet that maybe look fine to them but they never run it by a lawyer,” Murphy said. “When they’re not tailored to a particular industry, or to a particular situation, or to a particular market, that’s when it begins to fall apart.”
Giving the working man blues
Whereas in the past usually only the most valuable employees would be subject to noncompete clauses, today some companies are asking even their most entry-level workers to sign them. Although such employees may lack the sophistication and resources to properly challenge such covenants, if push does come to shove courts are unlikely to enforce them, in which case companies may not be left with any means of protecting their legitimate interests in their business know-how.
“I typically recommend to an employer that they consider using a confidentiality agreement for low-level employees who may have access to confidential information belonging to the employer,” Satterfield said. “Protect that, because you have every right to protect that. But for someone who is an administrative assistant or a production employee, it’s taking a pretty aggressive position to say that a company needs to protect itself from a rank-and-file production employee going to another company.”
Eight hours of pushing broom
Noncompete clauses also need to be narrowly tailored in terms of the sorts of jobs that a former employee is precluded from taking. Attorneys call this the “janitor rule,” when a clause is so unspecific that it would prevent a former employee from taking literally any job with a competitor, even as a janitor. (Thus, the janitor rule applies exclusively to employees who aren’t janitors.)
Arnold said that the landmark case on this issue in South Carolina is Faces Boutique v. Gibbs, a 1995 decision by state’s Court of Appeals ruling against a facial spa that wanted to keep a former employee from working for a nearby beauty salon as a manicurist. The spa complained that even though the employee was performing unrelated work, the new job still violated the covenant because the nail salon also provided facials.
“In that case the noncompete prohibited the employee from working for a competitor ‘in any capacity.’ The court said that’s just overly broad because that employee may be involved in a completely noncompetitive activity, but they’re still prohibited from working there, and there’s no legitimate interest in keeping an employee from engaging in areas of a business that are not competitive,” Arnold said. “That’s kind of a flag that you’ve got this janitor problem.”
Follow David Donovan on Twitter @SCLWDonovan