Day in Court: A Noncompete and the Duty of Loyalty

I had a trial two weeks ago week.  My client’s former employer (“Employer”) had sued him for breach of a non-compete and breach of the duty of loyalty.  Employer wanted almost $500,0000 in damages on these two claims plus their attorneys’ fees.  My client, now a small business owner, had fought for almost a year and a half before the day of reckoning had arrived. Fortunately, the Court ruled in our favor, although the judge will consider post-trial motions before the decision is final. Yet, while it is fresh on my mind, I wanted to record some of the experience to help readers get a better understanding of the challenges they might face.
Basic Facts
My client signed a non-compete agreement two days after beginning his employment as a salesman in south Florida. He worked for about 6 years before resigning.  Before he resigned, Employer assigned another sales person to his territory, which raised his concerns that his income would be reduced or that his accounts might be placed in jeopardy.  His largest account was the school district, which worked on a bid system. There was no solicitations of this account.  The jobs were awarded based solely on price, and relationships played no role in the awarding of purchase orders.  Most sales to individual schools, which were generally smaller, were somewhat different but also came down to price.  Lowest bid won.  And all bids were made public after the fact.
My client testified that there had been no mention of the non-compete when he was offered the job.  It was undisputed he was not presented with one at the time the offer was made, and he did not sign the non-compete until the third day on his new job.   His employment was “at will.”  South Carolina law states pretty clearly that if a non-compete is entered into after the initial offer of employment (and certainly after the first day of employment), then the non-compete is not enforceable unless the employee received something of additional value.  However, in this case, the court actually determined that there was an “intention” to enter into a non-compete, and its ruling in my client’s favor was not premised on lack of consideration.
Reasonable in Geographic Scope
The non-compete in this case prohibited my client from competing within a 100 mile radius of Miami.  However, this 100 mile radius included much territory that my client had never called on customers.  In fact, it included another sales persons territory, which my client never entered.  And the second salesperson which was placed into this territory by the Employer was because the territory was too big for just one salesperson.  South Carolina law states that a non-compete must be limited to the territory where the salesperson actually called on customers and not simply where the Employer does (or wants to do) business.  The judge ruled the territory was overly broad, and therefore unenforceable.
Non-Solicitation Agreement
The non-solicitation prohibited my client from calling on customers or accounts he had solicited during the last 12 months of employment.  Of course, this would include accounts who were not current customers of the employer, which is usually overly broad under South Carolina law.   Moreover, there was no evidence that the accounts my client solicited after he left employment were actual customers of the Employer.  The court ruled that there was no evidence my client had sold to actual customers of the Employer.
Breach of Duty of Loyalty
Every employee has a duty of loyalty to his employer while an employee.  If an employee acts disloyal by competing with his employer, then he has breached the duty of loyalty and can be held liable for damages, including his compensation during the period of disloyalty.  However, an employee may prepare to compete in the future.  Here, my client had formed a corporate entity with the Florida Secretary of State.  He had had a friend create a website for his business, although the website had never gone live and had never made any sales through the website.  The court found that merely preparing to compete did not breach the duty of loyalty.
Again, these rulings are subject to post-trial motions.  After a trial, the losing party can make post trial motions to seek a reconsideration of the judge’s rulings.  The Employer has very capable defense counsel who will do a good job trying to pick apart the judge’s ruling.  We will be prepared.  And we will file our own post trial motion directed at the ruling on consideration.  Of course, Employer may file an appeal. However, we are confident the judge’s ruling will stand up, and just as confident that our argument on consideration will provide another basis to uphold this ruling.