South Carolina Case Review: Team IA, Inc. v. Lucas

The most recent reported South Carolina case involving a non-compete is Team IA, Inc. v. Lucas, 717 S.E.2d 103 (S.C. Ct. of App. Oct. 2011).  The case provides only modest insight into the legal landscapes of non-compete agreements, and in some ways creates a bit of uncertainty.  In Lucas, the Court of Appeals struck down the nationwide non-compete as being overly broad, but left open the possibility of enforcing the alternative geographic restriction “defined as the states of South Carolina, North Carolina, Georgia and Alabama.”  Not unlike the last Supreme Court case on the subject, this case is curious for the issues not addressed in more detail and the cases not cited. But, I get ahead of myself:  First the facts.

Lucas resigned from Team IA in February 2009.  After he resigned, Lucas contacted all but one of the customers with whom he had worked and advised each of his departure.  One such customer, Fulton County, Georgia, pulled a project from Team IA and awarded it to 5 Point Solutions, LLC, which is the company Lucas established just one week after his resignation.  Another customer pulled a scanning project and awarded it to 5 Point Solutions.  A lawsuit quickly followed.

The non-compete at issue prohibited Lucas from soliciting and/or selling within the “Restricted Territory” for 12 months after termination.  Restricted Territory was defined as “the entire continental United States” but if this was deemed unreasonable “then such territory, shall be defined as the states of South Carolina, North Carolina, Georgia and Alabama.”  The court held that the nationwide restriction was “overly broad on its face.”  However, the Court of Appeals determined there was a question of fact as to whether the “step down” provision four state territory was overly broad and remanded the case back for further proceedings.

The Court then notes that there was conflicting evidence in the record as to “whether the ‘sales activity’ Lucas conducted as documented in the expense report included contact with Team IA customers in South Carolina, North Carolina, Georgia and Alabama is unclear.” So, it was necessary to inquire “into the nature of Lucas’ assigned territory and contact with customers/potential customers….” In support of this inquiry, the Court cited Standard Register.

In Standard Register Co. v. Kerrigan 238 S.C. 54 (1961) the Supreme Court precluded an employee from “selling to the accounts or in the territory in which he has been performing his duties as such sales representative.” But, doesn’t that just beg the question, what is the meaning of “territory?”  Does it mean the national territory (no), the state territory, the county territory, the neighborhood, or the actual plot of land on which the customer was located?

Although the case was not cited, it seems this question has been mostly answered in Oxman v. Sherman,   239 S.C. 218, 122 S.E.2d 559 (1961). In Oxman, the South Carolina Supreme Court held that a state wide prohibition when the employee’s dealings occurred in only two counties was overly broad. “Any covenant should have been limited to the area where he worked. Extending it to the entire State rendered it unenforceable.” See also Rental Uniform Serv. v. Dudley,  278 S.C. 674, 301 S.E.2d 142 (1983)(citation omitted)(“A geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”). So, shouldn’t the lower court be looking at contact on at most a county by county basis to determine if a statewide prohibition is enforceable? Hopefully, we shall find out.

The Court of Appeals wanted to make sure that it acknowledge the Supreme Court’s last case on blue penciling, Poynter Invs., Inc. v. Century Builders, 694 S.E.2d 15 (2010), in evaluating the step down provision.  The Court emphasized that it was not “insert[ing] a geographical limitation where none existed.”  In fact, the Court concluded this discussion with the following:

 Therefore we interpret the Supreme Court’s holding in Poynter to mean that (1) a court  may not “blue pencil” the restriction contained in a non-competition provision by inserting or subtracting terms not agreed to by the parties in order to make it valid and enforceable, and (2) the parties may not of their own accord convert an overly broad  territorial restriction into an enforceable one by entering into a subsequent agreement that artificially limits the actual terms used by the parties original contract.

Lucas, 717 S.E.2d at 107.

Perhaps the most irritating part of the Lucas case is this footnote:  “We decline to rule on whether a non-solicitation agreement’s prohibition on contact with former prospective customers of a former employer is overly broad and unenforceable on its face….” It seems that present law supports enforcement of a non-geographic non-solicit if it limited to “existing customers.”  See Wolf v. Colonial Life and Acc. Ins. Co.309 S.C. 100, 420 S.E.2d 217 (S.C. App. 1992).  This footnote only presents more cause for confusion at the trial court level—in this case and others.

Finally, the case also contains some rather unsurprising discussion of the choice of law provision.  The bottom line is if a contract provides South Carolina law applies, then there is no need to apply traditional choice of law rules.  The Court of Appeals believes the contract answers that question.

Take away:  A nation-wide prohibitions are overly broad “on its face.” (I don’t believe it in all cases.) Statewide non-competes are not per se overly broad, but precedent still intact holding employee contact must be statewide and not limited to just a few counties.  Non-solicitations also present factual questions, apparently even if the apply to “prospective customers.” (If this is affirmed by the Supreme Court, it will be a dramatic expansion of enforcement.) And, “step down” provisions are probably enforceable, although they only invite mischief.

Note:  At time of drafting of this post, I believe one of the parties had petitioned the South Carolina Supreme Court for cert.

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