South Carolina courts evaluate the enforceability of non-compete provisions executed in the employment context and in connection with the sale of the business under the same reasonableness test. To be enforceable in South Carolina, a covenant not to compete must be (1) necessary for the protection of the legitimate interests of the employer or purchaser, (2) reasonably limited with respect to time and place, (3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood, (4) reasonable from the standpoint of sound public policy, and (5) supported by valuable consideration. South Carolina courts generally disfavor covenants not to compete and find them to be unenforceable if they are the slightest bit too broad. Last Wednesday, the South Carolina Court of Appeals found a non-compete agreement to be overly broad and unenforceable based on its 150-mile radius territorial restriction.
In Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the non-compete agreement was executed in connection with the sale of a mortuary transport business located in Lexington County. As part of the purchase, the buyer required the seller to execute a covenant in which the seller agreed not to provide competitive services within 150 miles of the business for 10 years following the closing date. Several years later, the seller competed with the buyer for (and ultimately won) a contract to provide mortuary services to Richland County, which neighbors Lexington. After losing the contract bid, the buyer sued the seller for violating the non-compete. The seller argued that the non-compete was unenforceable because it was not supported by adequate consideration and contained unreasonable temporal and geographic restrictions. A special referee ruled in favor of the buyer, finding the non-compete enforceable.
The South Carolina Court of Appeals reversed the special referee’s decision, finding the non-compete invalid based solely on the geographic scope. The court held that the 150-mile restriction, which prohibited the seller from competing with the buyer anywhere in South Carolina and in some portions of neighboring states, did not protect the legitimate business interests of the buyer. The court focused on the fact that, at the time of the sale, the seller engaged in the mortuary transport business in only Richland and Lexington Counties. The buyer’s tentative desire to expand its business throughout South Carolina did not make the statewide restriction reasonable.
The Court of Appeals confirmed longstanding precedent in South Carolina that courts cannot revise a restrictive covenant to result in a narrower restriction, even when a non-compete provision invites the court to do so. Because the agreement between the buyer and the seller in this case had no alternative step-down territorial provision, to redraw a smaller restriction would require the court to add an arbitrary term upon which the parties did not negotiate or agree and thus, was impermissible.
This case is a good reminder about the importance of drafting restrictive covenants as narrowly as possible to address the legitimate business interests of the employer/buyer. In South Carolina, restrictive covenants are not “one size fits all” and should be carefully tailored to fit each specific situation.