An update on COVENANTS NOT TO COMPETE and OTHER RESTRICTIVE COVENANTS Cherie W. Blackburn Nexsen Pruet, LLC May 13, 2011 ©2011 Nexsen Pruet, LLC

Milikin & Co. vs. Morin, 685 S.E.2d 828 (Ct. App. 2009) Covenants not to compete are generally disfavored. Strictly construed against employer. Enforceability depends upon: –Necessary for protection of legitimate interests of employer; –Reasonably limited in time and place; –Not unduly harsh and oppressive on employee’s legitimate efforts to earn a living; –Supported by valuable consideration; and –Reasonable from standpoint of sound public policy.

Milikin & Co. vs. Morin… Morin, a Research Physicist, signed an Associate Agreement (1995) Confidentiality provision – agreed not to use or disclose confidential information for 3 years after termination. Confidential Information – “all competitively sensitive information of importance to and kept in confidence by Milikin…which does not fall into the definition of trade secrets.”

Milikin & Co. vs. Morin… Morin resigned in Set up his own company, Innegrity, LLC, the same week. Later filed for patent. Milikin sued – included breach of inventions assignment agreement, covenant not to compete, and confidentiality provision. Jury found Morin breached Associate Agreement (either inventions assignment or confidentiality provision). Damages award to Milikin of $25,324.

Milikin & Co. vs. Morin… On appeal, Morin argued the inventions assignment and confidentiality provisions were overly broad, oppressive in his legitimate efforts to earn a livelihood, and unreasonable under public policy. Morin argued they should be subject to same scrutiny of a covenant not to compete under Muckenfuss case.

The covenant in the Muckenfuss Case “…any knowledge or information concerning any process, product or customer…or any aspect of the Corporation which could, if divulged to a…competitor, adversely affect the business of the Corporation…”

“The contractual provision at issue here does not identify any specific trade secrets; rather it defines trade secrets so broadly that virtually all of the information Muckenfuss acquired during his employment would fall within its definition.” Carolina Equipment Company, Inc. v. Muckenfuss, 471 S.E.2d 721, 725 (S.C. App. 1996)

Milikin & Co. vs. Morin… Court found confidentiality provision did not restrict Morin from using any and all information he learned at Milikin or from using general knowledge and skills he learned while working there. Inventions Assignment was limited to 1 year; confidentiality provision was limited to 3 years. Court has upheld covenants up to 3 years as enforceable.

Milikin & Co. vs. Morin… Morin also argued they were unenforceable because unlimited in territory. Court noted that non-solicitation can be limited to existing customers (doesn’t have to have geographic restriction). Here, covenants were limited to competitors of Milikin, which is reasonably necessary to protect legitimate interests of Milikin.

Poynter Investments, Inc. v. Century Builders of Piedmont, 694 S.E.2d 15 (2010) Rector sold his business Century Builders to Poynter Investments in 2007 and entered into an Employment and Non-Competition Agreement: –Poynter employed Rector for 1 year; –Rector agreed to 4 year non-compete

Poynter Investments, Inc. v. Century Builders of Piedmont… Restricted Territory defined as: –(i) 75 miles in any direction from Poynter’s offices; –(ii) In the event the above subparagraph shall be determined by judicial action to be unenforceable, the Restricted Territory shall be Greenville County South Carolina and any county that boarders Greenville County, SC; –(iii) the same as (ii) but only Greenville County.

Poynter Investments, Inc. v. Century Builders of Piedmont… Trial judge issued injunction within Greenville County, SC, and within an area encompassing 15 miles in any direction from Poynter’s offices. Supreme Court – trial judge exceeded authority in rewriting or “blue-penciling” the territorial restriction. Case of first impression in SC regarding court’s ability to decrease the geographical limitation in overly broad non-compete agreement.

Poynter Investments, Inc. v. Century Builders of Piedmont… It would violate public policy to allow a court to insert a geographical limitation where none existed because it would add a term to the contract that the parties did not negotiate or agree to. Stonhard, Inc. v. Carolina Flooring Spec., Inc., 621 S.E.2d 352 (2005). It is impermissible to extend non-compete period because it would essentially rewrite the parties’ contract, a service the SC courts do not perform. MailSource, LLC v. M.A. Bailey & Assoc., 588 S.E.2d 635 (Ct. App. 2003)

Poynter Investments, Inc. v. Century Builders of Piedmont… Holding: In SC, restrictions in a non-compete clause can’t be rewritten by the court or limited by the parties’ agreement, but must stand or fall on their own terms.

Poynter Investments, Inc. v. Century Builders of Piedmont… The Supreme Court noted that the parties were under the misconception that the appeal prevented the circuit court from proceeding with the case. An order granting a preliminary injunction is immediately appealable; the proceedings in other respects in the court below shall not be stayed during the appeal unless ordered by the court.

Lampman v. Dewolff Boberg & Associates, 319 Fed.Appx.293, 2009 WL (C.A.4 (S.C.)) Unpublished decision. Lampman employed as systems analyst in In 2004, Lampman executed shareholders’ agreement with covenant not to compete. In August 2004, DBA terminated him. In October 2004, Lampman went to work for Synergetics, a competitor of DBA.

Lampman v. Dewolff Boberg & Associates… District Court held non-compete enforceable; granted summary judgment to DBA. District court found that non-compete only prevented Lampman from working for a direct competitor in positions similar to ones he held at DBA. Lampman argued on appeal that non-compete is void because no geographical limitation and is “broader than necessary to protect DBA’s legitimate interest.”

Lampman v. Dewolff Boberg & Associates… Covenant: “Each shareholder agrees that he or she will not, directly or indirectly, engage in Competition with [DBA]…for a period of three (3) years following the termination of his or her employment…for any reason…” “Competition shall mean…serving in any capacity, job or function… for any Person that analyzes, designs, modifies or implements management systems…and where such services are competitive with or similar to those that such Shareholder rendered during his employment with DBA.”

Lampman v. Dewolff Boberg & Associates… “[DBA’s] known competitors include the entities identified on Exhibit D attached hereto, which may be amended from time to time.” Exhibit D listed eight “known competitors,” and included Synergetics The District Court found that the non-compete only prevented Lampman from working for “one of DBA’s direct competitors,” but permitted him to work for any indirect competitor in SC and elsewhere in the world. Eight direct competitors language was valid substitute for geographic limitation.

Lampman v. Dewolff Boberg & Associates… Fourth Circuit reversed the District Court and found non-compete void as matter of law. Nothing in the non-compete covenant limits its scope to the eight “direct competitors.” Covenant’s definition of “competition” is much broader. It would prevent Lampman from working for companies that do not compete with DBA.

Lampman v. Dewolff Boberg & Associates… Plain language of the covenant prohibits him from working “for any Person” “in any capacity, job or function” where his duties were “competitive with or similar to those he rendered during his” employment with DBA. Would prevent Lampman from working for Ford Motor Company, which “analyzes, designs, modifies and implements management systems…” for the company’s internal use.

Lampman v. Dewolff Boberg & Associates… In addition, covenant would prevent Lampman from providing “competitive or similar” services anywhere in the world, even in places where DBA concedes it conducts no business. Lampman could not work for a “competitor” in Zimbabwe, even though DBA does not provide services in that country and has no legitimate interest in prohibiting Lampman from working there.

Nucor Corporation v. Bell, 482 F. Supp.2d 714 (2007). Bell worked for Nucor 19 years. Bell signed three confidentiality agreements. Third agreement required Bell to refrain from disclosing confidential information, defined as: –“all Inventions and other business, technical and financial information Bell develop(s), learn(s) or obtain(s) during the term of his employment that relate to (i) the Company and its business…”

Nucor Corporation v. Bell… No consideration other than “continued employment given to Bell.” Indiana law said continued employment is valid consideration. Court: Indiana law contrary to SC public policy. Nucor argued that non-disclosure covenants are not subject to rule applicable to covenants not to compete

Nucor Corporation v. Bell… District Court disagreed; cited Muckenfuss. District Court found non-disclosure agreement did not identify any specific information as a trade secret – it defined “confidential information so broadly that virtually all the information” Bell acquired during his employment fell into definition. Thus SC Courts would hold the non-disclosure covenant to the same heightened standard as a non- compete (citing Muckenfuss ). No consideration – invalid.

Lessons Learned from Recent Cases Don’t draft non-disclosure covenant too broadly. Put time limitation on non-disclosure of confidential information covenant. Give specific examples of confidential information. Give some amount as consideration. In Nucor, the court found that the $10.00 given for the remaining two confidentiality agreements was “valuable consideration.” Make sure the employer actually pays whatever dollar amount is referenced in agreement.

Lessons Learned from Recent Cases Draft non-compete territorial restriction narrowly; will stand or fall on initial language. Do not expect court to blue pencil to smaller area even if parties agree. Pay close attention to language used in drafting covenant not to compete. Language such as “services similar to” may make the covenant too broad.