Lawyers are often called upon by their clients to draft covenants not to compete in employment settings. We lawyers know that covenants against competition are highly disfavored under the law, yet there still exists the tension of wanting to provide the client with the maximum available protection. The line between a valid and enforceable covenant and one that the courts will disregard in their entirety can be a very fine line. Even more troublesome is the fact that the line is often difficult to recognize. Restrictive covenants must be reasonable in time, geographical areas and scope. Our courts have routinely held that if any part of the covenant fails this strict interpretation, the courts will not rewrite or “blue pencil” the clause to make it legally enforceable. If one part fails, the entire covenant would fail. Courts in recent years sent clear signals that industry or occupation wide prohibitions were not acceptable and that the employer should protect customers and confidential information as an outermost post-employment restraint.
Notwithstanding what appeared to be a long string-cite of clear authority, South Carolina Supreme Court recently denied certiorari in Baugh v. The Columbia Heart Clinic, P.A. (April 2014), and in doing so made murky once again an issue of law that seemed rather clear. Baugh involved a challenge by a cardiologist to a covenant not to compete which prevented him from engaging in “any practice of medicine” for a period of time after his separation from employment. The South Carolina Court of Appeals upheld the enforceability of the clause. Traditionally, physician employment agreements that included a post-employment covenant that prohibited the physician from practicing “any form of medicine” were considered overly broad and unenforceable. After all, if our cardiologist friend wanted to practice family medicine during the restricted period, how could his former practice group complain about unfair competition? In Faces Boutique, Ltd, v. Gibbs (1995), even a hair stylist was released from a covenant not to compete which prohibited her from providing “cosmetology services” because it would have prevented her from engaging in non-hair stylist activities such as performing manicures or pedicures.
By not granting certiorari, the South Carolina Supreme Court let stand the Court of Appeals which upheld the clause, including the following findings:
The forfeiture clause was subject to a reasonableness test applied to covenants not to compete.
The covenant prohibiting former-employees from assisting another person to engage in the practice of cardiology practice was enforceable.
The covenant not to compete in the employment agreement executed several years after former-employees joined the cardiology practice was supported by new consideration.
The territorial restriction in the covenant not to compete was reasonable.
The stipulated damages provision of the covenant not to compete was not an unenforceable penalty.
The forfeiture provision in the employment agreement was not an unenforceable penalty.
The former employees were not entitled to recover damages under the SC Wage Payment Act.
So now what are you going to do counselor? Do you advise your client to go for the full Monty with a wall to wall “no practice of medicine” type restriction? Do you risk being the author of malpractice when the court is confronted with its next “test case” and brings Baugh back into compliance with our prior and well-settled case law that would have popped the “no practice” clause? For our money, “any practice” looks like malpractice because it is an invitation for a future court to strike down the very protection that your employer client asked you to provide in the first place.
Eric Bland and Ronnie Richter