Covenants not to compete, sometimes referred to as non-compete clauses, allow an employer to place certain limitations upon an employee’s activities subsequent to the employee’s termination or resignation. Essentially, an employee agreeing to a covenant not to compete agrees not to compete against the employer in the same trade or profession after the employee separates from the employer.
The traditional covenant not to compete restricts an employee from being able to compete with her employer for a set, limited time within a certain predefined geographical area. In the traditional covenant not to compete, the type of work or profession that the employee is prohibited from engaging in or conducting is defined in scope, as is the precise geographical area in which the employee agrees to not compete. Typically, the covenant not to compete also expressly states a set time, usually a certain number of months or years, that the restriction will remain in effect for after the employee’s separation from the company. Other common types of covenants not to compete include covenants not to solicit customers, covenants not to disclose trade secrets, and covenants not to solicit employees.
Covenants not to compete will not be upheld unless they are reasonable in nature and scope. In South Carolina, courts have used the “reasonableness test” to determine whether a covenant not to compete is enforceable. The test holds that a covenant not to compete will be enforced if it: (1) is necessary for the protection of the legitimate interests, (2) is reasonably limited with respect to time and place, (3) is not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood, (4) is reasonable from the standpoint of sound public policy, and (5) is supported by valuable consideration.
South Carolina courts strictly require that covenants not to compete be supported by “valuable consideration.” Case law has helped to shape the meaning of exactly what “valuable consideration” is over the years and the courts have refused to enforce covenants not to compete that are supported by consideration that is less than “valuable” or otherwise insufficient. For example, an employer giving an at-will employee a few dollars as consideration in support of a covenant not to compete that will last for 3 years from the date of the employee’s separation would not likely be considered as one giving valuable consideration. Likewise, continued employment alone is not enough to support a covenant not to compete that is entered enter after the employee has already started working for the employer. A promotion or pay raise, however, would be considered valuable consideration.
Many disputes surrounding covenants not to compete revolve around whether or not the geographical or time limitations of the covenant are overbroad or unreasonable.