Delmar Studios of the Carolinas v. Kinsey
233 S.C. 313, 104 S.E.2d 338, 1958 S.C. LEXIS 70 (1958)
Rule of Law:
A restrictive covenant in an employment contract, prohibiting an employee from competing after termination, is lawful in North Carolina if it is no more than necessary to protect the employer's legitimate business interests, is not unduly oppressive to the employee, and is not injurious to the public. To be reasonable, the restraint must be limited in its operation with respect to time and place, and its territorial scope must correlate with the employee's actual work area and client contacts, not merely the employer's total business territory.
Facts:
- Delmar Studios of the Carolinas (Delmar) is a North Carolina corporation engaged in school photography and yearbook sales across parts of North Carolina, Georgia, and all of South Carolina.
- In January 1956, Donald L. Kinsey began employment with Delmar as a salesman.
- On September 22, 1956, Kinsey signed a superseded employment contract with Delmar that included a covenant prohibiting him from engaging in competitive business for two years after termination in a specified 'Territory' covering about three-fourths of North Carolina, all of South Carolina, and eleven counties in Georgia.
- Kinsey was assigned to work under a sales manager and was permitted to solicit business and contact school officials only in approximately ten counties in South Carolina and six in Georgia, mostly bordering the Savannah River, which was a small fraction of the contract's defined 'Territory.'
- Kinsey worked in his assigned territory, then briefly as a sales manager for an affiliate company in Missouri, before returning to assist with photography in his former South Carolina and Georgia territory around October 1957.
- Kinsey terminated his employment with Delmar around January 1, 1958, and shortly thereafter began soliciting school contracts for a competitor of Delmar's in portions of South Carolina and Georgia.
Procedural Posture:
- Delmar Studios of the Carolinas filed an action against Donald L. Kinsey in an unspecified trial court to enjoin him from violating his non-compete covenant.
- On January 31, 1958, the trial court issued a temporary restraining order against Kinsey.
- On February 6, 1958, after considering affidavits, the trial court issued an injunction pendente lite (preliminary injunction) requiring Delmar to post a $2,500 bond.
- On March 28, 1958, after taking testimony, the trial court issued a permanent injunction against Kinsey.
- Kinsey appealed the trial court's decision, challenging the validity of the covenant.
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Issue:
Does a restrictive covenant in an employment contract, prohibiting a former salesman from competing in an entire multi-state territory where the employer operates, constitute an unreasonable restraint of trade when the salesman only worked in a small, specific portion of that territory?
Opinions:
Majority - Oxner, Justice
Yes, a restrictive covenant in an employment contract prohibiting a former salesman from competing in an entire multi-state territory where the employer operates does constitute an unreasonable restraint of trade when the salesman only worked in a small, specific portion of that territory. The Supreme Court of South Carolina, applying North Carolina law, found that such covenants are lawful only if the restriction is no more than necessary to afford fair protection to the employer, is not unduly oppressive on the employee, and is not injurious to the public interest. The crucial test is the reasonableness of the restraint, which requires limitations in time and place that correspond to the employer's legitimate need without overly interfering with public interest or the employee's ability to earn a livelihood. While the two-year time limitation was deemed reasonable, Delmar failed to demonstrate that the extensive territorial scope (three-fourths of North Carolina, all of South Carolina, and eleven counties in Georgia) was necessary for its protection. The court noted that Kinsey only worked in a small, specific part of South Carolina and Georgia, and his employment only brought him into contact with customers in that limited area. There was no showing that he became acquainted with customers in other parts of the contract territory or was furnished customer information outside his actual work area. Distinguishing Kinsey, a mere salesman, from managers who typically have broader knowledge of a business, the court emphasized that the covenant was broader than Kinsey's actual sphere of activity. The court relied on North Carolina precedents like Kadis v. Britt and Noe v. McDevitt, which invalidated covenants with overly broad territorial restrictions unrelated to the employee's actual customer contacts. The court further held that it could not 'blue-pencil' or modify the unreasonable territory to make a new, reasonable contract, stating that the contract 'must stand or fall integrally.'
Analysis:
This case reinforces the principle that courts view employment-based restrictive covenants with skepticism, particularly regarding their territorial scope. It clarifies that an employer must demonstrate the necessity of the restriction for its legitimate business protection, and this necessity is typically tied to the employee's actual customer contacts and the geographic area where they developed goodwill. The refusal to 'blue-pencil' (modify an overbroad covenant to make it reasonable) is a significant aspect, indicating a strict approach to enforcement, forcing employers to draft narrowly tailored agreements from the outset. This ruling provides a strong incentive for employers to align non-compete clauses precisely with an employee's actual work responsibilities and geographic reach, rather than imposing blanket restrictions across an entire corporate operating territory.
