Fay v. Total Quality Logistics, LLC
2017 WL 798496, 799 S.E.2d 318, 419 S.C. 622 (2017)
Rule of Law:
In South Carolina, a nondisclosure provision in an employment agreement that is so broad as to effectively function as a covenant not to compete must be reasonably limited in time to be enforceable and comport with South Carolina public policy, regardless of a choice-of-law clause designating another state's law for interpretation, as courts will not 'blue pencil' (rewrite) such agreements.
Facts:
- Total Quality Logistics, LLC (TQL), an Ohio-based company, offered Joshua Fay employment as a Logistics Sales Account Executive in November 2012.
- The offer required Fay to complete, sign, and return a TQL non-compete/non-disclosure agreement on his first day of employment.
- Fay accepted the offer and began working in December 2012, signing TQL’s Employee Non-Compete, Confidentiality, and Non-Solicitation Agreement (the Agreement).
- The Agreement contained nondisclosure provisions in paragraph four, prohibiting Fay from disseminating or using 'Confidential Information' without TQL’s permission 'at all times thereafter.'
- The Agreement also included paragraph six, stating that if Fay engaged in employment with a 'Competing Business' in a 'similar position' anywhere in the Continental United States, it would 'necessarily and inevitably' result in him using TQL’s Confidential Information.
- In June 2013, TQL terminated Fay's employment.
- Fay subsequently founded JF Progressions, LLC (JF) through which he allegedly worked as the 'exclusive shipping agent' for The Brandt Companies, LLC (Brandt).
- In August 2013, TQL notified Fay that it intended to pursue legal action if he failed to cease working as a broker for Brandt through JF.
Procedural Posture:
- In November 2013, Joshua Fay filed an action in circuit court (trial court) against Total Quality Logistics, LLC (TQL), seeking a declaratory judgment that his employment agreement was invalid and unenforceable.
- TQL filed an answer asserting counterclaims against Fay for breach of the employment agreement and misappropriation of trade secrets, also seeking injunctive relief.
- In December 2013, Fay filed a motion for judgment on the pleadings or, alternatively, summary judgment, arguing the Agreement was invalid and unenforceable.
- In January 2014, TQL filed a cross-motion for summary judgment, contending the Agreement was reasonable and enforceable.
- In April 2014, the circuit court partially granted TQL’s motion for summary judgment, finding the Agreement was valid and enforceable under Ohio law and did not offend South Carolina public policy.
- The circuit court denied TQL’s motion for summary judgment regarding its counterclaims for breach of the Agreement and misappropriation of trade secrets.
- Fay appealed the circuit court’s finding that the Agreement was valid and enforceable (Fay as appellant); TQL cross-appealed the denial of summary judgment on its counterclaims (TQL as appellant/cross-appellant and Fay as appellee/cross-appellee).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an employment agreement's nondisclosure provision, which effectively functions as a non-compete provision with no reasonable time restriction, violate South Carolina public policy, even if the agreement specifies interpretation under another state's law?
Opinions:
Majority - Thomas, J.
Yes, an employment agreement's nondisclosure provision that effectively functions as a non-compete provision without a reasonable time restriction violates South Carolina public policy and is unenforceable, even if the agreement specifies interpretation under Ohio law. South Carolina courts disfavor non-compete provisions and strictly construe them against the employer, prioritizing the employee's right to earn a living while acknowledging the employer's legitimate interests. While an agreement may be construed under another state's law, it will not be enforced if it is contrary to South Carolina public policy, which requires non-compete agreements to be reasonably limited in time and place, not unduly harsh, and reasonable from a public policy standpoint. The Agreement's nondisclosure provisions, particularly paragraphs four and six, when read together, created a perpetual restriction on Fay's ability to hold a similar position with any TQL competitor, thus operating as a non-compete without a reasonable time limitation. Such broad provisions, which restrict employment activities rather than solely protecting trade secrets, are subject to the same strict scrutiny as traditional non-compete agreements. South Carolina does not follow the 'blue pencil' rule, meaning courts cannot rewrite or insert missing terms, such as a reasonable time restriction, into an agreement to make it enforceable, as this would violate public policy by binding parties to terms they did not negotiate. The court also dismissed TQL’s cross-appeal, reiterating that a denial of summary judgment is not an appealable order in South Carolina.
Concurring - Geathers, J.
Yes, the nondisclosure provision acting as an overbroad non-compete without a time limitation is unenforceable, but the court should first attempt to modify the agreement under Ohio law before deeming it contrary to South Carolina public policy. South Carolina generally honors choice-of-law clauses unless applying the foreign law violates its public policy. Following Stonhard, Inc. v. Carolina Flooring Specialists, Inc., the court should first determine if the agreement could be modified under Ohio law, as Ohio’s 'reasonableness' test permits courts to modify or amend overly restrictive employment agreements. However, modification under Ohio law is discretionary, and courts may decline to modify if it requires rewriting substantial portions of the covenant. In this case, the agreement's broad prohibition against Fay working in a similar position indefinitely would fail Ohio's reasonableness test due to undue hardship on Fay and being a greater restraint than necessary for TQL. Modifying paragraphs four and six and potentially narrowing the broad 'Confidential Information' definition would necessitate substantial rewriting, making it difficult to honor the parties' original intent, and thus Ohio courts would likely decline to modify it. Therefore, since modification is not feasible under Ohio law and the unmodified agreement is unreasonable under both Ohio and South Carolina public policy, the agreement is unenforceable.
Analysis:
This case significantly reinforces South Carolina's strict stance against overly broad restrictive covenants, particularly its rejection of the 'blue pencil' rule. It clarifies that confidentiality or nondisclosure clauses, if broad enough to effectively preclude an employee from pursuing their profession, will be treated as non-compete agreements subject to stringent public policy requirements, including reasonable time limitations. The decision highlights that choice-of-law provisions will not override South Carolina's strong public policy against unreasonable restraints on trade. This ruling serves as a warning to employers, emphasizing the need for carefully drafted and narrowly tailored restrictive covenants to avoid unenforceability and potential litigation, particularly where the primary objective is truly to protect trade secrets without unduly restricting future employment opportunities.
