Palmetto Mortuary Transp., Inc. v. Knight Sys., Inc.
424 S.C. 444, 818 S.E.2d 724 (2018)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A non-compete covenant executed in conjunction with the sale of a business is enforceable if it is not detrimental to public interest, ancillary to the sale, reasonably limited as to time and territory, and supported by valuable consideration, with courts applying a more relaxed scrutiny than for employment contracts. A breach of contract by the covenantee will only excuse the covenantor's performance if the breach is material, being so substantial and fundamental as to defeat the contract's primary purpose.
Facts:
- Knight Systems, Inc. (Knight) operated a mortuary transport business and manufactured body bags since the 1980s.
- In January 2007, Knight sold the mortuary transport portion of its business, including goodwill and customer accounts (e.g., Richland, Lexington, and University of South Carolina contracts), to Palmetto Mortuary Transport, Inc. (Palmetto) for $590,000 through an Asset Purchase Agreement.
- The Agreement included a ten-year, 150-mile non-compete covenant restricting Knight from providing mortuary transport services within that radius of Lexington County, and an Exclusivity Provision requiring Palmetto to purchase all its body bags from Knight for ten years.
- From 2007 through 2011, Palmetto purchased over $45,000 worth of body bags from Knight but also purchased $478.50 worth of specific types of body bags (heavy duty and water-retrieval) from other manufacturers, which Palmetto conceded was a breach of the Exclusivity Provision.
- Although aware of some of Palmetto's outside purchases in 2009 or 2010, Mr. Knight waited until June 16, 2011, one day before the deadline for a Richland County mortuary transport Request for Proposal (RFP), to accuse Palmetto's CEO, Mr. Lintal, of breaching the Exclusivity Provision.
- The very next day, Mr. Knight submitted his own RFP for the Richland County mortuary transport contract, despite having sold his transport business to Palmetto.
- Mr. Knight subsequently contacted the Richland County Procurement Office and informed an official that Knight should be awarded the contract because it was the sole provider of odor-proof body bags, a requisite of the RFP.
Procedural Posture:
- Palmetto sued Knight in a special referee proceeding for breach of the Agreement, alleging Knight violated the non-compete covenant and the Exclusivity Provision.
- Knight counterclaimed, arguing the non-compete covenant was unenforceable and that any breach by Knight was excused because Palmetto first materially breached the Exclusivity Provision.
- The special referee found the non-compete covenant reasonable and enforceable, ruled Knight breached it, and concluded Palmetto's breach of the Exclusivity Provision was not material. The referee awarded damages and an injunction to Palmetto, and minor damages to Knight.
- Knight appealed the special referee's order to the South Carolina Court of Appeals, arguing the territorial restriction was unreasonable, among other points.
- The South Carolina Court of Appeals reversed and remanded, holding the non-compete covenant's 150-mile territorial restriction was unreasonable and unenforceable, and declined to modify the agreement under the 'blue pencil rule'.
- Palmetto filed a petition for a writ of certiorari, which the South Carolina Supreme Court granted to review the Court of Appeals' decision.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
1. Is a 150-mile territorial restriction in a ten-year non-compete covenant, ancillary to the sale of a mortuary transport business between sophisticated parties, reasonable and enforceable given the business's mobile nature and the buyer's intent to expand, even if the selling business primarily operated in a smaller area? 2. Does a buyer's minor breach of an exclusivity provision, by purchasing $478.50 worth of body bags from other manufacturers when over $45,000 worth were purchased from the seller, constitute a material breach sufficient to nullify a non-compete covenant in a business sale agreement?
Opinions:
Majority - Justice James
Yes, the 150-mile territorial restriction in the non-compete covenant is reasonable and enforceable because covenants ancillary to the sale of a business between sophisticated parties are scrutinized with greater latitude, and the mobile nature of the mortuary transport business makes a broader geographic scope foreseeable for expansion. No, Palmetto's minor breach of the exclusivity provision, by purchasing $478.50 worth of body bags from other manufacturers, was not a material breach and therefore did not nullify Knight's obligations under the non-compete covenant. The court reversed the court of appeals' decision, reinstating the special referee's order. The Court emphasized that non-compete covenants made during a business sale are viewed less strictly than those in employment contracts, especially when both parties are sophisticated and represented by counsel. It applied the Reeves v. Sargeant factors for reasonableness, considering the contract's subject matter, the business's character, and the parties' intentions. The court noted that the $590,000 sale and the non-compete were integral to Palmetto's decision to purchase, and Knight benefited significantly. The mobile nature of a mortuary transport business supported the 150-mile radius, allowing for foreseeable expansion, distinguishing this case from Somerset v. Reyner, which involved a localized retail business. Regarding public policy, the Court found no evidence of collusion impacting public procurement and declined to void the covenant on those grounds. Concerning Palmetto's breach, the Court affirmed the special referee's finding that it was not material. It interpreted the Exclusivity Provision to cover only the types of bags listed, leading to a $478.50 breach, a negligible amount compared to the $590,000 purchase price and $45,000 in bag purchases from Knight. Citing Brazell v. Windsor and Rogers v. Salisbury Brick Corp., the Court held that a breach must be 'so substantial and fundamental as to defeat the purpose of the contract' to be material, applying the factors from Restatement (Second) of Contracts § 241 (as adopted in Kiriakides v. United Artists Commc'ns, Inc.). The Court also noted Knight's two-year delay in asserting the breach, which undermined its materiality claim. Finally, the Court ruled that a general termination clause stating 'a breach' would release Knight referred to a material breach, consistent with prior holdings.
Analysis:
This case significantly clarifies how South Carolina courts evaluate non-compete covenants arising from business sales, emphasizing a 'more relaxed scrutiny' compared to employment contracts. It reinforces that the reasonableness of territorial restrictions must consider the specific nature of the business (e.g., mobile vs. stationary) and the sophisticated parties' intentions for future growth. Furthermore, the decision sets a high bar for what constitutes a 'material breach' sufficient to nullify an entire contract, underscoring that minor infractions will not excuse core contractual performance. Future litigants will likely rely on this precedent to justify broader non-compete terms in business acquisition contexts and to defend against claims of non-material breaches as grounds for contract termination.
