Standard Register Co. v. Kerrigan
238 S.C. 54, 1961 S.C. LEXIS 79, 119 S.E.2d 533 (1961)
Rule of Law:
Restrictive covenants in employment contracts are enforceable if they are reasonable in scope (time and territory), necessary to protect a legitimate business interest of the employer, not unduly harsh or oppressive to the employee, not contrary to public policy, and supported by valuable consideration.
Facts:
- The Standard Register Company, an Ohio corporation, manufactures and sells business forms, systems, and accessories.
- D. C. Kerrigan was initially employed by Standard Register in 1940 as a stenographer.
- On August 3, 1953, Kerrigan and Standard Register Company entered into a written employment agreement for a sales representative role, which contained a restrictive covenant.
- The 1953 contract stipulated that for two years after leaving employment, Kerrigan would not compete with Standard Register by selling to accounts or in the territory where he had performed duties, and specified Ohio law would govern the contract.
- As a condition of signing the 1953 agreement, Kerrigan was promoted from a clerical job in Dayton, Ohio, to a special accounts salesman in New York.
- From July 1955 until May 1, 1959, Kerrigan served as a sales representative for Standard Register in Greenville, South Carolina, and was limited to eighteen specific assigned accounts.
- On May 1, 1959, Kerrigan voluntarily terminated his employment with Standard Register and immediately incorporated Southern Systems & Forms, Inc., in Greenville, South Carolina, becoming its president and general manager.
- Southern Systems & Forms, Inc. manufactures and sells business forms and devices comparable to those sold by Standard Register Company.
- Kerrigan contacted all but one of his former eighteen assigned accounts for Standard Register Company to promote sales for Southern Systems & Forms, Inc., and made sales to some of these accounts.
Procedural Posture:
- The Standard Register Company brought an equitable action in a lower court (Trial Court) in South Carolina.
- Standard Register Company sought a permanent injunction to prevent D. C. Kerrigan from violating a restrictive covenant in his employment contract by competing in the Greenville area, and to restrain Southern Systems & Forms, Inc. from interfering with this contract.
- The Trial Court refused to grant the injunction.
- The Standard Register Company appealed the Trial Court's order to the Supreme Court of South Carolina (appellant).
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Issue:
Does a restrictive covenant, limiting a former employee from competing with a former employer for two years in selling to eighteen specific accounts, violate public policy, lack sufficient consideration, or impose an unreasonable restraint on the employee, thereby making it unenforceable?
Opinions:
Majority - Moss, Justice
No, a restrictive covenant limiting a former employee from competing for two years in selling to eighteen specific accounts does not violate public policy, lack sufficient consideration, or impose an unreasonable restraint, and is therefore enforceable. The Court applied a three-part test, considering reasonableness from the standpoint of the employer, the employee, and sound public policy, as well as the presence of valid consideration. First, regarding the employer, the restraint was reasonable because it was no greater than necessary to protect Standard Register's legitimate business interest in its customer relationships. The covenant was limited to the specific eighteen accounts Kerrigan serviced and for a duration of two years, which directly protected the company's most important asset: its established customer base cultivated by Kerrigan. Second, concerning the employee, the restraint was not unduly harsh and oppressive. Kerrigan received a promotion and continued employment for six years as consideration for signing the agreement, leading to a significant increase in income. He retained the ability to sell non-competitive products to the eighteen accounts, sell competitive products to hundreds of other customers in the Greenville area, and work in an administrative and executive capacity for his new company. No economic hardship was demonstrated. Third, from the standpoint of public policy, the restraint was reasonable. The sale of business forms in the Greenville area was highly competitive with many organizations selling similar commodities. Thus, temporarily restricting Kerrigan from selling to eighteen specific accounts did not deprive the general public of necessary services or industry. Finally, the covenant was supported by valuable consideration. Kerrigan's testimony confirmed that signing the 1953 agreement was a condition for his promotion from a clerical job to a special accounts salesman, a change in contractual relationship that provided him a benefit and was sufficient consideration. The Trial Judge's failure to enforce the covenant, based on erroneous findings regarding public policy and consideration, was incorrect.
Analysis:
This case affirms the principle that restrictive covenants are enforceable when carefully tailored to protect legitimate business interests without imposing undue burdens. It provides a clear framework for analyzing the reasonableness of such covenants, emphasizing the balance between employer protection, employee livelihood, and public interest. Future cases will likely refer to this three-part test for evaluating the validity of similar agreements, particularly in disputes involving customer-contact employees and consideration in ongoing employment relationships.
