One growing area of employment law is the area of employee competitiveness. Many employees who seek to compete with their current or former employer find themselves in trouble because they fail to understand the full range of issues that arise. For example, just because a future job or business will not violate terms of a non-compete agreement, doesn’t mean that the departing employees does not have to seriously consider whether the employee can operate without using the employer’s “trade secrets.” In addition, while employed, there are strict rules on what an employee may not do as a result of common-law duties of loyalty.
Covenants not to compete are enforceable in South Carolina if deemed reasonable under the
circumstances. In order to be enforceable, they must be:
Supported by valuable consideration;
Necessary to protect the legitimate interests of the employer;
Reasonably limited in operation with respect to time and place;
Not unduly harsh and oppressive in curtailing the legitimate efforts of the
employee to earn a livelihood; and
Reasonable from the standpoint of sound public policy.
Other than these general principles, it is not possible to provide general guidance on what is considered enforceable as each case must be evaluated according to its unique facts. For example, whether there is “consideration” (a legal term meaning something of value) to support the covenant or whether the employer breached obligations to the employee before the separation from employment are issues that frequently arise and may affect the outcome of the case. The nature of the market involved also is a key issue that must be examined under the particular facts of the situation to see if a covenant is too broad.
Many employers have wisely abandoned the traditional noncompete (based on geography or territory) and have utilized specific non-solicit agreements that prohibit efforts to divert work from customers with which the employee had contact while employed. These present somewhat different issues, but generally are far more defensible if limited properly.
From our experience there are several key issues most judges also will look at in determining whether to enforce a covenant that are not factors mentioned in the law books. These include:
The circumstances under which the employee is no longer with the employer (i.e.
did he or she quit voluntarily);
Whether there is evidence that the employee engaged in wrongdoing in seeking
to “steal business”;
Whether the covenant is restricted to the customers or clients with which the
employee dealt, or is the employer seeking to just “wall off” a market for
competitive purposes; and
Whether the employee has experience and knowledge gained either prior to the
employment at issue or through means available to anyone, or whether he or she
only is able to compete because of his or her access to information provided by
Even if there is no written agreement, employers have significant protections for their “trade secrets” under South Carolina law. The Trade Secrets Act provides companies with a right to sue for misappropriations of trade secrets. It defines a “trade secret” as:
Information, including a formula, pattern, compilation, program, device, method, technique, or process that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Employees are generally entitled to take the skills and general knowledge acquired or increased during previous employment. What constitutes “general knowledge” versus knowledge that is proprietary to the employer is a tricky issue at times. In addition, there is some information that, by itself, may not be a trade secret (for example, the identity of users of a certain product in a certain industry in some cases), but certain compilations of that information done by the employer may constitute a trade secret.
While employed, it is important to know what kinds of actions one can take in preparing to compete, as opposed to the kinds of actions that are considered a violation of the common-law duty of loyalty for which an employee may be sued. Generally, while employed, you may not compete or act against the interest of the employer in terms of recruiting customers or employees. For example, in one case, the court found that a management group acted wrongfully when it planned to form a competitor company and took steps, while employed, that were both against the interests of the employer and in violation of their obligations to keep trade secrets confidential. This included soliciting
business and employees while still connected with the former company.
Generally, however, an employee may take certain preparatory steps with a plan to compete as long as he or she is not competing or acting against the interest of the employer. These steps typically involve activities such as forming a corporation, leasing space, and obtaining a phone number and bank account.
There are two important points to remember when considering whether to compete with your current or a former employer: (1) you must be mindful of all the potential legal issues and not just those that may be part of a written agreement or employment contract; and (2) each situation is unique and those who succeed typically obtain counsel and advice before taking steps to compete with their employer.