Have An Employment Agreement That Could Be Interpreted as Extending Forever? These Probably Will Not Hold Up in Court

Fay v. Total Quality Logistics, LLC - South Carolina Court of Appeals

Facts:  Joshua Fay ("Fay") worked as a sales account executive at Total Quality Logistics, LLC ("TQL").  On his first day of work, Fay signed a Non-Compete, Confidentiality, and Non-Solicitation Agreement (all to be enforced under the laws of Ohio).  The Non-Solicitation Agreement defined "Confidential Information" as, among other things, "all information disclosed to [Fay] or to which [Fay had] access during the period of his employment...if there is any reasonable basis to believe it to be Confidential Information or if TQL appears to treat it as confidential."  However, the non-disclosure portions did not include a time restriction or expiration date.  Instead, it purported to be binding "at all times" after Fay's employment period ended with TQL.

In relevant part, the non-disclosure provisions provided its restrictions were "not intended and shall not be construed to prohibit [Fay] from disclosing or using the general skills and knowledge [Fay] acquired as an employee of TQL."  On the other hand, if Fay engaged in an employment relationship with a Competing Business "in a position similar" to the one he held with TQL, it would "necessarily and inevitably result in [Fay] revealing, basing judgments, and decisions upon, or otherwise using TQL's Confidential Information to unfairly compete with TQL."  Competing Business was defined as any business providing motor transport and related services "anywhere in the Continental United States."

After Fay was terminated about seven months into his employment with TQL, he accepted a new position with a separate company which TQL claimed Fay was working in a competing position.  TQL threatened legal action and claimed Fay was in violation of the Agreement.  Fay sought a declaration that the Agreement was unenforceable on the grounds that it was "overly broad and not necessary for the reasonable protection of TQL".  The trial court held the Agreement was valid and enforceable and Fay subsequently appealed.

Holding:  (Note, this analysis is in relation only to the claims brought by Fay, not any of the counterclaim issues presented by TQL).  In its initial analysis of the appeal, the Court of Appeals agreed that terms of a non-compete agreement can be construed according to the laws of another state (in this case, Ohio).  However, when the suit is brought in South Carolina, courts in the state must assess whether the agreement "comports with [state] public policy."  In South Carolina, "contracts against competition are held to be unenforceable unless they meet certain criteria", including time or geographic restrictions.

In this instance, the Court of Appeals held that the TQL non-disclosure provisions operated as a non-compete provision and did not contain a reasonable time restriction, in violation of the public policy of South Carolina.   While a time restriction of multiple years had been approved as reasonable in other cases, the limitation in this case was in essence forever.  As the Court noted, the language of the Agreement was so broadly worded that Fay would essentially be barred from using any information he learned from working at TQL if he went to work for any other trucking company.  This type of restriction was found to be an unreasonable restriction on Fay's ability to earn a living.  While other portions of the Agreement contained time restrictions of one year, the Court held that time restriction could not be read into the portions of the Agreement at issue in this case.

Judgment:  The South Carolina Court of Appeals reversed the lower court's ruling and held that the overly broad restrictive language in a non-disclosure agreement used by TQL served as an unenforceable non-compete provision and therefore could not be enforced against the former employee who went to work for a competing company.

The Takeaway:  Employers take note:  This is a rather straight forward case where the Court would have likely upheld the Agreement, had the plain language of the Agreement not been interpreted so broadly.  As the Court of Appeals noted, a "reasonable" time restriction (such as a year) would likely have resulted in this Agreement having been held to be valid and enforceable against Fay.  However, because the language of the Agreement, on its face, was held to extend forever and in essence prevent Fay from taking any information he learned at TQL and going to any competing business in the United States, this Agreement was doomed from the start.  

While employers might prefer to keep their former employees from jumping to a competitor and using previously gained knowledge to help the competing employer, this case serves as a reminder to be smart about what restrictions are put into non-compete and non-disclosure agreements.  As this case shows, some restraints and limitations are allowed...but not ones that can be interpreted as extending until the end of time.  Be smart when drafting these types of Agreements; courts are not going to simply rubber stamp these (nor should they).

Majority Opinion Judge:  Judge Thomas

Date:  March 1, 2017

Opinion:  cases.justia.com/south-carolina/court-of-appeals/2017-5471.pdf?ts=1488384949