In perhaps another example of a case where a court has looked at substance over form in determining the validity of a claim (see prior blog entry: JUST BECAUSE THE HORSE HAS STRIPES ON IT DOESN’T MAKE IT A ZEBRA — Business Court Finds “Securities Transaction” Beyond the Reach of Chapter 75), the Court of Appeals in South Carolina last year affirmed the trial court’s finding that a confidentiality agreement was enforceable after scrutinizing it under standards applicable to non-compete agreements. Milliken & Co. v. Morin, 685 S.E.2d 828 (Ct. App. 2009). This case, interesting in several respects, highlights a significant distinction between North Carolina and South Carolina law with respect to confidentiality agreements: South Carolina, unlike its neighbor to the north, can subject confidentiality agreements to heightened scrutiny typically given to non-compete agreements to determine if the agreement is enforceable. If the agreement tends to restrict competitive employment, then it will treated as a non-compete agreement and reviewed as such under applicable law. Again, labels do not control; substance does.

In the Milliken & Co. v. Morin case, Milliken had employed Morin as a research analyst. As part of his employment, Morin signed an employment agreement with Milliken, which contained an inventions assignment provision, a non-compete provision and a confidentiality provision. In his position with Milliken, Morin allegedly developed an idea to create a high modulus multifilament polypropylene fiber. Milliken apparently did not pursue the idea of developing this fiber. Morin subsequently resigned from Milliken, created his own company, and filed a patent for a high modulus multifilament polypropylene fiber. Upon learning of Morin’s conduct, Milliken brought suit against him, alleging claims for, among other things, breach of contract with respect to the confidentiality provision and violation of South Carolina’s Trade Secrets Act. At the close of Milliken’s case at trial, Morin moved for a directed verdict, arguing that the confidentiality agreement was unenforceable. The trial court denied the motion and Morin appealed the decision.

The central issue in Morin’s appeal, which is of interest here, was whether the confidentiality provision satisfied “the same strict scrutiny” applied to non-compete agreements under South Carolina law. The appellate court, citing Carolina Chem. Equip. Co. v. Muchkenfuss, 471 S.E.2d 721, 723 (Ct. App. 1996) for the proposition that “a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny,” analyzed Morin’s confidentiality provision under standards applicable to non-compete agreements, and determined that the provision “did not substantially restrict Morin’s competitive employment activities” and was enforceable. In arriving at this conclusion, the court noted that the provision did not “prohibit Morin from disclosing or using any and all information he learned working at Milliken, or using the general knowledge and skills he learned while working there.” The court also found the provision reasonable as to time period and territory.

The Milliken case raises several important questions. First, should the Milliken decision be read to stand for the proposition that all confidentiality agreements must meet the standards set for non-compete agreements to be enforceable? While not expressly addressing the issue, the court suggests that may be the case. In its analysis, the Milliken court quickly jumped to the Muckenfuss decision, stating “In Muckenfuss, the court determined a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny.” However, the Milliken court did not initially address whether the confidentiality provision had this effect as to Morin. The court did not consider the competitive effect of the confidentiality provision as an initial matter and simply proceeded to an analysis under the non-compete standards. There certainly is a healthy question as to whether Muckenfuss should be read for the proposition that all confidentiality agreements, regardless of reach or effect, must be analyzed under the standards set for non-compete agreements.

Second, if Muckenfuss and now Milliken are to be read broadly to reach all confidentiality agreements, then one is left to ask about what that means for the enforceability of confidentiality provisions that prohibit an employee from disclosing confidential information of his former employer in a non-competitive setting. For example, if a former employee disclosed confidential information on the internet out of spite or revenge, such disclosure would not be in a competitive environment. Yet, the enforceability of the confidentiality provision, and redress for the wrong, might still turn on whether it met the “strict scrutiny” afforded to non-compete agreements. If the provision lacked any territorial limitation, would it nevertheless be found enforceable and a tool for redress against such conduct? Applying a broad reading to Muckenfuss and Milliken could lead to the conclusion that even in such a situation the confidentiality agreement may be found invalid.

With the adage “better safe than sorry,” the uncertainties surrounding confidentiality agreements in South Carolina suggest the need to draft confidentiality agreements in a manner that is compliant with the standards set for non-compete agreements. Among other things, confidentiality agreements should be kept narrow to avoid a charge that it would prevent the employee from “using the general skills and knowledge he gained” at the former employer. Carolina Chemical Equipment Co., Inc. v. Muckenfuss, 471 S.E.2d 721, 724. In this case, the “horse” may actually be a zebra, even though it lacks the stripes, and should be handled accordingly.