Category Archives: South Carolina Law

SOUTH CAROLINA SUPREME COURT REJECTS EFFORT TO NARROW GEOGRAPHIC RESTRICTION IN NON-COMPETE

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Posted by Eric Welsh on June 18, 2010 – 7:30 am
Filed under SC Supreme Court, South Carolina Law, Uncategorized, Unfair Competition

In a decision filed in May, the South Carolina Supreme Court reversed the trial court’s “blue-penciling” of a territorial restriction in a non-compete to uphold its validity.  Poynter Investments, Inc. v. Century Builders of Piedmont, Inc., No. 26821 (May 21, 2010).  In that case, the defendant, Clyde Rector, sold his business to Poynter Investments and in connection with that sale, entered into a non-compete agreement.  The non-compete agreement was for a duration of four years and contained a three tiered geographic restriction.  By the terms of that agreement, Rector was prohibited from engaging in a competing business (i) within 75 miles of the premises, (ii) if found too broad, then in Greenville County, South Carolina and any bordering county, or (iii) if found too broad, then Greenville County, South Carolina.  According to the opinion, Rector subsequently breached his employment and non-compete agreement, and Poynter Investments filed suit against him to enforce the non-compete.

The trial court upheld the non-compete agreement, granting a preliminary injunction.  In doing so, the trial court limited the geographic restriction of the non-compete to “Greenville County, and within an area encompassing fifteen miles in any direction of [the Premises].”  Rector appealed the decision, arguing, in part, that the trial court impermissibly “blue-penciled” an overbroad non-compete agreement. 

On appeal, the South Carolina Supreme Court found such rewriting of the non-compete by the court to be improper.  After citing to precedent discussing the limitations of the courts in deviating from the express terms of non-compete agreements, the Supreme Court found that the trial court’s crafted geographic limitation similarly flawed for straying from the express terms of the agreement:

“These cases stand for the proposition that, in South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms. We hold, therefore, that the trial judge erred in rewriting the territorial restriction in the parties’ contract.”

What is interesting about this case is not what questions have been answered but rather, what remains unanswered by the opinion.  For example, had the trial court simply used the third definition of the non-compete’s geographic provision — Greenville County, South Carolina — and ignored the other two, which were probably overbroad, would the court’s decision have been upheld or viewed as improper “blue-penciling”?  In such a situation, does the agreement stand by its own terms if two of the definitions are viewed as over broad and ignored?  

Interestingly, in North Carolina, where courts are also prohibited from rewriting non-compete agreements, such agreements are not unenforceable simply because the territorial restriction employs multiple definitions of varying geographic reach.  As long as the provisions are separate and distinct, a court can strike the overbroad provisions in a non-compete agreement without violating the prohibition on rewriting the covenant.  See, e.g. Wachovia Ins. Svcs., Inc. v. McGuirt, No. 06 CVS 13593, 2006 WL 3720430, *9, fn.4 (NCBC Dec. 19, 2006)  at *11 (excising single provision of covenant regarding solicitation of customers while preserving remainder); Philips Elecs. North America Corp. v. Hope, 09 cv 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009) at fn.6 (stating blue penciling is especially appropriate to excise provisions separated by the term “or”).  Accordingly, a geographic restriction that is tiered in structure is not by itself a bar to enforcement in North Carolina.

South Carolina had previously recognized a similar rule, permitting courts to enforce a non-compete if the offensive provision is “severable.”  See Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344 (1958); Lampman v. Dewolff Boberg & Assoc. Inc., 2009 U.S. App. LEXIS 6046 (4th Cir. March 23, 2009); see also Rockford Mfg., Ltd. v. Bennet, 296 F. Supp.  2d 681 (D.S.C. 2003).  At first blush, Poynter Investments seems at odds with this precedent.  Does Poynter Investments mark a change in South Carolina’s treatment of non-compete provisions that are severable?  Will South Carolina enforce a strict prohibition on all “blue-penciling” of restrictive covenants?  Certainly, the Poynter Investments case can be limited to its facts to avoid any inconsistencies with precedent.  The trial court judge did not simply enforce the non-compete based on one of three definitions of geography found in the parties’ agreement.  Rather, he modified one of the geographic definitions, thereby broadening its reach.  Even under Somerset and other precedent, such judicial intervention would be viewed as improper. 

Time will tell whether South Carolina is ushering in a stricter approach to non-compete agreements.  One thing is clear, as with North Carolina, non-compete agreements are viewed closely by the courts in South Carolina and will not be saved by judicial rewriting of existing contractual terms.

Actions Speak Louder than Words: Bad Faith Conduct Supports Finding of “Inevitable Disclosure” of Trade Secret

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Posted by Eric Welsh on February 19, 2010 – 9:10 am
Filed under Federal Court, South Carolina Law, Trade Secrets

Earlier this month, a federal court in Pennsylvania issued an injunction against a former employee of Bimbo Bakeries in a trade secret case that once again demonstrates that the “inevitable disclosure” doctrine is alive and well in certain states. Bimbo Bakeries USA, Inc. v. Botticella, Civil Action No. 10-0194 (E.D. Pa. February 9, 2010).

Although the principles of inevitable disclosure have existed for decades in trade secret cases, the “inevitable disclosure” doctrine itself finds its origin in the Seventh Circuit Court of Appeals opinion Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Under that doctrine, a former employee can be enjoined by a court from taking on employment with a competitor of his former employer if such employment would necessarily require the disclosure or use of his former employer’s trade secrets to carry out the duties of the new position. “A plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1269. Since that significant decision, courts from around the country have been asked to consider the “inevitable disclosure” doctrine, and while two state appellate courts have rejected the doctrine (see Whyte v. Schlage Lock Co., 125 Cal. Rpt. 2d 277, 291 (Ct. App. 2002) and LeJeune v. Coin Acceptors, Inc, 849 A.2d 451, 471 (Md. 2004)), the majority of the courts to consider the doctrine have accepted it to some extent. See e.g. National Starch and Chemical Corp. v. Parker Chemical Corp., 219 N.J. Super. 158, 530 A.2d 31 (N.J. 1987) (applying New Jersey law); Cardinal Freight Carriers, Inc. v. J.B. Hunt Transportation Services, Inc., 987 S.W. 2d 642 (Ark. 1999) (applying Arkansas law); Air Prods. & Chem., Inc. v. Johnson, 442 A.2d 1114, 1120 (Pa. Super. Ct. 1982); Victaulic co. v. Tieman, 499 F.3d 227, 234 (3rd Cir. 2007). Although no state court in North Carolina has yet formally adopted the doctrine, a federal court has found the doctrine not to be inconsistent with North Carolina law and that it would be followed by a North Carolina court with respect to specifically defined trade secrets. See Merck & Co. v. Lyon, 941 F.Supp. 1443, 1460-62 (M.D.N.C. 1996) (granting in part injunction under inevitable disclosure doctrine, finding that North Carolina courts would enjoin threatened misappropriation based on their version of inevitable disclosure); see also Analog Devices, Inc. v. Michalski, 157 N.C.App. 4621, 579 S.E.2d 449 (2003) (finding it unnecessary to consider whether to adopt the doctrine of inevitable disclosure since it would not be applied in the broad fashion sought by the plaintiff).

In Bimbo Bakeries, the court applied the “inevitable disclosure” doctrine in entering a consent injunction against a former employee of Bimbo who allegedly possessed Bimbo’s trade secrets, including proprietary and confidential information concerning Bimbo’s strategies, formulas and process parameters for Bimbo’s products. The former Bimbo employee, who was one of five key executives of Bimbo’s western region operations, had accepted a similar position at Hostess Bakery. The former employee had not entered into a non-compete agreement with Bimbo but had signed a confidentiality agreement. Bimbo filed suit against the former employee for trade secret misappropriation and argued to the federal court that without an injunction, the former employee would inevitably use or disclose the trade secrets in his new position with a competitor. The court agreed and entered a consent injunction, preventing the former employee from assuming his new position with Hostess Bakery. The former Bimbo employee has filed a notice of appeal.

Several points are worth noting from the Bimbo Bakeries court’s decision. First, the court applied the “inevitable disclosure” doctrine but found that the threat of disclosure of a trade secret “need not amount to its inevitability.” Noting that Pennsylvania law provides the right to enjoin “threatened” not just “actual” misappropriation of a trade secret, the court found that a more flexible standard should be employed than “inevitability” in determining whether a substantial risk exists of disclosure or use of the trade secret. Applying the doctrine in that case, the court found “at least a substantial threat that Defendant will disclose Bimbo’s trade secrets in the course of his employment at Hostess.”

Second, while the court recited several bases for its finding of this “substantial threat” of disclosure, perhaps the most significant related to the former employee’s conduct and actions following his acceptance of an offer from Hostess. The court appeared to rely heavily on the fact that the former employee allegedly had not disclosed to Bimbo his plans to begin employment with Hostess while employed by Bimbo and receiving its trade secrets and had downloaded Bimbo Bakeries’ confidential information from his work laptop computer on to an external storage device prior to his departure from Bimbo. The court found this strong evidence which undermined his denials of future disclosure or use of the trade secrets. “Defendant’s handling of Bimbo’s trade secrets after accepting the Hostess position undermines his trustworthiness with regard to those trade secrets.” Bimbo Bakeries, Inc. v. Botticella, Civil Action No. 10-0194 at * 29. The court found that the evidence regarding the former employee’s conduct evidenced an intention on that former employee’s part to use Bimbo’s trade secrets at Hostess, and if the case was close, which it appeared not to be, for this court, convincingly tipped in favor of an injunction.

“Defendant’s knowledge of Bimbo’s trade secrets, combined with evidence of an intention to use them at Hostess, creates a realistic expectation that Defendant will draw on and will use his knowledge of Bimbo’s trade secrets in performing his job at Hostess. Based upon the totality of the evidence, we are satisfied that there is a substantial likelihood that Defendant will not be able to perform his duties at Hostess and will not perform those duties without disclosing, whether intentionally or inadvertently, Bimbo’s trade secrets.” Bimbo Bakeries, Inc. v. Botticella, Civil Action No. 10-0194 at * 29.

In trade secret cases, the actions of departing employees can be a key factor in a court’s determination of the risk of future disclosure or use. All the denials of use cannot overcome findings of deceptive conduct by the employee when leaving for a competitor. For example, in the Pepsico case, the Seventh Circuit noted that the ex-employee’s “lack of forthrightness on some occasions, and out and out lies on others, in the period between the time he accepted the position with [his new employer] and when he informed [his then employer] that he had accepted that position leads the court to conclude that [the defendant] could not be trusted to act with the necessary sensitivity and good faith under the circumstances in which the only practical verification that he was not using plaintiff’s secrets would be [the defendant’s] word to that effect”. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270.

Similarly, the United States District Court of South Carolina, in a “classic inevitable disclosure scenario”, relied on the fact that a departing employee had taken his former employer’s documents, and had acted in bad faith in spoliating evidence of his conduct, in enjoining that former employer from taking on duties in his new position with a competitor. Nucor Corp. v. Bell, 2:06-cv-02972-DCN (2008). As the court noted:

“There are also circumstances demonstrating defendants’ unwillingness or inability to safeguard Nucor’s purported trade secrets. Bell took Nucor documents after he knew he was going to work for SeverCorr and plaintiff has shown a possibility of succeeding to the extent its trade secrets claim relies on those events. Thus, plaintiff has some evidence that Bell already misappropriated its trade secrets. More importantly, the court has already concluded in connection with the motion for sanctions that Bell acted in bad faith by throwing away the SanDisk thumb-drive containing documents with Nucor’s potential trade secrets. . . . The presence of spoliation supports a finding that the circumstances as a whole warrant application of the inevitable disclosure doctrine.”

Based in part on the former employee’s bad faith conduct, the court, in a case of first impression in South Carolina, applied the inevitable disclosure doctrine and found that the former employer’s new employment would inevitably require him to disclose the purported trade secrets.

Time and time again in trade secret cases, the denials of actual or threatened misappropriation are belied by the conduct of the departing employee. The old adage rings true here: actions speak much louder than words.

Parker Poe Adams & Bernstein LLP was counsel to Nucor Corp. in the Bell matter, which marked the first time a court in South Carolina accepted the inevitable disclosure doctrine in a trade secret case after having found that the defendants spoliated evidence.

IN SOUTH CAROLINA, A HORSE CAN BE A ZEBRA: SOUTH CAROLINA SCRUTINIZES CONFIDENTIALITY AGREEMENT UNDER NON-COMPETE STANDARD

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Posted by Eric Welsh on February 3, 2010 – 12:11 pm
Filed under SC Court of Appeals, South Carolina Law, Trade Secrets, Unfair Competition

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.

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

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Posted by Eric Welsh on January 28, 2010 – 9:05 am
Filed under NC Business Court, South Carolina Law, Unfair Competition

In a decision rendered in October 2009, the North Carolina Business Court dismissed a claim brought under North Carolina’s Unfair and Deceptive Trade Practices Act, finding that the conduct alleged was a “securities transaction” and beyond the scope of Chapter 75. Charlotte-Mecklenburg Hospital Authority v. Wachovia Bank, National Association, 08 CVS 27739 (Oct. 6, 2009).

In that case, Charlotte-Mecklenburg Hospital brought a series of claims against Wachovia Bank related to a Securities Lending Agency Agreement. It was alleged that under that Agreement, Wachovia was to manage cash collateral investments on the Plaintiff’s behalf pursuant to specific investment guidelines governing the investment activity. It was further alleged that Wachovia made an imprudent investment as part of this securities lending program. The Plaintiff alleged that the investment was too risky and that Wachovia failed to liquidate the investment timely, resulting in a loss of $14 million.

In moving to dismiss the complaint, Wachovia challenged the Unfair and Deceptive Trade Practices claim on the basis that securities transactions are exempted. Citing Skinner v. E.F. Hutton & Co., Inc., 333 S.E.2d 236, 241 (1985), Wachovia argued the Plaintiff’s allegation related to a security transaction and therefore was outside the reach of Chapter 75. In response, the Plaintiff acknowledged that the statute does not govern securities transactions but tried to escape dismissal, arguing that the subject of the claim involved “investment advice” and an “investor/investment advisor relationship,” not “securities transactions.” In advancing this argument, however, the Plaintiff failed to rely on any controlling authority that was apposite to the issues at hand. The Business Court rejected the Plaintiff’s attempt to reclassify its claim.

While correctly noting that the commerce element of Chapter 75-1.1 encompasses a broad range of business activity, the Business Court stated that “it does not cover ‘all wrongs’ in a business setting.” Id. citing Sterner v. Penn, 159 N.C. App. 626, 632-33, 583 S.E.2d 670, 675 (2003). The Business Court went on to cite North Carolina case law that has excluded securities transactions, beyond conventional securities, from the reach of the statute. See e.g. Oberlin Capital, LP v. Slavin, 147 N.C. App. 52, 62, 554 S.E.2d 840, 848 (2001) (Chapter 75 claim dismissed in case involving a loan agreement). Noting that courts have previously held that “transactions entered into for purposes of raising capital also qualify as a ’securities transaction’,” Id., the Business Court found the “securities lending program” at issue in the case to be similar to “raising capital” and therefore beyond the statute’s definition of “in or affecting commerce.”

Ultimately, the Business Court was not persuaded by the Plaintiff’s creative labeling. Reading Plaintiff’s argument, one is reminded of Shakespeare: “A rose by any other name would smell as sweet.” The Plaintiff’s argument was certainly not made any easier by the fact that, while at the same time it argued its claim did not involve securities transactions, it brought a separate claim against Wachovia for a violation of North Carolina Securities Act and relied on the same basic facts for both of these claims.

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