Noncompetition, Confidentiality, and Inventions Assignment Agreements
This guide discusses noncompetition, confidentiality, and inventions assignment agreements. Two recent South Carolina cases dealing with these agreements remind us that “less" is definitely “more" and that companies should ensure their agreements are narrowly tailored to protect legitimate business interests and not prevent an employee from trying to earn a living. We begin with some practical steps your company can take to improve its agreements. We then summarize the current law and discuss the two recent cases.
In light of the cases discussed below and South Carolina law governing noncompetition and similar agreements, here are some practical steps your company can take to improve its agreements and the likelihood they will be enforced:
Confidential Information – ensure the definition of confidential information only applies to competitively sensitive information kept in confidence by your company.
Inventions Assignment – ensure the inventions assignment provision only applies to work that relates to your company’s business or anticipated R&D or work that was developed using company equipment or facilities.
Consideration – ensure employees receive something of value for entering into these agreements. For example, signing an agreement when an employee is first hired or when an employee receives a raise would constitute value. Requiring an employee to sign an agreement as a condition of his or her continued employment would not constitute value.
Attorneys’ Fees – require employees to reimburse you for the costs of enforcing these agreements even though courts will not always award attorneys’ fees.
Choice of Law – specify that South Carolina law applies.
Assignment – expressly permit your company to assign the agreement in connection with a sale of substantially all of its assets or the assets of one of its divisions.
Limit on Geography and Time – place reasonable limitations on place and time or focus exclusively on current customers.
Employee-Specific Agreements – be specific to the employee and their job functions. Prohibiting a director of marketing from providing marketing services to one of your competitors is enforceable. Prohibiting a receptionist from providing bookkeeping services to one of your competitors is not.
Summary of the Law
In South Carolina, noncompetition agreements are generally disfavored and strictly construed against the employer. To be enforceable, an agreement must be: (1) necessary for the protection of the legitimate interests of the employer; (2) reasonably limited in its operation with respect to time and place; (3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood; (4) reasonable from the standpoint of sound public policy; and (5) supported by valuable consideration. When a confidentiality or inventions assignment provision has the same basic effect as a noncompete it is subject to the same level of scrutiny.
First Case: Milliken v. Morin1
In this case, an employer sought to enforce an inventions assignment and nondisclosure agreement against its former employee. The employee argued that these provisions were unreasonable as a matter of sound public policy because they were overly broad, curtailed his ability to earn a living, and prevented him from using the general skills and knowledge he acquired at the company.
The inventions assignment was narrowly drafted to apply only to inventions that related to (1) the company’s business; (2) actual or anticipated R&D of the company; (3) work performed by the employee for the company; (4) work utilizing company equipment or facilities; or (5) work developed on company time. The inventions assignment provision was also limited to one year. The court held this provision was enforceable because it was limited to work related to the company’s business or research or that was created using company resources and limited to one year.
Likewise, the confidentiality provision was narrowly drafted to apply only to competitively sensitive information kept in confidence by the company. The confidentiality provision applied for three years. The court held this provision was enforceable because it did not prohibit the employee from disclosing or using all of the information he learned working at the company, or using the skills he acquired while working there. Additionally, the employee testified he could have obtained other jobs without violating this provision.
Second Case: Poynter Investments v. Century Builders2
In this case, an employer sought to enforce a noncompetition agreement against its former employee. The agreement defined the restricted territory as 75 miles from the company’s premises, or if that restriction is unenforceable, then Greenville County and all neighboring counties, or if that restriction is unenforceable, then just Greenville County. A lower court granted a preliminary injunction but substituted its own restricted territory. The lower court’s preliminary injunction restricted the employee from competing with the company within Greenville County or 15 miles from any of the company’s premises.
The South Carolina Supreme Court held that the trial judge exceeded his authority in rewriting or “blue-penciling" the territorial restriction. This case confirms the general rule that restrictions in a noncompete clause cannot be rewritten by a court; they must stand or fall on their own terms.
Milliken v. Morin, 685 S.E. 2d 828 (Ct. App. 2009) available at http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=4610
Poynter Investments v. Century Builders, Opinion No. 26821 (2010) available at http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=26821
This guide is intended to provide general information about legal and business issues. It should not be construed as legal advice or as an advertisement for legal services.