Feb 28, 2013 – Noncompetition Agreements

 

 

 

In light of the restrictive nature with which South Carolina courts have historically viewed noncompetition agreements, many people assume they are not enforceable and, in essence, “not worth the paper they’re written on.” However, in January of this year, the South Carolina Court of Appeals upheld a physician’s noncompetition agreement and expanded the scope of enforceable noncompetition agreements in this state.  See Baugh and Feldman v. Columbia Heart Clinic, P.A., Op. No. 5074 (Jan. 16, 2013).  Importantly, not only does the ruling expand the scope of enforceable agreements, but it also contemplates that future consideration, in the form of severance payments, is acceptable to support such agreements. 

Background

 

Two interventional cardiologists, who had been shareholders and employees of Columbia Heart Clinic (the practice) since before 2000, were asked in 2004 to sign new agreements containing noncompetition restrictions.  The practice had significantly expanded its business and wanted to protect its investment in the shareholder physicians.  In April 2006, four months after the practice opened a new office, the two cardiologists left and shortly thereafter opened a competing office within 300 yards of the new practice location. The cardiologists subsequently filed a lawsuit against the practice seeking a declaratory judgment that the noncompete provisions were unenforceable and alleging violations of the South Carolina Payment of Wages Act.  The trial court held that the noncompete provisions were unenforceable and awarded the cardiologists unpaid wages. The practice subsequently appealed.

NonCompetition Agreements at Issue

 

At issue in the appeal were two noncompete provisions.  The first, referred to as the “forfeiture provision,” required the physicians to forfeit any monies payable to them if they practiced medicine in the field of cardiology within a 20-mile radius of any practice office at which they routinely provided services during the year prior to the termination of the agreement.  The second restriction constituted a more traditional noncompete, preventing the physicians from “competing” with the practice by: “(A) organizing or owning any interest in a business which engages in the Business in the Territory, (B) engaging in the Business in the Territory; and (C) assisting any Person . . . to engage in the Business in the Territory.”

The “territory” was a defined as a 20- mile radius of any practice office where the physicians routinely performed services during the year prior to expiration of the agreement.  The “business” was defined as “the practice of medicine in the field of cardiology.”

 

The third clause of the traditional noncompete provision, containing the “assist with” language, caused the most dispute between the parties, largely because of prior South Carolina court decisions. 

Rulings

Scope of Services restriction upheld. The Court of Appeals upheld as “reasonable” the prohibition of “assisting any Person…to engage in [the practice of medicine in the field of Cardiology].”  The court agreed with the practice’s argument that the covenant’s prohibition against “assisting” the practice of medicine in the field of cardiology was necessary to prevent the physicians from indirectly engaging in activities they clearly could not participate in directly.  Notably, the court distinguished the “assist with” language in the practice’s agreements from language restricting employees from competing in “any manner” that the court had struck down in prior cases.  See e.g. Faces Boutique, Ltd. v. Gibbs, 455 S.E.2d 707 (S.C. Ct. App. 1995) (finding covenant unenforceable that restricted employee from being “employed by, participat[ing] in, or be[ing] connected in any manner with the ownership, management, operation, advertisement or control of any business in direct competition with” the employer).

Consideration Held Sufficient. The physicians argued the noncompetition agreements were unenforceable because they were not supported by “new” consideration.  The court disagreed and held that the forfeiture provision, which provided that the physicians would be paid $5,000 per month for each of the 12 months they did not violate the noncompetition restriction, was sufficient consideration.  The physicians argued that the promise to pay $60,000 in severance after termination was “illusory” because they would not receive the money if they competed.  However, the court held that “a promise is not illusory merely because its enforceability depends upon the performance of a reciprocal promise.”

 

Territory Restriction Upheld. The court held that the 20-mile territorial restriction from the practice location where the physicians routinely performed services was “reasonable” and would not be unduly burdensome on the physicians’ ability to earn a living.

 

Liquidated Damages Upheld. The court held that the provisions at issue were not “unenforceable” for containing a “penalty” for violation of their restrictions.  The forfeiture provision contained a liquidated damages provision for violation of the covenant equivalent to 100 percent of the physician’s income in the calendar year prior to termination of the agreement, a figure in excess of $575,000.  The court held that this was not a penalty but, rather, was a conservative estimate of damages sustained by the practice when a shareholder physician departed and competed. The noncompetition provision required the physicians to forfeit all monies payable to them for competing in violation of that section, which included a forfeiture of the $60,000; all salary earned or accrued but unpaid as of the date of termination; and the physicians’ pro rata share of the current year’s actual collection percentage of the accounts receivable of the practice, which was about $240,000.  Again, the court held this was not a penalty.

 

No Wage Payment Violation.  Finally, the court overturned the trial court’s award of wages under the South Carolina Payment of Wages Act.  Because the forfeiture provision was enforceable, no additional wages were due under the agreements.

Recommendations for Employers

The Columbia Heart decision is certainly a positive development for employers, both health care and non-health care alike, which are often faced with the daily concern of protecting one of their most valuable investments – those highly compensated individuals on whom the success of their company or practice may largely depend.  Recognizing this significant investment, the tide in South Carolina seems to be shifting toward upholding agreements that are carefully drafted. Nevertheless, while employers may now have at their disposal new options for future consideration to enforce such agreements, and more leeway in the inclusion of hefty liquidated damages provisions for violations, employers should continue to exercise caution in attempting to restrict the scope of services in which a former employee may engage in any future employment.

Nikole Setzler Mergo represents clients in both Carolinas, pro
viding advice and counsel and litigation defense related to complex commercial litigation and employment defense litigation, as well as unfair business practices. Her corporate clients do business in the health care, pharmaceutical, manufacturing and retail industries. You can reach her at [email protected]