Feb 28, 2013 – Noncompetition Agreements

 

 

 

In light of the restrictive nature with which South Carolina courts have historically viewed noncompetition agreements, many people assumethey are not enforceable and, in essence, “not worth the paper they’rewritten on.” However, in January of this year, the South Carolina Courtof Appeals upheld a physician’s noncompetition agreement and expandedthe 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 thescope of enforceable agreements, but it also contemplates that futureconsideration, in the form of severance payments, is acceptable tosupport such agreements. 

Background

 

Two interventional cardiologists, who had been shareholders andemployees of Columbia Heart Clinic (the practice) since before 2000,were asked in 2004 to sign new agreements containing noncompetitionrestrictions.  The practice had significantly expanded its business andwanted to protect its investment in the shareholder physicians.  InApril 2006, four months after the practice opened a new office, the twocardiologists left and shortly thereafter opened a competing officewithin 300 yards of the new practice location. The cardiologistssubsequently filed a lawsuit against the practice seeking a declaratoryjudgment that the noncompete provisions were unenforceable and allegingviolations of the South Carolina Payment of Wages Act.  The trial courtheld that the noncompete provisions were unenforceable and awarded thecardiologists 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 toforfeit any monies payable to them if they practiced medicine in thefield of cardiology within a 20-mile radius of any practice office atwhich they routinely provided services during the year prior to thetermination 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 businesswhich engages in the Business in the Territory, (B) engaging in theBusiness in the Territory; and (C) assisting any Person . . . to engagein the Business in the Territory.”

The “territory” was a defined as a 20- mile radius of any practiceoffice 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 betweenthe parties, largely because of prior South Carolina court decisions. 

Rulings

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

Consideration Held Sufficient. The physicians arguedthe noncompetition agreements were unenforceable because they were notsupported 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 thenoncompetition restriction, was sufficient consideration.  Thephysicians argued that the promise to pay $60,000 in severance after termination was “illusory” because they would not receive the money ifthey competed.  However, the court held that “a promise is not illusorymerely because its enforceability depends upon the performance of areciprocal promise.”

 

Territory Restriction Upheld. The court held thatthe 20-mile territorial restriction from the practice location where the physicians routinely performed services was “reasonable” and would notbe 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 provisioncontained a liquidated damages provision for violation of the covenantequivalent 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 aconservative estimate of damages sustained by the practice when ashareholder physician departed and competed. The noncompetitionprovision required the physicians to forfeit all monies payable to themfor competing in violation of that section, which included a forfeitureof the $60,000; all salary earned or accrued but unpaid as of the dateof termination; and the physicians’ pro rata share of the current year’s actual collection percentage of the accounts receivable of thepractice, which was about $240,000.  Again, the court held this was not a penalty.

 

No Wage Payment Violation.  Finally, the courtoverturned the trial court’s award of wages under the South CarolinaPayment 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 areoften faced with the daily concern of protecting one of their mostvaluable investments – those highly compensated individuals on whom thesuccess of their company or practice may largely depend.  Recognizingthis significant investment, the tide in South Carolina seems to beshifting 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 restrictthe scope of services in which a former employee may engage in anyfuture employment.