Court Finds Broad Non-Disclosure Agreement is Unenforceable Non-Compete

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Last week, in the case of Fay v. Total Quality Logistics, LLC, the South Carolina Court of Appeals ruled that language in a non-disclosure agreement was so broad it effectively became an invalid non-compete agreement.  The case serves as a reminder for employers to review their non-disclosure and confidentiality agreements to make sure they are enforceable.

Background of Case

In November 2012, Joshua Fay started employment as a sales account executive with Total Quality Logistics (TQL), an Ohio-based trucking company.  On his first day, Fay signed a Non-Compete, Confidentiality, and Non-Solicitation Agreement that was to be interpreted and enforced under the laws of Ohio. 

The Agreement defined “Confidential Information” very broadly as, among other things, “all information disclosed to [Fay] or to which [Fay had] access during the period of his employment . . . if there is any reasonable basis to believe it to be Confidential Information or if TQL appears to treat it as confidential.”  The non-disclosure provisions did not include a time restriction or expiration period, and they purported to be binding “at all times” after Fay’s employment with TQL. 

The Agreement stated that its restrictions were “not intended” to prohibit Fay from using “the general skills and knowledge” he acquired while working for TQL.  However, if Fay engaged in an employment relationship with a Competing Business “in a position similar” to his position with TQL, then, per the Agreement, such a relationship would “necessarily and inevitably result in [Fay] revealing, basing judgments and decisions upon, or otherwise using TQL’s Confidential Information to unfairly compete with TQL.”  The Agreement defined a “Competing Business” as a business providing motor transport and related services “anywhere in the Continental United States.” 

In June of 2013, TQL terminated Fay, and he founded a separate company through which TQL alleged he was working as an “exclusive shipping agent.”  TQL threatened legal action and, in response, Fay sought a declaration in court that the Agreement was unenforceable.  The trial court found the Agreement was valid and enforceable, and Fay appealed.

Court of Appeals Decision

The Court of Appeals first agreed that, as a general rule, terms of a non-compete agreement could be construed according to the law of another state, such as Ohio—whose courts likely would have upheld the Agreement.  However, South Carolina courts must always assess whether an agreement “comports with [state] public policy.”  In South Carolina, “contracts against competition are held to be unenforceable unless they meet certain criteria” including reasonable time or geographic restrictions. 

The Court also noted that, generally, confidentiality agreements do not necessarily require reasonable time restrictions.  However, in this case, although the non-disclosure provisions were “ostensibly” related to TQL’s Confidential information, according to the Court, they were so broadly worded that they effectively became non-compete provisions, which must be “reasonably limited with respect to time.”  Because the Agreement barred the use of essentially all information Fay learned while working for TQL forever and to any trucking company anywhere in the United States, they were overly broad and violated South Carolina public policy. 

In light of this case, South Carolina employers should review their confidentiality and non-disclosure agreements.  Even if an employment agreement focuses only on confidential information or tradesecrets—and does not expressly limit subsequent employment with a competitor—a court may nonetheless find the agreement unenforceable if it is overly broad and its practical effect unduly restricts an employee’s ability to earn a living.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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