S.C. Supreme Court Says 150-Mile Radius Reasonable for Sale of Business Noncompete

Parker Poe Adams & Bernstein LLP

Parker Poe Adams & Bernstein LLP

South Carolina courts evaluate the enforceability of noncompete provisions executed in the employment context and in connection with the sale of businesses under the same reasonableness test. To be enforceable in South Carolina, a covenant not to compete must be (1) necessary for the protection of the legitimate interests of the employer or purchaser, (2) reasonably limited 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. Last week, the South Carolina Supreme Court found a noncompete agreement with a 150-mile radius geographic restriction entered into as part of a sale of a business to be enforceable.

In Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the noncompete agreement was executed in connection with the sale of a mortuary transport business located in Lexington County, South Carolina. As part of the purchase, the buyer required the seller to execute a covenant in which the seller agreed not to provide mortuary transport services within 150 miles of the business for 10 years following the closing date. Several years later, the seller competed with the buyer for (and ultimately won) a contract to provide mortuary services to Richland County, which neighbors Lexington. After losing the contract bid, the buyer sued the seller for violating the noncompete. The seller argued the noncompete was unenforceable because it contained unreasonable temporal and geographic restrictions. A special referee ruled in favor of the buyer, finding the noncompete to be enforceable.

The South Carolina Court of Appeals reversed the special referee’s decision, finding the noncompete to be invalid based solely on the overly broad geographic scope. The court said that at the time of the sale, the seller engaged in the mortuary transport business in only Richland and Lexington Counties. The buyer’s tentative desire to expand its business throughout South Carolina did not make the statewide restriction reasonable.

The South Carolina Supreme Court reversed the Court of Appeals decision, finding it had erred in holding the territorial restriction in the noncompete unreasonable. The Supreme Court stressed that noncompete covenants executed in conjunction with the sale of a business should be scrutinized at a more relaxed level than noncompete covenants executed in conjunction with employment contracts. In finding the territorial restriction to be reasonable, the court focused on the buyer’s reliance on it when entering into the transaction, the sophistication of the parties, and the mobile nature of the services provided.

South Carolina courts will continue to make determinations based on the specific facts of each case. This case makes clear that courts will apply a stricter level of scrutiny to restrictive covenants in the employment context. Therefore, employers should continue to carefully tailor noncompetes in a way that does not overreach beyond what is essential to protect their legitimate interests.

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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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