Wednesday, May 26, 2010

SC Supreme Court: Courts Cannot "Blue Pencil" Non-Compete Restriction

In Poynter Investments v. Century Builders, the South Carolina Supreme Court continued a line of cases holding that the "restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties' agreement, but must stand or fall on their own terms." In addition, the Court clarified that there is no separate "balancing the equities" requirement for the issuance of a preliminary injunction (modifying five South Carolina Court of Appeals opinions including such a "requirement").

Appellant Rector sold his business to Poynter in 2007, and the parties entered into an "Employment and Non-Competition Agreement" containing a four year non-competition clause, and preventing Appellants from competing in a defined geographic area ("Restricted Territory") during that time period.

Poynter sued Appellants in 2008 alleging violations of the non-competition agreement. The trial judge granted Poynter a preliminary injunction purporting to enforce the non-competition agreement, but created a "Restricted Territory" that did not exist in the agreement, (decreasing the geographical scope of the "Restricted Territory").

Citing a line of cases construing non-compete agreements in South Carolina, (Stonhard, MailSource, Faces Boutique) the Court ruled that the trial court erred in rewriting the territorial restriction in the parties' contract.

Additionally, the Court clarified that the issuance of a preliminary injunction requires a showing of three (and only three) requirements: irreparable harm, a likelihood of success on the merits, and no adequate remedy at law. Several opinions of the Court of Appeals going back to 2002 had also included a "balancing the equities" requirement in the preliminary injunction context, and the Supreme Court ruled that such a requirement is "neither necessary or appropriate in a preliminary injunction case".

Of note, the Court also pointed out that an appeal from the issuance of a preliminary injunction does not stay the underlying proceedings on the merits.