A Non-Disclosure Provision Can Constitute a Non-Compete

In Fay v. Total Quality Logistics, LLC, the South Carolina Court of Appeals held that a non-disclosure agreement signed by an employee was unenforceable because it was so broad that it effectively became a non-compete agreement.  As such, it was not enforceable because it did not include a duration limit.

Background of Non-Compete And Non-Disclosure Law in South Carolina

            South Carolina court decisions on the law of non-compete provisions has been a minefield for employers (and attorneys) for many years. This article will not attempt to cover this area of law, but non-compete requirements include that any restriction be reasonably limited with respect to time and place. Also, South Carolina courts will not “blue pencil” or modify the provisions of a non-compete to terms that would be enforceable. If the provisions are not enforceable as written, then they are unenforceable. It is all or nothing.

            Non-disclosure provisions, however, are treated differently. While the courts will closely scrutinize non-compete provisions that curtail an employee’s efforts to earn a livelihood, those considerations do not apply to an employee’s ability to disclose an employer’s or former employer’s confidential information or trade secrets. In fact, the South Carolina legislature passed a law, S.C. Code §39-8-30(b), which provides that non-disclosure provisions relating to trade secrets “must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.”

Facts of Fay v. Total Quality Logistics, LLC

The employer in the Fay case attempted to use for its benefit the different legal standards of scrutiny for non-disclosure provisions and non-compete provisions. In 2012, Joshua Fay started employment as a sales account executive with Total Quality Logistics (TQL), a trucking company based in Ohio.  On his first day of work, Fay signed a Non-Compete, Confidentiality, and Non-Solicitation Agreement that was to be interpreted and enforced under the laws of Ohio. 

The Agreement broadly defined “Confidential Information” as, including, “all information disclosed to [Fay] or to which [he 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, and in fact sated they were to be binding “at all times” after Fay’s employment with TQL. 

In an attempt to appear reasonable, 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.  But, if Fay were to work for a Competing Business “in a position similar” to his position with TQL, then it 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 started another company working as a shipping agent.  TQL threatened legal action and, in a preemptive move, Fay sought a declaration in court that the Agreement was unenforceable.  The trial court found the Agreement was valid and enforceable, and Fay appealed.

South Carolina Court of Appeals Decision

The Court of Appeals first noted that terms of a non-compete agreement generally could be construed according to the law of another state. In this case, under the law of Ohio the Agreement likely would be enforceable. South Carolina courts, however, must determine whether an agreement “comports with [the] public policy” of South Carolina.  Under South Carolina law, non-compete provisions are unenforceable unless they meet certain criteria, including reasonable time or geographic restrictions. 

As set forth above, non-disclosure or confidentiality agreements normally do not require reasonable time restrictions.  The Court held in Fay that the non-disclosure provisions were so broadly worded that they effectively became non-compete provisions, which are required to include reasonable time restrictions. Because the non-disclosure Agreement barred the use of essentially all information that Fay learned while working for TQL forever and to work for any trucking company anywhere in the United States, the provisions were overly broad and violated South Carolina public policy. 

In this case, the employer attempted to use non-disclosure provisions to expand the protections it could achieve under South Carolina non-compete law, according to the holding of the Court. Employers need to ensure that their non-disclosure provision do not reach too far or they could be held to be unenforceable. 

A petition for rehearing has been filed, and is currently pending.