Almers v. South Carolina Nat. Bank of Charleston., 20047

• Decision Date: 26 June 1975
• Docket Number: No. 20047,20047
• Parties: Herbert J. ALMERS, Jr., Appellant, v. The SOUTH CAROLINA NATIONAL BANK OF CHARLESTON, a corporation, et al., Respondents.
• Court: South Carolina Supreme Court

Page 135

217 S.E.2d 135

265 S.C. 48

Herbert J. ALMERS, Jr., Appellant, v. The SOUTH CAROLINA NATIONAL BANK OF CHARLESTON, a corporation, et al., Respondents.

No. 20047.

Supreme Court of South Carolina.

June 26, 1975.

Dobson & Dobson, Greenville, for appellant.

Rainey, Fant & McKay, Greenville, for respondents.

NESS, Justice:

This case involves the question of whether a noncompetition clause in a noncontributory pension plan, where such clause is unlimited in terms of time and geographical extent, constitutes an unreasonable restraint on trade, and is thus void and unenforceable as against public policy.

Almers was an employee of the South Carolina National Bank (hereinafter SCN) of Charleston, during a seventeen-year period from 1948 until 1965. In 1965, he left the respondent's employ and took a position with Southern Bank and Trust Company (hereinafter Southern), in Greenville, South Carolina. At SCN, appellant was a vicepresident, ranking fourth in chain of command. His duties with SCN could be categorized generally as administrative and internal; and substantially the same with Southern.

From 1950 to 1965 appellant had been covered under a SCN profit sharing program in which all contributions to the plan were made by the Bank and there was no individual contribution by participants. All forfeitures under any provision of the plan, including the competitive employment provision, accrue to the benefit of the remaining participants in the plan not to the Bank. The plaintiff had acquired an 85% Vested interest which at oral argument was estimated to be worth Twenty Thousand ($20,000.00) Dollars. However, subsequent to Almers' departure from the employ of SCN, and his assumption of his new position with Southern, his benefits under the aforementioned profit sharing plan were terminated by SCN pursuant to the following restrictive proviso contained in the plan:

'Notwithstanding anything in this Plan to the contrary, no benefit shall be paid hereunder subsequent to the date any Participant, former Participant or Retired Employee enters any employment in the State of South Carolina, if in the opinion of the Board such employment is in competition with or to the detriment of The South Carolina National Bank of Charleston.'

The master concluded that the clause was unreasonably broad and invalid. The county judge reversed. We agree with the master.

Appellant contends that this forfeiture provision is void because it is an unreasonable restraint of trade. While the forfeiture is not a direct restraint of trade in that the appellant is not precluded from engaging in his chosen profession, appellant argues that the consequences of forfeiture enkindle a restraining influence, albeit in a subtle fashion. We do not have any precedents dealing with forfeiture of retirement income ¹; however, the appellant asserts that the result of permitting unrestricted forfeiture clauses is similar to that of covenants not to compete, the classic example of a direct restraint.

Case precedent in our own State is ample to establish the proposition that agreements not to compete, while looked upon with disfavor, critically examined, and construed against any employer, will be upheld as enforceable if such agreement is reasonable as to territorial extent of the restraint and the period for which the said restraint is to be imposed. Eastern Business Forms, Inc. v. Kistler, 258 S.C. 429, 189 S.E.2d 22 (1972); Oxman v. Profitt, 241 S.C. 28, 126 S.E.2d 852 (1962); Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (1961); Standard Register Co. v. Kerrigan, 238 S.C. 54, 119 S.E.2d 533 (1961); South Carolina Finance Corp. of Anderson v. West Side Finance Co., 236 S.C. 109, 113 S.E.2d 329 (1960); 11 S.C.L.Q. 343, n. 4. However, all previous opinions by this Court have passed upon the validity of noncompetition clauses in the context of either the sale of a business or practice and its good will, or the promise not to enter into competitive employment ancillary to the execution of a contract of employment. In those cases, the remedy sought by an alleged aggrieved former employer was injunctive and/or damages; the prohibition on the employee was inability to engage in a particular profession. Here, the consequence is not the inability to engage in competitive employment, but the forfeiture of pecuniary benefits should SCN, as was the case in the instant action, determine that an employee with accrued benefits had come within the aforenoted forfeiture clause. Respondents contend that the distinction as to result in the two classes of cases is critical. In so arguing, they are not without considerable supporting authority.

The leading discussion of covenants not to compete is the well reasoned opinion of Chief Justice Moss in Standard Register Company v. Kerrigan, supra. ² In it Justice Moss observed that in order for a covenant not to compete to be enforceable, the covenant must be reasonable and consistent with the public interests. Inevitably the determination of reasonableness depends on the competing needs of the parties. The employer is entitled to protect himself from instant pirating of his old customers as well as the good will of his business. At the same time the prior clientele is not to be forever insulated from competition. Therefore, some time and geographic limitation must be incorporated into the covenant. Likewise, the public interest, an elusive concept, must not be offended. A determinative factor in this regard is the economic consequences suffered by the employee. The covenant is incompatible with the public interest if it is 'unduly harsh and oppressive' tending 'to deprive the employee the opportunity of supporting himself and his family.' Id. 119 S.E.2d p. 540; see also Blake, Employee Agreements Not to Compete, 73 Harvard Law Review, 625 (1960) and a multitude of cases collected in two encyclopedia annotations, 41 A.L.R.2d 15; 43 A.L.R.2d 94.

Since the question presented is a matter of novel impression, we turn to cases from other jurisdictions which have considered whether forfeiture provisions are void as against public policy unless they contain reasonable limitations.

One line of cases has accepted the analogy between covenants not to compete and forfeiture provisions. The first case in this camp affords a striking paralle to the instant appeal. In Van Hosen v. Bankers Trust Company, 200 N.W.2d 504 (Iowa 1972), the plaintiff's career with Bankers Trust spanned thirty-three (33) years, beginning as a messenger boy and ending as a vice-president. A company sponsored retirement plan included a forfeiture clause, without any time limitation, in the event of competitive employment. Van Hosen requested a waiver which was denied and his retirement benefits were terminated when he accepted employment with another bank. The court observed that 'employers, like employees, are participating in a constant struggle for survival.' Id. p. 508. Nevertheless, the court noted that pensions have a humanitarian design both to provide economic stability and financial independence in otherwise nonproductive years. Thus, 'the infinite forfeiture and termination of all pension rights instantly acquired by plaintiff through prior affiliation with defendant bank, merely by accepting employment with a competing institution, imposes an unjust and incivic penalty on plaintiff at the same time disproportionately benefiting these defendants.' Id. p. 509. Accordingly, the forfeiture provision was not enforceable.

Another leading case is Food Fair Stores, Inc. v. Greeley, 264 Md. 105, 285 A.2d 632 (1972). Greeley had been employed for sixteen (16) years with Food Fair Stores when he decided to accept employment with a competitor. A forfeiture provision without reasonable time and geographical restrictions was found to be invalid. The court recognized the distinction between direct and indirect restraints, but did not find the difference dispositive of the question. The court stated that it matters not whether the employer is armed with the legal sanction of an injunction or the subtle persuasion of a forfeiture clause.

Another case in which a reasonableness standard was considered a condition precedent to enforcement of a forfeiture provision is Lavey v. Edwards, 264 Or. 331, 505 P.2d 342 (1973). The court considered the restraint, while not total, sufficient to impede employees from seeking alternative employment. Often times a job with a competitor, the court observed, even if it involved a promotion and increase in salary, would be insufficient to compensate for the forfeited benefits. This restraint was deemed contrary to the public interest and therefore unenforceable.

Other cases reaching a similar result but which rely on specific statutory authorization are Muggill v. Reuben H. Donnelley Corporation, 62 Cal.2d 239, 42 Cal.Rptr. 107, 398 P.2d 147 (1965); Flammer v. Patton, 245 So.2d 854 (Fla.1971); see also 18 A.L.R.3d 1246 (1968). According to that annotation forfeiture provisions at the date of that article were so rare that no attempt to state general rules was warranted.

The respondent acknowledges the above cited line of cases; however, those cases are in the numerical minority and it is urged that the majority rule should be followed. Perhaps the leading case advancing the majority rule in Rochester Corporation v. Rochester, 450 F.2d 118 (th Cir. 1971). At oral argument appellant, after several inquiries, conceded that Rochester is indistinguishable from the matter currently before the court. Judge Russell, interpreting Virginia law, rejected the forfeiture covenant not to compete analogy. He stated:

'The authorities, though, generally draw a clear and obvious distinction between restraints on competitive employment in employment contracts and in pension plans. The strong weight of authority holds that forfeitures for engaging in subsequent competitive employment, included in pension retirement plans, are valid,...