Carolina Chemical Equipment Co., Inc. v. Muckenfuss

• Decision Date: 10 January 1996
• Docket Number: No. 2502,2502
• Citation: 471 S.E.2d 721,322 S.C. 289
• Parties: , 39 U.S.P.Q.2d 1642 CAROLINA CHEMICAL EQUIPMENT COMPANY, INC., Respondent-Appellant, v. Daniel B. MUCKENFUSS and Energen of Carolina, Inc., Appellants-Respondents. . Heard
• Court: South Carolina Court of Appeals

Page 721

471 S.E.2d 721

322 S.C. 289, 39 U.S.P.Q.2d 1642

CAROLINA CHEMICAL EQUIPMENT COMPANY, INC., Respondent-Appellant, v. Daniel B. MUCKENFUSS and Energen of Carolina, Inc. Appellants-Respondents.

No. 2502.

Court of Appeals of South Carolina.

Heard Jan. 10, 1996.

Decided April 22, 1996.

Rehearing Denied June 20, 1996.

Certiorari Denied Jan. 23, 1997.

Richard B. Watson and Cherie W. Blackburn, both of Nelson, Mullins, Riley & Scarborough, Charleston, for appellants-respondents.

Stephen P. Groves, W. Jefferson Leath, Jr., and Edward D. Buckley, all of Young, Clement, Rivers & Tisdale, Charleston, for respondent-appellant.

CONNOR, Judge:

This action was one for intentional interference with contractual rights, misappropriation of trade secrets, and breach of contract. Muckenfuss appeals the denial of his motions for directed verdict and for judgment notwithstanding the verdict on the trade secrets cause of action. He and Energen both appeal the issuance of a five year injunction prohibiting them from selling certain products in Charleston County. Carolina Chemical Equipment Company, Inc. also appeals the issuance of the injunction, and the denial of its motions for a new trial nisi additur, new trial absolute, and judgment notwithstanding the verdict on the misappropriation of trade secrets cause of action. We reverse and remand.

FACTS

Energen and Carolina Chemical both sell industrial cleaning equipment and supplies. Muckenfuss was one of three shareholders of Carolina Chemical from 1982 until 1989. In August 1989, the other two shareholders voted Muckenfuss out. Muckenfuss sold his stock back to Carolina Chemical under the terms of a Stock Redemption Agreement. This agreement included a covenant not to compete and a covenant not to disclose trade secrets. In order to comply with the agreement, Muckenfuss refrained from selling cleaning equipment and supplies from August 1989 until March 1991, when he went to work for Energen.

Energen had been selling industrial cleaning supplies in competition with Carolina Chemical since Energen's inception in 1976. Carolina Chemical claims Muckenfuss disclosed trade secrets to Energen. In June 1991, Carolina Chemical obtained a preliminary injunction prohibiting Muckenfuss and Energen from divulging trade secrets or from selling products made from those secrets to anyone who was not a customer of Energen's prior to March 15, 1991.

This case has been tried by a jury twice. Both times the jury returned a verdict for Carolina Chemical but awarded no damages. ¹ After the second verdict, the judge instructed the jury to either find some amount of damages, or find in favor of Energen and Muckenfuss. They then awarded Carolina Chemical $37,500 for violation of trade secrets, and $37,500 for breach of contract. They found for Muckenfuss and Energen on interference with a contract. Thereafter, the trial judge enjoined Muckenfuss and Energen from selling four products in Charleston County for five years.

ANALYSIS

Muckenfuss first argues the trial judge erred in denying his motions for a directed verdict and for judgment notwithstanding the verdict on the breach of contract cause of action because in this instance the covenant not to disclose trade secrets is really a covenant not to compete.

When reviewing the denial of motions for directed verdict or judgment notwithstanding the verdict, we must consider the evidence in the light most favorable to the non-moving party. Brady Dev. Co. v. Town of Hilton Head Island, 312 S.C. 73, 439 S.E.2d 266 (1993). A directed verdict or judgment notwithstanding the verdict should not be granted unless only one reasonable inference can be drawn from the evidence. Id.

At early common law, any agreement in restraint of trade was void as against public policy. Standard Register Co. v. D.C. Kerrigan, 238 S.C. 54, 119 S.E.2d 533 (1961). The agreement at issue in Standard included the following covenant not to compete:

The sales representative further agrees, for a period of two years after leaving the employment of the Company, that he will not engage, directly or indirectly, in competition with said Company in selling to the accounts or in the territory in which he has been performing his duties as such sales representative.

Id. at 58-59, 119 S.E.2d at 536. Our Supreme Court upheld this restriction as reasonable, noting the evolution of the law:

"Such [noncompetition agreements] were regarded with high disfavor under the old common law. And they are so regarded, in general, by modern courts, though apparently with some amelioration of the ancient disfavor. Modern courts have usually, in passing on these contracts, employed three criteria: (1) Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest? (2) From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood? (3) Is the restraint reasonable from the standpoint of a sound public policy?"

Id. at 60, 119 S.E.2d at 536 (citations omitted). Noncompetition agreements, which must be supported by valuable consideration, will be critically examined and construed against the employer. Rental Uniform Service of Florence, Inc. v. Dudley, 278 S.C. 674, 301 S.E.2d 142 (1983); Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (1961).

The Stock Redemption Agreement underlying this litigation contains a paragraph titled "Covenant Not to Divulge Trade Secrets," which reads, in part:

[Muckenfuss] agrees to not divulge any trade secrets of the Corporation. Trade secrets means any knowledge or information concerning any process, product, or customer of the Corporation and more generally any knowledge or information concerning any aspect of the business of the Corporation which could, if divulged to a direct or indirect competitor, adversely affect the business of the Corporation, its prospects or competitive position. Seller shall not use for his own benefit any trade secret of the Corporation in any manner whatsoever.

Despite its designation as a "Covenant Not to Divulge Trade Secrets," this section would substantially restrict Muckenfuss's competitive employment activities. Because it basically has the effect of a covenant not to compete, we must subject it to the same scrutiny as a covenant not to compete. Using those criteria, the restraint is unlimited in time and territory, and is far greater than necessary to protect any legitimate business interest. See Cafe Assocs., Ltd. v. Gerngross, 305 S.C. 6, 406 S.E.2d 162 (1991) (enforcing five mile radius and five year time restraint on activities of former owner of restaurant); Sermons v. Caine & Estes Insur. Agency, Inc., 275 S.C. 506, 273 S.E.2d 338 (1980) (holding covenant restraining solicitation of existing customers "at any time" unenforceable as a matter of law); Eastern Business Forms, Inc. v. Kistler, 258 S.C. 429, 189 S.E.2d 22 (1972) (noncompetition agreements, while not favored, will be upheld if the territorial extent of the restraint and the period for which it will be imposed are reasonable); Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (1961) (statewide restraint on competition held unenforceable where employee's solicitations had been in only two counties during his employment). An employer has no legitimate commercial interest in prohibiting competition in itself. Almers v. South Carolina Nat'l Bank of Charleston, 265 S.C. 48, 217 S.E.2d 135 (1975).

Moreover, the restraint is harsh and oppressive in curtailing the legitimate efforts of Muckenfuss to earn a livelihood. Muckenfuss, a high school graduate, has worked in the industrial chemical business since he completed high school. As a matter of fact, he began assisting his father, Bernard Muckenfuss, one of the original owners of Carolina Chemical, on a part-time basis while still in high school. When an employee leaves a job, he is entitled to take the skills and general knowledge he has either acquired or increased during his employment with him:

[T]he right of an individual to follow and pursue the particular occupation for which he is best trained is a most fundamental right. Our society is extremely mobile and our free economy is based upon competition. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience. These skills are valuable to such employee in the market place for his services . Restraints cannot be lightly placed upon his right to compete in the area of his greatest worth.

ILG Industries v. Scott, 49 Ill.2d 88, 273 N.E.2d 393, 396 (1971). The clause at issue here, if enforced, would prevent Muckenfuss from using the general skills and knowledge he acquired at Carolina Chemical.

Finally, the restraint is not reasonable from the standpoint of sound public policy because of its effects on both the employee and the competitive business environment. Accordingly, the trial judge erred in denying Muckenfuss's motions for a directed verdict on the breach of contract claim. ²

Muckenfuss and Energen also argue the trial judge erred in denying their motions for directed verdict and for judgment notwithstanding the verdict because there was no evidence they used or disclosed any trade secret of Carolina Chemical under the common law definition of "trade secret." The threshold issue in any trade secrets case is not whether there was a confidential relationship or a breach of contract or some other kind of misappropriation, but whether there was a trade secret to be misappropriated. Lowndes Prods., Inc. v. Brower, 259 S.C. 322, 191 S.E.2d 761 (1972). Prior to the South Carolina General Assembly enacting the Uniform Trade Secrets Act in 1992, South Carolina courts had already approved the broad definition of trade...