Palmetto Mortuary Transp., Inc. v. Knight Sys., Inc.

• Decision Date: 29 August 2018
• Docket Number: Appellate Case No. 2016-001531,Opinion No. 27833
• Citation: Palmetto Mortuary Transp., Inc. v. Knight Sys., Inc., 424 S.C. 444, 818 S.E.2d 724 (S.C. 2018)
• Court: South Carolina Supreme Court
• Parties: PALMETTO MORTUARY TRANSPORT, INC., Petitioner, v. KNIGHT SYSTEMS, INC. and Robert L. Knight, Respondents.

424 S.C. 444

818 S.E.2d 724

PALMETTO MORTUARY TRANSPORT, INC., Petitioner,

v.KNIGHT SYSTEMS, INC. and Robert L. Knight, Respondents.

Appellate Case No. 2016-001531

Opinion No. 27833

Supreme Court of South Carolina.

Heard March 28, 2018

Filed August 29, 2018

John Julius Pringle Jr. and Lyndey Ritz Zwingelberg, of Adams and Reese LLP, of Columbia, for Petitioner.

Reginald I. Lloyd, of Lloyd Law Firm, LLC, of Camden, and James Edward Bradley, of Moore Taylor Law Firm, P.A., of West Columbia, for Respondents.

JUSTICE JAMES :

Palmetto Mortuary Transport, Inc.(Palmetto) sued Knight Systems, Inc. and Robert Knight(collectively, Knight) for breach of an asset purchase agreement executed in connection with the sale of Knight's mortuary transport business to Palmetto.A special referee found Knight breached the agreement by violating both a non-compete covenant and an exclusive sales provision contained in the agreement.Knight appealed, and the court of appeals reversed and remanded, holding the 150-mile territorial restriction in the non-compete covenant was unreasonable and unenforceable.Palmetto Mortuary Transp., Inc. v. Knight Sys., Inc. , 416 S.C. 427, 786 S.E.2d 588(Ct. App.2016).We reverse the court of appeals and hold that under the facts of this case, the territorial restriction in the non-compete covenant was reasonable and enforceable.We also find Knight's additional sustaining grounds to be without merit and therefore reinstate the special referee's order.

FACTUAL AND PROCEDURAL HISTORY

Founded in the 1980s, Knight began its operations as a mortuary transport business; however, it eventually expanded to include the manufacturing and sale of body bags.In 2006, Knight decided to sell the mortuary transport portion of its business and approached a broker for assistance.In October 2006, Donald and Ellen Lintal(the CEO and CFO of Palmetto) met with a broker to discuss the purchase of Knight's mortuary transport business.From November 2006 to January 5, 2007, the parties and their agents—including brokers, accountants, and attorneys—negotiated the terms of an asset purchase agreement (the Agreement).During negotiations, Mr. Knight expressed to Mr. Lintal his desire to "get out of the business."

On January 5, 2007, Knight and Palmetto executed the Agreement.Pursuant to the Agreement, Knight sold various tangible assets, goodwill, and customer accounts—including body removal service contracts with Richland County, Lexington County, and the University of South Carolina—to Palmetto in exchange for $590,000.¹The Agreement included a provision (Exclusivity Provision) requiring Palmetto to purchase body bags from Knight for ten years and requiring Knight to sell body bags to Palmetto for ten years.The Exclusivity Provision became a central issue in the dispute between the parties.

A ten-year, 150-mile non-compete covenant was also executed and was included as an exhibit to the Agreement.Although the non-compete covenant restricted Knight from providing mortuary transport services within a 150-mile radius of Lexington County, it placed no restrictions on Knight's ability to continue its body bag manufacturing business.The non-compete covenant also provided that "a breach by [Palmetto] of [the Agreement] or such other documents ancillary thereto, shall constitute a breach of [the non-compete covenant] and shall release [Knight] from any and all restrictions hereunder."

Mr. Lintal testified the 150-mile territorial restriction extending from Lexington County was included to ensure Knight would not compete with Palmetto in South Carolina for ten years.Mr. Lintal acknowledged that at the time Palmetto purchased the transport business, Knight provided services primarily in Richland and Lexington County.Mr. Lintal testified that at the time the Agreement was executed, "We didn't know where the business was actually going to—what we were going to—if we were going to try to expand it at different locations.We wanted to keep our options open if it was doable."

In 2011, Palmetto still held the mortuary transport services contract with Richland County pursuant to the Agreement.Since the original five-year term between Palmetto and Richland County was expiring, Richland County issued a Request for Proposal (RFP) seeking mortuary transport service for the succeeding five years.Palmetto timely submitted its response to the RFP.

As noted above, the Exclusivity Provision required Palmetto to purchase body bags exclusively from Knight for ten years.From 2007 through 2011, Palmetto purchased over $45,000 worth of body bags from Knight.Palmetto had also purchased body bags from manufacturers other than Knight in the amount of $884.97.These purchases consisted of thirty-one infant bags ($192.75), four extra-large body bags ($213.72), six heavy duty body bags ($208.50), and six water-retrieval bags ($270.00).Knight became aware of the purchase of infant bags in 2009 or 2010 and immediately considered the purchase to be a breach of the Agreement, but did not confront Palmetto about the supposed breach for almost two years.Mr. Knight testified he did not become aware of the other purchases until discovery was exchanged after litigation began.

Palmetto believed the Exclusivity Provision did not require Palmetto to purchase either infant or extra-large bags from Knight.Palmetto agreed it had breached the Exclusivity Provision in purchasing heavy duty and water-retrieval bags from other manufacturers but argued this breach was not material.It argued the remedy for this breach was not cancellation of the Agreement, but rather money damages in the amount of $478.50, the sum it paid other manufacturers for heavy duty and water-retrieval bags.Knight argued the Exclusivity Provision required Palmetto to purchase all of its body bags from Knight and claimed the breach was material and nullified all terms and conditions of the Agreement, including the non-compete covenant.

On June 16, 2011, one day prior to the deadline for responses to the RFP, Mr. Knight recorded a conversation he had with Mr. Lintal.During the conversation, Mr. Knight accused Palmetto of purchasing infant body bags from other manufacturers.Mr. Lintal replied he did not believe his purchase of these body bags from other manufacturers was "significant," and he noted he did not believe "it was anything to break [the Agreement]."As noted above, Mr. Knight was aware of Palmetto's supposedly illicit purchase of infant body bags for almost two years before he confronted Mr. Lintal.

Following his conversation with Mr. Knight, Mr. Lintal suspected Knight was going to bid against Palmetto on the Richland County contract.Mr. Lintal's suspicion was correct—Mr. Knight submitted his own RFP the very next day.Even though Knight had received $590,000 for the sale of the business and an extra $45,000 in body bag purchases from Palmetto, Mr. Knight testified, "I didn't want to get back in the business.I was forced to. ...I felt like if I didn't take action at that time, I was going to be left out in the cold."After the RFP deadline passed, Mr. Knight contacted the Richland County Procurement Office and told a Richland County official that Knight should be awarded the contract because it was the sole provider of odor-proof body bags—a requisite of the RFP.²Although Palmetto's response to the RFP contained the lowest price for services and received the highest total points from the Richland County Procurement Office, Richland County awarded the contract to Knight the next month.

Palmetto sued Knight for breach of the Agreement, alleging Knight violated: (1) the non-compete covenant prohibiting Knight from providing mortuary transport services for ten years within the 150-mile territorial restriction and (2) the Exclusivity Provision, based upon Knight's refusal to supply Palmetto with body bags.Knight answered and counterclaimed, alleging the non-compete covenant was unenforceable because it contained an unreasonable territorial restraint, contained an unreasonable time restriction, and was not supported by adequate consideration.Knight also alleged any breach of the non-compete covenant was excused because Palmetto first materially breached the Exclusivity Provision by purchasing body bags from other manufacturers.

The case was tried before a special referee.The special referee found the non-compete covenant was reasonably limited in time and territorial scope and was supported by valuable consideration.The special referee found Knight breached the Agreement by violating the non-compete covenant and by refusing to sell body bags to Palmetto.The special referee determined Palmetto's purchase of heavy duty and water-retrieval body bags from other manufacturers, although a breach, did not constitute a material breach of the Agreement such that Knight was excused from performance of its contractual obligations.The special referee ordered Knight to pay (1) attorneys' fees and (2) damages of $373,264.54 in lost profits resulting from the wrongful competition with Palmetto.The special referee issued a permanent injunction requiring Knight to comply with the terms of the non-compete covenant for a term of five years and seven months following the date of his order, but allowing Knight to complete its performance of the 2011 mortuary transport contract with Richland County.Finally, the special referee awarded Knight $478.50 in damages for Palmetto's breach of the Agreement.

Knight appealed the special referee's order to the court of appeals, arguing the special referee erred in finding (1) the territorial restriction in the non-compete covenant was reasonable and enforceable, (2) the territorial restriction was supported by independent and valuable consideration, (3) the non-compete covenant was not void as against public policy, and (4) the non-compete covenant was not voided by Palmetto's breach of the Exclusivity Provision.Palmetto Mortuary Transp., Inc. v. Knight Sys., Inc. , ...