Monthly Archives: May 2014

Covenants Not to Compete: How to Avoid Turning “Any Practice” into Malpractice

Lawyers are often called upon by their clients to draft covenants not to compete in employment settings.  We lawyers know that covenants against competition are highly disfavored under the law, yet there still exists the tension of wanting to provide the client with the maximum available protection.  The line between a valid and enforceable covenant and one that the courts will disregard in their entirety can be a very fine line.  Even more troublesome is the fact that the line is often difficult to recognize.  Restrictive covenants must be reasonable in time, geographical areas and scope. Our courts have routinely held that if any part of the covenant fails this strict interpretation, the courts will not rewrite or “blue pencil” the clause to make it legally enforceable. If one part fails, the entire covenant would fail. Courts in recent years sent clear signals that industry or occupation wide prohibitions were not acceptable and that the employer should protect customers and confidential information as an outermost post-employment restraint.

Notwithstanding what appeared to be a long string-cite of clear authority, South Carolina Supreme Court recently denied certiorari in Baugh v. The Columbia Heart Clinic, P.A. (April 2014), and in doing so made murky once again an issue of law that seemed rather clear.   Baugh involved a challenge by a cardiologist to a covenant not to compete which prevented him from engaging in “any practice of medicine” for a period of time after his separation from employment.  The South Carolina Court of Appeals upheld the enforceability of the clause.  Traditionally, physician employment agreements that included a post-employment covenant that prohibited the physician from practicing “any form of medicine” were considered overly broad and unenforceable. After all, if our cardiologist friend wanted to practice family medicine during the restricted period, how could his former practice group complain about unfair competition?  In Faces Boutique, Ltd, v. Gibbs (1995), even a hair stylist was released from a covenant not to compete which prohibited her from providing “cosmetology services” because it would have prevented her from engaging in non-hair stylist activities such as performing manicures or pedicures.

By not granting certiorari, the South Carolina Supreme Court let stand the Court of Appeals which upheld the clause, including the following findings:

  1. The forfeiture clause was subject to a reasonableness test applied to covenants not to compete.
  2. The covenant prohibiting former-employees from assisting another person to engage in the practice of cardiology practice was enforceable.
  3. The covenant not to compete in the employment agreement executed several years after former-employees joined the cardiology practice was supported by new consideration.
  4. The territorial restriction in the covenant not to compete was reasonable.
  5. The stipulated damages provision of the covenant not to compete was not an unenforceable penalty.
  6. The forfeiture provision in the employment agreement was not an unenforceable penalty.
  7. The former employees were not entitled to recover damages under the SC Wage Payment Act.

So now what are you going to do counselor?  Do you advise your client to go for the full Monty with a wall to wall “no practice of medicine” type restriction?  Do you risk being the author of malpractice when the court is confronted with its next “test case” and brings Baugh back into compliance with our prior and well-settled case law that would have popped the “no practice” clause?  For our money, “any practice” looks like malpractice because it is an invitation for a future court to strike down the very protection that your employer client asked you to provide in the first place.

Eric Bland and Ronnie Richter

Merging Your Way into Malpractice

It has been said that he who laughs last laughs the loudest.  It is perhaps equally true in the law that the document that speaks last, speaks the loudest.  This is most true in a contractual / transactional setting where the “deal” may be documented through a series of related transactional agreements.  Typical situations which involve a progression of documents related to the same transaction include employment related agreements, which may include an employment agreement and separate agreements such as covenants not to compete, and real estate transactions, which begin with a contract of sale and end in an instrument of conveyance.  An important consideration in all transactional settings these days is whether to include a mandatory arbitration provision which would require the submission of future disputes into arbitration, rather than submitting them to the risk and vagaries of trial court litigation.   Most sellers / employers would probably prefer the arbitration route over the litigation route and would look for their counsel to make sure they are adequately protected in this regard.

 

Here is where it can get sticky for the drafting attorney.  The doctrine of merger provides that all prior agreements, documents, understandings, etc. (whether oral or written) are merged or combined into the final agreement, such that only the language in the final agreement survives. In fact, most written contracts contain a Merger or Entireties Clause similar to the following:

 

Entire Agreement:  This Agreement represents the final agreements between the parties and all other agreements, understandings (whether oral or written) are superseded by this Agreement and such prior agreements are no longer valid and are void.

 

What happens, though, when the “final” agreement contains an arbitration clause, but the “final, final” agreement does not?   The recent South Carolina Supreme Court decision in Davis v. KB Home of South Carolina, Inc. is instructive on this important issue.   In Davis, the employee had filled out an application for employment which clearly provided that any future disputes related to the employment would be subject to mandatory arbitration.  A later executed employment agreement, however, failed to capture the same intent.   Our Supreme Court held that the arbitration clause in the application of employment was no longer enforceable because the later employment agreement did not contain an arbitration provision and was “merged” into the employment agreement by the Merger Clause or Entireties Clause.  Therefore, the employee could not be compelled to arbitrate his employment claims and was permitted instead to sue in court.

 

It is easy to speculate that the employer was less than pleased with this result.  Whether the result is the by-product of malpractice is an entirely separate issue.   The case should serve as fair warning to lawyers in transactional settings.  The merger doctrine is alive and well in South Carolina.  Drafting counsel should be careful to include language in all transactional documents to ensure that they read together and that they perform harmoniously.  This is true not simply for contract documents that are executed together, but also for amendments which seek to alter or modify earlier terms.  If the last document does in fact speak the loudest, you don’t want it to say that the lawyer inadvertently giving away valuable rights.

 

Eric Bland and Ronnie Richter

Unauthorized Practice of the Law?

If LegalZoom is not engaged in the unauthorized practice of law, then what does the unauthorized practice of law mean?

In March, 2014, the South Carolina Supreme Court ruled that LegalZoom does not engage in the unauthorized practice of law through its internet sale of legal documents which are produced when customers answer questions through an intuitive and interactive computer program.  If answering questions about how one is to dispose of their wealth upon death which results in a legally binding Last Will and Testament is not the practice of law, then what is?

Our statute which criminalizes the unauthorized practice makes the issue appear fairly straight forward:  “No person may either practice law or solicit the legal cause of another person or entity in this State unless he is enrolled as a member of the South Carolina Bar pursuant to applicable court rules, or otherwise authorized to perform prescribed legal activities by action of the Supreme Court of South Carolina. The type of conduct that is the subject of any charge filed pursuant to this section must have been defined as the unauthorized practice of law by the Supreme Court of South Carolina prior to any charge being filed. A person who violates this section is guilty of a felony and, upon conviction, must be fined not more than five thousand dollars or imprisoned not more than five years, or both.”  S.C. Code, Section 40-5-310.

As it relates to the preparation of a Last Will and Testament, our Court previously declared in Doe v. Condon, Opinion 25138 (June, 2000), that even the preparation of such an instrument by a paralegal working under the supervision of an attorney is still the unauthorized practice of law:

The activities of a paralegal do not constitute the practice of law as long as they are limited to work of a preparatory nature, such as legal research, investigation, or the composition of legal documents, which enable the licensed attorney-employer to carry a given matter to a conclusion through his own examination, approval or additional effort.  [Citation Omitted].

While the important support function of paralegals has increased through the years, the Easler guidelines stand the test of time. As envisioned in Easler, the paralegal plays a supporting role to the supervising attorney. Here, the roles are reversed. The attorney would support the paralegal. Petitioner would play the lead role, with no meaningful attorney supervision and the attorney’s presence and involvement only surfaces on the back end. Meaningful attorney supervision must be present throughout the process. The line between what is and what is not permissible conduct by a non-attorney is oftentimes “unclear” and is a potential trap for the unsuspecting client. [Citation Omitted].  The conduct of the paralegal contemplated here clearly crosses the line into the unauthorized practice of law. It is well settled that a paralegal may not give legal advice, consult, offer legal explanations, or make legal recommendations.

So apparently, the Doe paralegal may not interview a client and input the client’s desires into a Will template to be reviewed and approved by the attorney without committing the crime of engaging in the unauthorized practice of law; however, it now appears that she could arguably create a for profit internet-based business to accomplish the same end.  I’ll be the first to spot the Supreme Court that balancing the need to provide the general public with affordable access to legal services with the need to protect them from the unqualified and unscrupulous is a dicey undertaking at best.  Adding to the complexity of the matter is the rapid evolution of technology and the emergence of “legal alternatives.”  Even so, it’s going to take some time to discern what is permissible in the new internet legal environment.  In the end, until they invent a web-site that can walk into a courtroom, arbitration or mediation setting and dispense the skill, zeal and advocacy of a real lawyer, I suppose the profession will survive.  Ronnie Richter