Non-Compete Agreement Between Two Government Contractors Is Preliminarily Valid; Equal Bargaining Positions Between The Parties Was Important Consideration
In ScanSource, Inc. v. The Thurston Group, LLC, in Maryland Federal District Court, a basic non-compete clause survived the first attack in litigation—a motion to dismiss – in part because the two parties had equal bargaining positions.
The Thurston Group, LLC (“Thurston”) of Camp Springs, MD, tested the strength of a non-compete it had signed in an agreement with the South Carolina-based ScanSource, Inc. The clause stated that Thurston would not “solicit, contact, or call upon any customer or prospective customer” of ScanSource, “with a view to sell or provide any deliverable or service competitive with” ScanSource during the term of Thurston’s work for ScanSource, and for one year after. The contract specified that South Carolina law would be applied in case of litigation.
Thurston had contracted with ScanSource for work that ScanSource had obtained from Alliance Technology, LLC, under Alliance’s contract for phase 1 of a project for Verizon Communications, Inc., the “Aberdeen End-State Installation.” While still working on its contract with ScanSource, Thurston independently submitted a bid for phase 2 of Verizon’s Aberdeen project. Upon learning this, ScanSource sent Thurston a cease-and-desist letter. After receiving no response, ScanSource filed suit.
Thurston’s motion to dismiss asserted two reasons for dismissal: first, that its non-compete with ScanSource was unenforceable under South Carolina law, and second, that ScanSource’s suit failed to include the required minimal facts to allege that Verizon is one of ScanSource’s customers. The court found that ScanSource’s complaint adequately alleged that “Thurston learned that Verizon was a customer of ScanSource and had contact with Verizon during performance of the agreement.”
A non-compete clause must meet five requirements in order to be enforced by
South Carolina law:
The non-compete clause must be:
- Necessary for the protection of the legitimate interest of the employer;
- Reasonably limited in its operation with respect to time and place;
- Not unduly harsh and oppressive in curtailing the legitimate efforts of the employer to earn a livelihood;
- Reasonable from the standpoint of sound public policy; and
- Supported by valuable consideration.
As to the first requirement, the court rejected Thurston’s argument that the non-compete was unnecessarily broad. The case Thurston relied on did not apply to the facts at hand, since ScanSource’s non-compete was expressly limited to customers “with which [Thurston] had contact during the term of this Agreement as a result of being retained by [ScanSource].”
On the second requirement, the court pointed out that, “While as a general rule covenants not to compete must have an appropriate geographic limitation, prohibitions against contacting existing customers can be a valid substitute for a geographic limitation.” The court then stated that the last three requirements could not be determined at this premature stage in litigation, and that Thurston had failed to show that ScanSource’s non-compete was unenforceable without further discovery of the facts of the case.
Having passed this first step, the non-compete clause will likely undergo further review as the parties proceed. While covenants not to compete are “generally disfavored and will be construed strictly against the employer” by South Carolina law, the court noted the hopeful prospect that “there is less justification for skepticism where both parties to the non-compete clause are established business entities and there is no evidence of a bargaining imbalance between the two entities.”