March 13, 2017
FOCUS...on the South Carolina Chapter
 

By in-house counsel, for in-house counsel.®


Chapter News
President Jeff Winkler
President's Letter
Jeff Winkler, President

It is humbling to step into leadership as the President of the South Carolina Chapter of ACC. Since the November Annual Meeting, we, meaning all of us on the Board of Directors, have been busy with the early 2017 activities and we look forward to leading the way through the remaining months of the year.

ACC membership continues to grow with now over 200 members in South Carolina and over 42,000 members across the globe. Pondering these numbers leads to the realization that we are all part of something much larger than ourselves. It is this shared collective experience that attracts many to ACC and this sharing is most prominent at the local level. So, make a point to attend as many Chapter events as you are able to this year. 

Looking at the ACC National 5-Year Strategic Plan, the focus areas for 2017 include:

  • publication of collective reports on management issues and trends specific to our industry so that we can benchmark by industry; company; and law department size and geographic location;
  • new leadership programs to locate and train us as advocates to expand the influence and visibility of in-house counsel;
  • emphasis on developing opportunities to serve members’ needs in the areas of career mobility and professional development.

Here at the South Carolina Chapter, we plan to engage these 2017 focus areas and follow these initiatives.

I also will take this opportunity to thank our immediate Past President, Chris Greene, and the 2016 members of the Board for their diligence and service. It’s a new year with lots to accomplish. Let me introduce you to your 2017 Board:

Vice President:  Luke Umstetter

Secretary:  Van Anderson

Treasurer:  Nici Comer

Past President:  Chris Greene

Board of Directors:
Jason Bradley
Jim Gibson
Scott Hile
Bryony Hodges
John Marshall Mosser
Jeff Pascoe
Rebecca Roser
Ronda Tranter
Robert Wilson
John Works

At a recent meeting of the Board, plans were discussed to adapt our programming to better fit the geographic distribution of our membership which is split among the metropolitan areas around Charleston, Columbia and Greenville. Additionally, educational initiatives are in the works to train you to be a better legal professional and a sharper business professional. 

We are pleased to have the participation of 15 firm sponsors for 2017.  As a member, you will be benefiting from programs sponsored by:

Adams & Reese LLP
Bowman and Brooke, LLP
Gallivan White and Boyd, P.A.
Haynsworth Sinkler Boyd, P.A.
Jackson Lewis, P.C.
K&L Gates LLP
McNair Law Firm, P.A.
Moore and Van Allen PLLC
Nelson Mullins Riley & Scarborough, LLP
Nexsen Pruet, LLC
Ogletree Deakins Nash Smoak & Stewart PC
Parker Poe Adams & Bernstein LLP
Turner Padget Graham and Laney, P.A.
Willoughby & Hoefer, P.A.
Womble Carlyle Sandridge & Rice, LLP

Remember that personal invitations are powerful.  As the sponsors plan each of their activities and invite you, make a point to pass that invitation on to a colleague or other in-house counsel you know and encourage them to participate. The board wants to challenge each of you to consider yourself an ACC ambassador who will reach out to all prospective members in your network.

I am excited about our social, programming and educational plans for 2017 and thank you for the opportunity to serve as your President in 2017. Please do not hesitate to contact me. I look forward to hearing from you.

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Save the Dates for these Upcoming ACC South Carolina Chapter Events

Join us for these upcoming ACC South Carolina Chapter Events:

March 22 - Columbia - South Carolina Men's Baseball Game with Turner Padget
Carolina Stadium, Coke Pavilion
7:00 PM
431 Williams Street
Columbia, SC 29201

Join the attorneys of Turner Padget and fellow ACC SC members as the USC Gamecocks take on the Charleston Southern Buccaneers.

Spouses and children are welcome and encouraged to attend!

Food and soft drinks will be served.

Registration will close March 15th at 4:30 PM. Click here to register for this event. Password is accsc.


April 27 - Charleston, Columbia, Greenville - Womble Carlyle Sandridge and Rice CLE Program

Save the Date for this CLE program! More information will be added soon and can be found here.

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Featured Articles
Patrick Cleary, Richard Willis, Angela Strickland
Making it Stick: Drafting Enforceable Arbitration Clauses in South Carolina
Patrick J. Cleary, Richard H. Willis, Angela G. Strickland, Bowman and Brooke LLP

It's been one of those rare quiet afternoons at Acme Manufacturing Company. The shareholder meeting is weeks away, the litigation docket is quiet, no one is on strike and nothing has exploded. You are catching up on deleting emails when the General Counsel bursts into your office, having just returned from a ski-LE in Aspen. "Say, while I was skiing, I mean in a CLE, we had a presentation on using arbitration to insulate your company from run-away jury verdicts. I took a few minutes in the chalet to draft up a mandatory arbitration clause that we need to include in our warranties. It says from now on, no one can sue us for anything, we can't be liable to anyone for monetary damages, and if our products don't work, too bad, you have to arbitrate. Can we make this stick?"

You take a deep breath and try to read the scribbled language on the back of a cocktail napkin. You are generally familiar with the basic law regarding arbitration clauses, but haven't looked at the issue in a few years. 

What you do know is that arbitration clauses encourage cost-efficient dispute resolution. As part of a well-designed product warranty and remedy mandatory arbitration typically lowers costs, while providing for a workable dispute resolution remedy.  Arbitration can provide a decision well before a court or jury can hear a case, and in dispute resolution, time is money. 

But arbitration can provide these benefits only if the seller can enforce the arbitration clause.  Until last year, the prevailing rule in South Carolina was that (with some very limited exceptions) public policy favored arbitration and unless the arbitration clause itself was unconscionable, arbitration would be compelled. This view was consistent with the Federal Arbitration Act[1] and the United States Supreme Court's Prima Paint doctrine.[2]

In 2016, the South Carolina Supreme Court and the South Carolina Court of Appeals issued opinions in two separate cases that illustrate differing applications of the Prima Paint doctrine. In the D.R. Horton case, the Supreme Court affirmed the circuit court's decision not to compel arbitration provisions in a new home sales contract. [3] In the One Belle Hall case, the Court of Appeals reversed the circuit court's decision finding that the arbitration clause included in a warranty for roof shingles was unconscionable and unenforceable.[4] These split opinions create the potential for confusion over what was previously well-settled law, and permit trial courts to look beyond the arbitration clause and potentially use extrinsic evidence to refuse to enforce an arbitration clause.  

This article examines the enforceability of arbitration clauses in South Carolina, discusses the effects of the D.R. Horton and One Belle Hall cases, and provides practical guidance on how to write more enforceable arbitration clauses for South Carolina product sales. 

The Federal Arbitration Act and the Prima Paint Doctrine

In 1924, the Federal Arbitration Act ("FAA") became law[5], and generally covers all arbitration agreements affecting interstate commerce.[6] Unless explicitly contracted otherwise, the FAA applies in federal or state court to any arbitration agreement involving interstate commerce and preempts contrary state law.[7] In 1967, the United States Supreme Court decided the Prima Paint[8] case, holding that that to avoid mandatory arbitration, a party must limit its contractual defenses to the arbitration agreement itself, and not to the contract as a whole.[9]

South Carolina Cases Applying Prima Paint

In applying Prima Paint, South Carolina courts have traditionally conformed to the notion that to challenge the enforceability, "a party must allege that the arbitration agreement is unconscionable, not that the entire contract is unconscionable."[10] The South Carolina Supreme Court held in 1993 that "a party cannot avoid arbitration through rescission of the entire contract when there is no independent challenge to the arbitration clause."[11] Prior to 2016, with a few exceptions, trial courts in South Carolina were instructed to apply principles of contract law to determine if the intrinsic text of the arbitration clause was fair and provided for a neutral forum. That instruction was consistent with our state policy to "favor arbitration of disputes."[12] 

D.R. Horton and One Belle Hall

D.R. Horton, Inc.

The D.R. Horton case arose from allegedly faulty home construction of a home in Dorchester County. In 2005, the owners entered into a Home Purchase Agreement with D.R. Horton. This Agreement included a lengthy Warranty and Dispute Resolution clause (Paragraph 14, subparts (a) through (j)) which required the parties to arbitrate any claim arising out of the home construction or any dispute over the warranties in the Agreement.[13] Paragraph 14 of the Agreement also included disclaimers of implied warranties on the home and provided that D.R. Horton would not be liable for any type of monetary damages. After five years of alleged construction defects and unsuccessful repairs, the owners filed suit against D.R. Horton. 

D.R. Horton filed a motion to compel arbitration, which the trial court denied, finding the arbitration agreement was unconscionable. In its ruling, the court observed that the arbitration agreement included "a number of oppressive and one-sided provisions" including warranty disclaimers and a prohibition on monetary damages. 

On appeal, both the Court of Appeals and the Supreme Court affirmed the trial court's ruling.  In the majority 3-2 opinion, the Supreme Court, in ostensibly applying Prima Paint, held that because of the "interlocking nature" of the warranties and dispute resolution provisions,[14] the determination of whether the arbitration agreement was unconscionable required an examination of the entire Agreement, not simply the subparagraph including the arbitration clause. In determining whether the Agreement itself was unconscionable, the Court evaluated all of the subparagraphs in the Agreement, without explaining how this could be consistent with the Prima Paint doctrine (much to the dismay of the dissenters). In finding that the warranty disclaimers and exclusion of monetary damages were unconscionable, the majority affirmed the decisions of the lower courts not to compel arbitration, holding that that the homeowners had no meaningful choice and the paragraphs were "clearly one-sided and oppressive."[15]  This invalidated the arbitration clause.

One Belle Hall

The One Belle Hall lawsuit began following the completion of a condominium project near Charleston. The condominium property association alleged that the roof shingles used by the roofing subcontractor permitted moisture intrusion into the property units and caused moisture damage. The admittedly "take it or leave it" shingle warranty included a binding arbitration clause and a separate legal remedies section that included implied warranty disclaimers, limitations on monetary recovery, as well as a severability and savings clause. Following the discovery of alleged defective shingles, the manufacturer provided the developer a warranty kit, per the terms of the Warranty. When the developer failed to comply with the warranty requirements, the manufacturer inactivated the warranty. The property association then filed suit and the manufacturer then filed a motion to compel arbitration. The circuit court denied the motion, finding that the warranty was a contract of adhesion, and contained terms that were one-sided. The court found that the arbitration clause within the contract "was so intertwined with the terms of the warranty that it could not be severed", and was therefore unconscionable and unenforceable.    

On appeal, the Court of Appeals reversed the circuit court, compelling arbitration.  In its opinion, the Court, in applying Prima Paint, held that the arbitration clause in and of itself was not unconscionable, and could in fact be severed from the warranty disclaimers and attempted restrictions on monetary recovery.  While not explicitly stated in the opinion, the Court indicated that if the arbitration clause can stand alone as providing a fair and neutral forum for resolution of disputes, then a trial court should enforce the arbitration clause and leave the issues as to the conscionability of the remaining terms of the warranty to determination by the arbitrator.    

Enforceable Arbitration Clauses in South Carolina

While there is no explicit guarantee that a trial court will find that an arbitration clause is enforceable, following the 4 "C's" described below will help improve the odds.

  • Commit the Parties – The arbitration clause should clearly commit the buyer, and any third-party beneficiary or subsequent purchaser to binding arbitration to be conducted as described in the clause itself. 
  • Conspicuous – The clause should be conspicuous and set aside from the rest of the warranty.  Approaches to ensure a conspicuous clause include putting it on a different page, using different fonts or type sizes, or using other visual cues to set the clause apart. You may also wish to consider a separate signature/initial from the parties to the agreement. 
  • Complete – The clause should be a "standalone provision," and not require the purchaser (and by extension a court) to read other sections of the warranty to understand its effects.
  • Commercially Reasonable – The provisions of the arbitration clause should include a description of the process for arbitration and provide for a neutral decision-maker.  Examples of this can include requiring arbitration in accordance with the rules of the American Arbitration Association or another accepted arbitration process. 

In addition to the guidance provided above, the One Belle Hall and D.R. Horton cases strongly indicate that an effective arbitration clause might also include the following provisions.

  • Severability Clauses Providing a severability clause in the arbitration clause itself may help focus the court into looking at the arbitration clause on its own. The absence of a severability clause could be cited as lack of intent.[16] 
  • Savings Clauses – Providing language that  "this warranty gives you specific legal rights and you may have other rights which vary from state to state and province to province" in the warranty helps save the key provisions of the warranty from challenge. In addition, language that states that any provision of the warranty or arbitration provision that is in violation of applicable state law would be considered null and void also helps save the arbitration clause. 
  • Chance for Independent Review – In cases of the sale of an expensive product or a product where specific statutory remedies apply, offering the buyer a chance to have independent counsel review the arbitration agreement before purchase reduces the chance that the court could agree with an unconscionability argument based on unequal bargaining power.

While not required by any case law or statute in South Carolina, adding the following provisions to the product warranty may help persuade a court, if it goes beyond the four corners of the arbitration clause itself, to find the arbitration clause enforceable.

  • Additional Benefits in the Warranty – For example, the warranty might provide a longer repair and replace period than provided by statute.[17] 
  • Identifying the Warranty and Arbitration Clauses on External Packaging or on the Internet – This type of notice puts the buyer on notice of the existence arbitration clause before purchase. 
  • Requiring the Purchaser to Specifically Acknowledge the Arbitration Clause – One additional idea is to specifically require the purchaser to acknowledge the arbitration clause at the time of purchase. 

Finally, for those limited cases involving only intrastate South Carolina commerce (and therefore the FAA and Prima Paint doctrines were not involved), the arbitration clause is governed by state law and must comply with the provisions of the South Carolina Uniform Arbitration Act.[18]  Of note, the SCUAA imposes additional notice requirements on the validity of an arbitration agreement.

"Notice that a contract is subject to arbitration pursuant to this chapter shall be typed in underlined capital letters, or rubber-stamped prominently, on the first page of the contract and unless such notice is displayed thereon the contract shall not be subject to arbitration."[19] 

Conclusion

How you write an arbitration clause effects its enforceability.  While the D.R. Horton and One Belle Hall opinions indicate divergence in our appellate courts about whether a trial court can look beyond the arbitration clause itself to determine enforceability, following the recommendations and guidance in this article, particularly the 4 "C's" will improve the chances that your arbitration agreement will be enforceable. 

The key to getting trial courts to enforce arbitration clauses is to resist the urge to write yourself an advantage over the other party to the agreement.  Damages limitations and warranty exclusions, even though expressly permitted by the UCC, can be made to look like an effort to deprive a consumer of rights conferred by other South Carolina laws or statutes.[20]  This is not to say these limitations cannot be enforced.  They can.  But you must provide that the forum in which they are to be enforced is neutral and mutual.  To the extent that you try to restrict what an arbitrator can or cannot do, you increase the risk of your case winding up in front of a jury.

 


[1] 9 U.S.C. § 1 et seq.

[2]Prima Paint Corp. v. Flood & Conklin Manufacturing Co.  388 U.S. 395 (1967).

[3]Gregory Smith and Stephanie Smith v. D.R. Horton, Inc. et. al., 417 S.C. 42, 790 S.E.2d 1, (2016).  This opinion was filed on July 6, 2016, and a petition for rehearing was denied on September 5, 2016. 

[4]One Belle Hall Property Owners Assoc. Inc., v. TAMKO Building Products, Inc. et. al., 418 S.C. Ct. App. 51, 791 S.E.2d, 286 (Ct. App. 2016).  This opinion was initially filed June 1, 2016, then withdrawn, substituted and refiled on September 28, 2016.  Co-authors Richard Willis and Angela Strickland filed the brief on behalf of TAMKO and Richard Willis argued on behalf of TAMKO before the Court of Appeals. 

[5] 9 U.S.C. § 1 et seq.

[6] See e.g. Cape Romain Contractors, Inc. v. Wando E., LLC, 405 S.C. 115, 121–22, 747 S.E.2d 461, 464 (2013).

[7] Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 538, 542 S.E.2d 360, 363 (2001).

[8] Prima Paint Corp. v. Flood & Conklin Manufacturing Co.  388 U.S. 395 (1967).

[9] Id. at 406. 

[10] See S.C. Pub. Serv. Auth. v. Great W. Coal (Ky.), Inc., 312 S.C. 559, 562–63, 437 S.E.2d 22, 24 (1993). 

[11] Id.

[12] Zabinski v. Bright Acres Assocs., 346 S.C. 580, 596, 553 S.E.2d 110, 118 (2001).

[13] The appellate record in D.R. Horton indicates that the subparagraphs of paragraph 14 included cross-references to one another. 

[14] D.R. Horton, 417 S.C. at 48.

[15] D.R. Horton, 417 S.C. at 50-51.

[16]See e.g. D.R. Horton, 417 S.C. at 46.

[17] In One Belle Hall, TAMKO offered a twenty-five year warranty period for its shingles.  

[18] S.C. Code Ann. § 15-48-10, et. seq

[19] S.C. Code Ann. § 15-48-10(a) (emphasis added).

[20] See e.g. Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 24-25, 644 S.E.2d 663 (2007) (affirming the denial of a motion to compel arbitration arising out of the trade of an automobile because the arbitration clause lacked mutuality and sought to tip the scales in favor of the car dealer).

 

Patrick Cleary defends major automotive and all-terrain manufacturers against product liability cases in both state and federal court. His most recent focus has been on the developing technologies and regulations surrounding autonomous vehicles.

Richard Willis is a trial lawyer with more than 34 years of experience practicing in the areas of product liability defense, environmental litigation, toxic torts, class actions and commercial litigation.  He has tried over 30 cases to verdict, representing corporate clients in many different areas and venues.

Angela Strickland practices in the areas of product liability and personal injury defense, with a focus on the defense of automotive and other products, both consumer and industrial.

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Jordan Crapps and Amy Hill
Case Update: South Carolina Court of Appeals Issues New Opinion Offering Insight into Drafting and Interpreting Non-compete and Nondisclosure Agreements
Jordan Crapps and Amy Hill, Gallivan, White, and Boyd, P.A.

          According to a March, 2016, U.S. Department of the Treasury report, nearly 30 million workers are covered by a non-compete agreement.[i] These workers run the gamut from CEOs to sandwich makers.[ii] It is important for firms and individuals to understand the import of these clauses and to enter into agreements knowing what is expected and required of them if the employee were ever to leave. Further, when an employee does leave, the new (hiring) employer, the employee, and the former employer all have important factors to consider. The South Carolina Court of Appeals issued an opinion March 1, 2017, which offers employers some important drafting considerations.[iii] This decision outlines the significant interplay between non-compete agreements and nondisclosure agreements.

          Much like a prenuptial agreement, employees and some employers find it uncomfortable discussing and negotiating non-competes on the front end. Some view it as an acknowledgement that the “marriage” will not work out. Some employers include this in a “take-it-or-leave-it” contract and eliminate any negotiation at all. Further, how does an employer protect important and sometimes vital confidential information and trade secrets without preventing an employee from ever earning a living? All of these considerations can lead to costly and complex litigation on the back-end. It is more important that parties to an employment agreement or an acquisition agreement seek advice of counsel to draft or review non-competes, and, later, to avoid running afoul of properly drafted non-competes either as the employee or the new employer.

          Non-compete agreements are contractual agreements which state that an individual, under certain circumstances, will not operate in the same industry within geographical area and within a certain time period after their employment ends. A nondisclosure agreement is often times a provision of a broader non-compete agreement. They attempt to prevent the dissemination of certain confidential information or trade secrets by a current or former employee. Both of these agreements typically arise in employment agreements or as a result of the sale of a business.

Despite their similarities, non-compete agreements and nondisclosure agreements may be reviewed and analyzed differently by the courts. In reviewing a non-compete agreement, courts could consider such things as:

  1. The type and size of the business involved;
  2. The geographic limitations imposed by the non-compete agreement;
  3. The time frame of the non-compete agreement;
  4. The employee’s position within the company;
  5. The ability of the employee to earn a livelihood; and
  6. Public policy.[iv]

Because covenants not to compete are agreements in partial restraint of trade, they may be critically examined and construed against the employer.[v] The extent of this review and the enforceability of the particular portions of a non-compete agreement varies from state to state.

          Further, in reviewing non-compete agreements, courts take various views on the ability of the court to revise a non-compete in light of an unreasonable provision. For example, if the court finds that a geographical restriction in a non-compete is unreasonable, courts disagree on whether they can strike the unreasonable restriction and provide a more reasonable one or otherwise save the non-compete agreement. Because these agreements can be construed against the employer and courts may not bail you out, firms need to pay particular attention to drafting these clauses with care and precision.

          By contrast, South Carolina statutory law dictates that “[a] contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.”[vi] Therefore, nondisclosure agreements, unlike a non-compete agreement, need not state or be constrained by reasonable geographic or time limitations. Further, because nondisclosure agreements do not restrain trade or employment opportunities but rather disclosure of information, “there is no ancient disfavor and thus they are not to be strictly construed in favor of the employee.”[vii] In reviewing nondisclosure agreements, courts seek to determine if the provision is “no greater than necessary to protect the employer’s legitimate interests, and it is not unduly harsh in that it curtails the employee’s ability to earn a living.[viii]

          It is this contrast of analysis that the South Carolina Court of Appeals was forced to deal with in the Fay decision issued March 1, 2017. The Court analyzed an employment agreement that contained both a non-compete agreement and a nondisclosure agreement.[ix] The non-disclosure provision prohibited the dissemination and use of “Confidential Information” at any time during the course of his employment and at all times thereafter.[x] Therefore, the non-disclosure agreement did not contain a time period restriction. The agreement defined Confidential Information very broadly. The Agreement went on to state that employment with a competing business would necessarily and inevitably result in [the employee] … using [the company’s] confidential information to unfairly compete with [the company].” The Agreement defined Competing Businesses as any person engaged in the motor transport and related service. Therefore the various provisions of the agreement, in summation, provided:

  1. Nearly any information received during the employment was confidential;
  2. Any employment with a competing business, defined broadly, anywhere in the United States would require the use of the confidential information;
  3. And use of confidential information was prohibited forever.

Seemingly, the employer in this case was contractually imposing what is known as the “inevitable disclosure doctrine.”[xi] Basically, the employer was saying that any employment within the same industry would result in the former employee disclosing confidential information.

          The Court interpreted the combination of these provisions to constitute a non-compete agreement as opposed to a non-disclosure agreement, as it was titled. The Court found that the employee “could never hold a position similar to his position at TQL with any competitor of TQL without violating this agreement.”[xii] As a non-compete agreement, it is subject to the rules surrounding non-competes as opposed to those surrounding non-disclosure agreements. The Court refused to apply a time restriction found elsewhere in the agreement or insert a reasonable time restriction to the nondisclosure agreement because “it would add a term to the Agreement to which the parties nether negotiated or agreed.[xiii] Therefore, the Court found that the non-disclosure agreement was in effect a non-compete provision without a reasonable time restriction and thus void.

          The idea of finding that a nondisclosure agreement may operate as non-compete agreement is not new.[xiv] South Carolina courts have referenced the idea since at least 1975.[xv] Recently, in 2012, the South Carolina Supreme Court analyzed a different non-disclosure agreement and found that, over the argument of the employee, it did not operate as a non-compete agreement and should not be analyzed under the higher applicable standard.[xvi] A comparison between the two may help sharpen what is often a fuzzy line between permissible and non-permissible restrictions.

In the Milliken case, the Court found that the following confidentiality/non-disclosure agreement did not operate as non-compete agreement:

CONFIDENTIAL INFORMATION means all
competitively sensitive information of importance to
and kept in confidence by Milliken, which becomes
known to me through my employment with Milliken
and which does not fall within the definition of Trade
Secret above. Such Confidential Information may
be valuable to Milliken because of what it costs to
obtain, because of the advantages Milliken enjoys
from its exclusive use, or because its dissemination
may harm Milliken's competitive position.
. . . .
B. EXCEPT as required in my duties to Milliken, I
will never, either during my employment by Milliken
or thereafter, use or disclose, modify or adapt any
. . . Confidential Information as defined in paragraph
3 hereinabove until three (3) years after the
termination of my employment except as authorized
in the performance of my duties for Milliken.[xvii]

The employee in Milliken was a physicist operating in Milliken’s Spartanburg plant. According to the Court, the confidential information Milliken was attempting to protect was narrow in scope in that the information must be:

  1. competitively sensitive information
  2. of importance to and
  3. kept in confidence by Milliken,
  4. which becomes known to the employee through his employment with Milliken, and
  5. which is not a trade secret.[xviii]

The Court found that this did not cover the employee’s general skill and knowledge and that Milliken had an important interest in protecting this type of information.[xix] Further, the agreement was “designed to strike an appropriate balance between protecting an employer’s valuable interest in its proprietary information and permitting an employee to find gainful employment in his chosen field.”[xx] Therefore, the Court did not apply the standard of review applicable to non-compete clauses and found it reasonable under the standard applicable to nondisclosure agreements. A comparison of the two nondisclosure agreements in Milliken and Fay can offer some important drafting assistance.

          Another interesting point in the Fay decision involves choice of law provisions. In Fay, the choice of law provision applied Ohio law to the agreement. Ohio does allow court drafted blue-pencil revisions to non-compete agreements. However, South Carolina law requires non-compete agreements, even those interpreted under other states’ laws, to be “reasonable from the standpoint of sound public policy,” and “the very act of adding a term not negotiated and agreed upon by the parties violates public policy.” Therefore, the Court found that it need not apply Ohio “blue-pencil” law because such law itself violates South Carolina public policy. It was on this issue that the majority and the concurrence opinion split. The concurrence opinion found that the court should apply Ohio “blue-pencil” law but that the resulting contract would still fail. Multi-jurisdictional companies have yet another thing to consider when drafting agreements and choosing choice of law provisions. What impact that has on the review and analysis of the contract may yet be determined.

          While the line of permissibility still may not be clear, it is clear that courts will review nondisclosure agreements for a sense of reasonableness. Employers must consider this in drafting these agreements and attempt to target important interests it wants to protect and leave room for employees to find gainful employment. Going too far in a nondisclosure agreement may result in a court finding that agreement is void. It is important to note that the Fay decision discussed above is subject to further appeal to the South Carolina Supreme Court. If review is granted, it will be a case worthy of following.

          Non-compete and nondisclosure agreements are complicated subject matter and are often a difficult topic to discuss in the euphoria surrounding a new employment agreement or acquisition agreement. However, it is important for all parties to enter into these agreements with a proper understanding of what they prohibit and what they do not prohibit. In any industry, having a well-crafted non-compete agreement provides the comfort to allow business to invest in individuals or businesses and protects individuals from signing their economic freedom away.

 


[i] U.S. Dep’t of the Treasury, Non-compete Contracts: Economic Effects and Policy Implications, available at https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf

[ii] Clare O’Connor, Does Jimmy John’s Non-Compete Clause for Sandwich Makers Have Legs?, Forbes (October 15, 2014), http://www.forbes.com/sites/clareoconnor/2014/10/15/does-jimmy-johns-non-compete-clause-for-sandwich-makers-have-legal-legs/#56dd36a02740

[iii] Fay v. Total Quality Logistics, LLC, No. 5471 (S.C. Ct. App. filed March 1, 2017).

[iv] For an example of a South Carolina court’s recitation, see, Faces Boutique v. Gibbs, 318 S.C. 39, 42, 455 S.E.2d 707, 708 (Ct. App. 1995).

[v] Poole v. Incentives Unlimited, Inc., 345 S.C. 378, 381, 548 S.E.2d 207, 208-09 (2001).

[vi] S.C. Code Ann. § 39-8-30(D).

[vii] Milliken & Co. v. Morin, 399 S.C. 23, 32 (2012).

[viii] Id. at 33.

[ix] Fay, Opinion 5471.

[x] Id.

[xi] For a general analysis of the doctrine, see, Keith Roberson, South Carolina’s Inevitable Adoption of the Inevitable Disclosure Doctrine: Balancing Protection of Trade Secrets with Freedom of Employment, 52 S.C. L.Rev. 895 (Summer, 2001).

[xii] Fay, Opinion 5471

[xiii] Id.

[xiv] Milliken, 399 S.C. at 33 (Footnote 4).

[xv] Id.

[xvi] Miliken, supra.

[xvii] Id. at 27-8.

[xviii] Id. at 38.

[xix] Id.

[xx] Id. at 38-9.

 

Jordan Crapps handles complex litigation matters out of the firm’s Columbia, South Carolina office. His practice focuses on banking, finance, contract disputes, business torts, and securities litigation.

Amy Hill is a litigation attorney practicing out of the firm’s Columbia, South Carolina office.  With a degree in accounting, her legal practice places an emphasis on business and commercial litigation with a particular focus on probate litigation as well as lender liability and FINRA litigation.  Amy also represents attorneys in malpractice claims and disciplinary matters.

Gallivan, White, & Boyd, P.A. is one of the Southeast’s leading law firms for business and litigation. Founded more than sixty years ago in Greenville, South Carolina, the firm’s attorneys serve clients from four offices: Charleston, Columbia, and Greenville, South Carolina and Charlotte, North Carolina. The firm frequently represents corporations, businesses, and individual clients in complex business and commercial disputes, insurance matters, arbitration, and litigation.  For more information, please visit www.gwblawfirm.com.

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David Eddy, Marguerite Willis, Dennis Lynch, Travis Wheeler
Should Major Customers Opt-out of or Exclude Themselves from Antitrust Class Actions?
David Eddy, Marguerite Willis, Dennis Lynch, Travis Wheeler, Nexsen Pruet, LLC

          Corporate legal departments are increasingly asked to be more than just a necessary cost of doing business, but also to act, when and where appropriate, as a monetary recovery center that contributes to the company’s bottom line. In our antitrust litigation practice, we increasingly hear from in-house counsel that they (and thus we) are to be on the alert for anticompetitive conduct in violation of the federal or state antitrust laws that may have injured the company.  In the event such a potential claim hits their radar, in-house counsel must assess the merits of the company’s claim, the potential damages suffered, and, if merited, determine the best path forward for the company to obtain a recovery. 

          In the context of antitrust law violations (especially where a company does not have dedicated antitrust counsel), a legal department may not learn of the company’s potential claim until after class notices of a litigation or settlement class begin trickling in from the company’s various divisions and operating facilities.  The notices will provide hard deadlines for the company either (1) to remain a passive member of the class (generally requiring no action) or (2) to take steps to exclude the company from or “opt out” of the class (timely written notice to a class action administrator) to pursue an independent path for the recovery on its claim. 

          The consequences of this decision, for the reasons discussed below, can be significant.  If the company elects to remain in a litigation class, it will be bound by any judgment for or against the class. If it elects to remain in a settlement class, it will be bound by the terms of the class settlement and, in particular, the broad release of claims given to the defendants.  We set forth below: (a) a brief overview of the antitrust laws, (b) how antitrust class actions arise, and (c) the factors to be considered in deciding whether or not a corporation should remain in or exclude itself from a class action.

  1. Brief Summary of the Federal Antitrust Laws

          Under the federal antitrust laws (the Sherman Act, 15 U.S.C. §§ 1-7, and the Clayton Act, 15 U.S.C. §§ 12-27), companies and individuals that engage in collusive anticompetitive conduct, such as price-fixing, bid-rigging, and/or allocation of markets/customers (which are all deemed to be per se illegal), face the potential for felony convictions and substantial criminal penalties. Criminal fines can run into the hundreds of millions of dollars[1] and executives face imprisonment of up to ten years.

          In addition to this extensive criminal exposure, companies that violate the antitrust laws may face very significant civil damages as well.  As the U.S. Supreme Court noted, Congress designed the antitrust laws to incentivize civil plaintiffs to serve as “private attorneys general.”[2] For example: (1) a defendant can be held jointly and severally liable for all the damages caused to a plaintiff by the entire conspiracy and all of its members; (2) if a plaintiff obtains a judgment its damages are automatically trebled, so that it will recover three times the damages the jury awarded; (3) the plaintiff is entitled to recover its reasonable attorneys’ fees and certain costs; and (4) prejudgment interest is also recoverable in some instances.

  1. How Antitrust Class Actions Generally Arise

          The DOJ’s Antitrust Division (the “DOJ”), through grand juries and leniency applications, investigates potential anticompetitive conduct by companies to, among other things, fix prices, rig bids, and/or allocate customers or markets in violation of the Sherman Act.  There generally are more than 60 sitting grand juries investigating antitrust violations at any one time.  In addition, the DOJ views it Leniency Program as its most important investigative tool for detecting cartel activity.  This Program provides powerful incentives for companies to self-report their illegal anticompetitive conduct, because generally the first company to inform the DOJ of the conspiracy will escape criminal prosecution and fines and its executives will not face prosecution.

          When a DOJ investigation comes to light, class action complaints (often by the dozens) inevitably soon follow.[3]  Class action cases may also arise even absent governmental action.  The Federal Rules of Civil Procedure provide that members of a certified class must be notified of the class action and given the opportunity to remain in the class (either a settlement class or litigation class) or to exclude themselves from the class (called “opting out”) to potentially pursue recovery of their damages separate and apart from the class.  Major purchasers of affected services or products often learn they have been victims of conspiracies only long after such class actions have been filed.  If no class is certified, however, affected "class members" may never receive any formal notice.

          Because the Clayton Act’s four-year statute of limitations is suspended or “tolled” by virtue of the filing of a class action (also if there is a pending criminal proceeding), there is generally no immediate urgency for a company to file an individual opt-out action.  Nevertheless, a company that learns it may have a claim should promptly collect its information sufficient to assess the scope of its claim.  This will allow it to decide whether it wants to remain a passive class member (and provide the information necessary for it to submit a class settlement claim form) or pursue its claim outside of the class.

  1. Factors affecting the Decision to Participate in or to Opt Out of Proposed Class Actions 

         When a large customer (defined by the size of its purchases of the affected product or service relative to the overall market) must decide whether to stay in the class action or pursue an independent path, there are a number of factors it should consider.

  1. The “Pros” of Staying in a Class Action

         The principal benefit of remaining as a passive member in a class action will be that the company generally needs to do nothing in the case and it will pay no out-of-pocket fees or costs.  The company will not need to select counsel, respond to discovery (generally), or otherwise participate in the litigation, except to its collect data/information for purposes of filing its claim in the event the class recovers money by way of settlement or judgment.  The flip side of being a passive class member is that the company is represented by class counsel that it did not select, does not know, and with whom it will likely never communicate during the case. 

         Another perceived benefit of remaining in a class is that customers stay “below the radar” and do not “antagonize” their supplier(s).  We have found in our practice, however, that suppliers who have violated the antitrust laws are themselves very concerned about how their customers will react once the conspiracy is public.  In most cartel cases in the United States, the companies involved will replace their former management (in whole or in part) and take affirmative steps to remedy their past misconduct.   Likewise, as major customers increasingly are filing individual actions in large cartel cases, they provide a certain “safety in numbers.”

  1. The “Pros” of Opting Out of a Class

        While a company that seeks to pursue an independent action will have to retain counsel and face discovery in its case (in the event the claim is not settled prior to suit), there is little discovery that legitimately can be demanded from victims of a conspiracy (usually just their transaction documents and data) as the evidence of the conspiracy lies in the hands of the defendants. Because some law firms will take such cases on a contingent fee basis, the company can also avoid out-of-pocket fees and costs.

The benefits of retaining independent counsel are, among others, that such counsel will:

  1. Work with economic consultants from the outset to develop a liability and overcharge economic analysis specific to the company;
  2. Analyze the claims and damages specific to the company;
  3. Work to maximize the amount, form, and timing of the company’s net recovery. Our experience has been that opt-outs may recover significantly more money (and often sooner) than absent members of a class.  Unlike individual settlements, class settlements must be approved by the Court, often are delayed by objections filed by class members, and can take years before the funds are distributed to class members;   
  4. Maximize the company’s control over the timing and substance of the prosecution and settlement of its claims;
  5. Provide flexibility in settlement negotiations with defendants to address potential business deal terms if desired (e.g., rebates, credits, etc.) along with or in lieu of cash payments;
  6. Focus exclusively on representing the company’s specific claims and best interests as opposed to the interests of the class as a whole;  
  7. Act to monitor all aspects of the case of particular relevance and importance to the company;
  8. Identify and pursue claims against all appropriate defendants, including in many instances, targets that have not been sued by the class; and,
  9. Demonstrate to the company’s vendors that it monitors their conduct and is proactive in seeking remediation for wrongdoing.

          One final—and significant—incentive for large customers to hire independent counsel is to ensure that their claims are preserved and advanced in a timely manner.  A class action can be a valuable procedural device that allows the claims of hundreds or thousands of small claimants to be handled by common counsel in one massive case.  Class actions make sense for companies that have small claims that do not merit individual attention.  In recent years, however, the U.S. Supreme Court and several appellate courts have imposed increasingly tough standards on the certification of class actions in antitrust cases and have found that many proposed classes fail to meet those standards.[4]  This is important for companies to consider because if a class is not certified, affected companies may discover several years down the road that no one is representing their interests or pursuing their claims.

          A large potential antitrust claimant may, therefore, be best served by moving quickly to retain independent antitrust counsel to evaluate the company’s claim and pursue (if merited) an opt-out strategy.

 


[1] The DOJ’s Antitrust Division obtained more than $7 billion in fines between 2012-2016.

[2] Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 262 (1972).

[3] The Federal Trade Commission also initiates investigations/proceedings into unfair methods of competition that occasionally give rise to civil class actions.

[4] For example, in reversing class certification in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), the U.S. Supreme Court emphasized that trial courts must undertake a “rigorous analysis” of whether a putative class should be certified, emphasizing, among other things, that differences in the nature and type of damages suffered by putative class members may bar class certification.  Indeed, as exemplified in In re Rail Freight Fuel Surcharge Antitrust Litigation, case filed in 2007 in MDL No. 1869 in the District of Columbia, questions over common impact/damages and “uninjured” class members can significantly prolong the issue of class certification:  initially granted in 2012, class certification was reversed in 2013 in light of Comcast, was reheard again in the Fall of 2016, and has yet to be decided.

 

David Eddy, Marguerite Willis, Dennis Lynch, and Travis Wheeler are principal members of the Antitrust Team at Nexsen Pruet, LLC and are located in its Columbia, SC office.  

Nexsen Pruet provides a full service antitrust practice that includes defense litigation, transaction counseling, compliance seminars, and pursuing antitrust recoveries for clients of all sizes located in the U.S. and elsewhere.

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