The opinion of the court was delivered by: Oxner, Justice.
This action was brought by Roy Somerset for a declaratory judgment that a covenant against competition contained in an option agreement signed by him on June 1, 1957, is void and unenforceable. During the trial of the case the Court allowed plaintiff to amend his complaint by alleging that this option had been superseded by a bill of sale executed on June 7th. After hearing the testimony, the County Judge held the restrictive covenant unenforceable upon the grounds (1) that the provisions in the bill of sale of June 7th superseded those contained in the option agreement of June 1st, and since the restrictive covenant was not contained in the bill of sale, it was not in effect, and (2) that if the covenant continued in force, it was unreasonable as to both time and space and, therefore, void as against public policy.
The material facts disclosed by the testimony, which are largely undisputed are as follows:
Plaintiff is by trade a "spinner", referred to in the testimony as one of the occupations of the silversmith industry. Such training is of great value to a retailer selling silver. In 1946 plaintiff and his brother, who lived in New Jersey, formed a South Carolina corporation known as "The Sterling Shop". Each owned half of the stock but plaintiff was in active charge of the business. This corporation sold at retail silver, china, crystal, jewelry and related articles. It also did a limited amount of repair work. The store was located at Five Points in the City of Columbia. The business was successful. Annual sales ran around $90,000.00. Ninety-five per cent of the sales were in the area of Greater Columbia (Columbia, Cayce, West Columbia and Fort Jackson). Only about 5% of the business came from outside this area, the greater portion of which consisted of sales at a discount to four or five florist shops in the lower part of the State which handled merchandise for brides. All other sales outside the Columbia area were negligible.
In 1956, plaintiff bought a restaurant. In order to raise funds to pay losses sustained in this venture, which was wholly unrelated to the retail silver and jewelry business, he decided to sell The Sterling Shop and approached Alan Reyner, president of Reyner's, Inc. These discussions resulted in an option agreement executed by Reyner, Reyner's, Inc., plaintiff and The Sterling Shop, on June 1, 1957. Under the terms of this instrument, Alan Reyner, for $250.00, was given a thirty-day option to purchase "the business of Roy Somerset and/or The Sterling Shop" at Five Points, including good will, merchandise, fixtures and all other assets except accounts receivable, at inventory value plus 20%, but in no case to exceed $35,000.00. The contract fixed the method of determining the inventory value. Plaintiff further agreed to rent for one year the premises in which The Sterling Shop was located to Alan Reyner at a certain rental, with the right to renew for an additional period of five years. The option contained the following clause, which is the subject of this controversy:
"In further consideration of this sale, Roy Somerset and/or The Sterling Shop agrees that he or it will not engage in the business of retail selling of jewelry, silverware, or similar items in the State of South Carolina for a period of twenty (20) years. Roy Somerset understands and agrees that this may limit him in his selling activities, but he does not intend to engage in this form of business and is perfectly agreeable to this paragraph."
The option was promptly exercised. The value of the inventory, computed in accordance with the terms of the option, amounted to $25,000.00, to which was added $5,000.00 as the value of the fixtures and equipment, making a total of $30,000.00. The transaction was consummated on June 7, 1957. On that date The Sterling Shop, in consideration of $30,000.00, executed a bill of sale transferring all of its assets except accounts receivable to Reyner's, Inc. This bill of sale did not contain the restrictive covenant in controversy but did include a provision not contained in the option to the effect that Reyner's, Inc. could in its discretion use in the conduct of its business the name "The Sterling Shop". Contemporaneously with the delivery of this bill of sale, plaintiff, in accordance with the terms of the option, leased the premises in which the business was conducted to Reyner's, Inc.
All of the foregoing instruments were either prepared by Alan Reyner or his attorney. At no time was plaintiff or The Sterling Shop represented by counsel.
On June 11, 1957, the accounts receivable of The Sterling Shop were sold to Reyner's, Inc. for $7,500.00. A few days thereafter plaintiff was employed as manager of Reyner's, Inc. but was discharged about three months later. The record discloses that after acquiring this business, approximately 88% of the sales of Reyner's, Inc., which had one other store in Columbia, came from the Greater Columbia area.
It is well settled that a restrictive covenant not to compete, ancillary to the sale of a business and its good will, will be upheld and enforced if "(1) supported by a valuable consideration, (2) if reasonably limited as to time, and (3) if reasonably restricted as to the place of territory, that is, where the time is not more extended or the territory more enlarged than essential for a reasonable protection of the rights of the purchasing party." Metts v. Wenberg, 158 S.C. 411, 155 S.E. 734, 735. Also, see Carroll v. Giles, 30 S.C. 412, 9 S.E. 422; Walter A. Wood Mowing & Reaping Co. v. Greenwood Hardware Co., 75 S.C. 378, 55 S.E. 973; Reeves v. Sargeant, 200 S.C. 494, 21 S.E.2d 184; Delmar Studios of the Carolinas v. Kinsey, (S.C. ) 104 S.E.2d 338.
We shall first determine whether the covenant under consideration is necessary in its full extent for the protection of the covenantee's business or good will. If not, the territorial scope of the restraint is unreasonable and no inquiry need be made as to the presence or absence of other necessary requirements. See lengthy Annotation in 46 A.L.R.2d 119.
The business sold was a comparatively small retail store. The trade came almost entirely from the area of Greater Columbia. Sales to customers living elsewhere, with the exception of four or five florists, were described in the testimony as being very "spotty". Obviously, it was unnecessary to the protection of the business sold, or that later operated by Reyner, Inc., that plaintiff be prohibited from engaging in a similar business in Charleston, Spartanburg, Greenville or numerous other cities in South Carolina. So much seems to be conceded by Alan Reyner. He testified that when Somerset later complained that the agreement put him in "bondage" he told Somerset that "I certainly had no idea of holding him in bondage, that at any time he wanted to open up any business outside of this Columbia area, I'd be happy to let him do it."
We find no rational basis for the extent of the territorial restraint. In that respect the covenant is clearly invalid.
The further contention is made that plaintiff is estopped to attack the validity of the covenant upon the ground that it covers a greater territory than necessary. This defense is based upon the testimony of Reyner that in his discussion with plaintiff of the area to be included, plaintiff told him, "you can make it for the whole State", as he had no intention of going back in the business. No authority has been cited by counsel for Reyner, and we have found none, sustaining this plea of estoppel. The reason why such covenants are held to be unenforceable is that unless they meet certain criteria, they constitute a restraint upon trade which ...