Non-Competition Agreements: Protecting Human Capital and Avoiding Liability By Anthony M. Hohn

The contents of this presentation are not intended as legal advice. Please consult an attorney for advice regarding your individual circumstances. ©2014 Davenport, Evans, Hurwitz & Smith, LLP

What Are We Talking About? • Agreements, or parts of agreements, that restrict certain aspects of a person’s ability to work or conduct business. • May include non-competition and nonsolicitation elements. • Often called “restrictive covenants.”

Why Use Them? • Protect key employees/human capital • Protect sensitive business information • Retain employees who have valuable relationships with customers • Time/expense in training and development

Are They Enforceable in South Dakota? SURPRISE! Depending on the scope of the agreement, noncompete agreements are enforceable in South Dakota. BUT… There are limits to enforceability.

Cautionary Note

The law on restrictive covenants differs from state to state!

What Does the Law Say? • Contracts that restrain trade are void unless they fit within a statutory exception. • Exceptions: – Sale of a business – Business Partners – Captive Insurance Agents – Employees

Employees

Agreements with Employees (SDCL 53-9-11) “An employee may agree with an employer at the time of employment or at any time during his employment not to engage directly or indirectly in the same business or profession as that of his employer for any period not exceeding two years from the date of termination of the agreement and not to solicit existing customers of the employer within a specified county, first or second class municipality, or other specified area for any period not exceeding two years from the date of termination of the agreement, if the employer continues to carry on a like business therein.”

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Employer/Employee relationship Agreement entered into during employment Agree not to compete or solicit 2 year maximum Specified geographic location

Parties to the Agreement

Parties • Restrictive covenant must be between employer and employee • Not independent contractor (unless captive insurance agent) • Applies to affiliates of the employer

Execution of Agreement

Execution • Any time during employment • Probably not After termination

Execution Independent consideration (such as more pay, benefits, etc.) is not necessary

Execution Protecting against forgery or destruction: – Have it notarized, or at least witnessed – Have each page initialed – Store original in safe place (offsite?)

What can the Agreement Restrict?

Restricted Conduct Can Include: • Direct AND indirect competition • Competitive employment, consulting, and ownership • Must relate to the same business of the employer

Restricted Conduct • Not all seemingly competitive activity is prohibited. • Courts look at the “quality” of the competitive activity: – Isolated? – Insubstantial? – Non-detrimental?

Duration of Restricted Conduct

In South Dakota: 2 Years

Geographic Limitations

Geographic Limitations • Statute does not define “other specified area.” • Courts: means an area that is “defined” and “known” to the employee. • Referencing counties, cities, states, or other specific descriptions is sufficient. • Describing sales territories may work. • Nationwide restrictions have been upheld

Termination

Termination • Nature of termination is important because: – Resignation or termination for good cause = restrictive covenant is enforceable without showing reasonableness. – Terminated without good cause = employer must prove enforcement is reasonably necessary to protect “legitimate business interest.”

Enforcement

Preliminary Injunction • Quickest way to seek and obtain court intervention • Employer must prove threat of irreparable harm and a likelihood of succeeding on the merits at trial • Court considers public policy and hardship on person to be restrained • Most cases won or lost at this point

Preliminary Injunction • Partial Enforcement: – If agreement is too broad, the court will “blue pencil” the agreement to restrict it to what is enforceable under the law – Recommendation: include “savings clause” in agreement

Preliminary Injunction • Equitable Considerations: – Defending parties will assert prejudice, delay, inconsistent enforcement, and “unclean hands.” – Recommendation: Enforce non-competes universally for all employees.

Remedies If injunction is successful, employee will not be able to violate agreement (i.e., work for competitor, solicit your customers, etc.)

Remedies: Attorneys’ Fees?

Remedies: Attorneys’ Fees • Employer may be able to recover attorneys’ fees and costs depending on language of agreement. • Recommendation: Cover it in your agreement!

Other Considerations Choice of Law/Forum Selection – Law varies from state to state, so be careful – Company should have some connection to state selected (incorporation, headquarters, business operations)

Other Considerations No-Hire/Anti-Recruiting Agreements Courts generally will not enforce agreements between companies not to hire each other’s employees.

Dangers

Risk of Using Non-Compete Agreements • Morale • Litigation • Time/Expense

Risks in Hiring Tortious Interference – Company may be sued if it hires a competitor’s former employee that has a valid non-compete – Knowingly hires or retains the employee in a capacity that causes a breach – Self-interest is not a defense

QUESTIONS?