Non-Compete Agreements in the Banking Industry
December 31, 2015 | dehs
We frequently encounter individuals who believe that South Dakota is a “right to work state” and that non-compete agreements—sometimes called covenants not to compete—are not enforceable under South Dakota law. Individuals holding this belief are mistaken. Under SDCL 53-9-11, an employee and an employer may agree to certain post-employment restrictions so long as two basic requirements are met. First, the restriction is only valid if it prevents the employee from engaging in the same type of business as his former employer within a specified geographic area. Thus, for example, a bank could not enforce a covenant not to compete that purported to prevent a former employee from selling shoes. Second, the restriction is only valid for two years post-employment. Once two years has passed, the former employee is free to compete with his former employer. As long as a non-compete agreement satisfies these two basic criteria, a court applying South Dakota law will enforce it by way of injunction regardless of the hardship it might visit on the former employee.
The one exception to this general rule is when an employee is terminated without cause. In that situation, courts are far less likely to enforce a non-compete agreement, on the theory that the employer should not be able to restrict a former employee’s right to earn a living after firing him for no reason. If an employee willingly leaves to work for a competitor, however, the non-compete agreement will be upheld.
Some employers may think the foregoing is of limited utility because none of their current employees signed non-compete agreements at the inception of their employment. However, a non-compete agreement executed by a current employee is just as enforceable as a non-compete agreement executed by an employee at the outset of his employment. Courts reason that continued employment is sufficient “consideration”—i.e., compensation—to support enforcement of a non-compete agreement. No additional payment to the employee is required in order to render the non-compete agreement enforceable.
Even in the absence of a non-compete agreement, employees owe their employer a duty of loyalty not to misappropriate proprietary, confidential or trade secret information and later use that information to compete with their former employer. However, proving that a former employee is actually using confidential information to compete—as opposed to competing legitimately—is often a difficult proposition. If the employee signed an enforceable non-compete agreement, the only thing the employer needs to prove to obtain an injunction against the employee is that the employee is, in fact, engaging in competition with the employer. There is no need in that instance to show the employee misappropriated information and is using such information to compete with his former employer.
Bankers are mobile individuals, often much to the chagrin of the banks that employ them. For that reason, bankers are also notoriously hostile to non-compete agreements and may be reluctant to sign one. But, in a highly competitive industry like banking, the benefit of having a non-compete agreement in place can be very great. A person is not often considering leaving a job the moment he accepts a position. So, a new hire might willingly sign a non-compete agreement at the beginning of his employment for a fairly modest sign-on bonus. Content existing employees might also welcome a little extra spending money in exchange for executing a non-compete agreement. Again, this extra compensation for signing the non-compete agreement is not required to create an enforceable agreement, but in practice it may prove necessary in order to convince a person in a highly competitive industry to sign.
It is also becoming more common for banks to expand into lines of business like insurance and investments where non-compete agreements historically have been more prevalent than they have for the traditional banker. It makes particular sense for employees hired in these “new” lines of business to sign non-compete agreements given that they have high levels of client contact and operate in industries where non-compete agreements are the norm rather than the exception. Without non-compete agreements for employees in these lines of business, banks may find themselves at a competitive disadvantage with their non-bank counterparts that offer similar products and services.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.