Protect the Playbook; Non-Disclosure and Non-Competition Agreements
So, you develop a great new product or service that your customers are going to love. Your marketing team devotes time, resources, and money to the launch. Your sales team does a great job contacting customers and distribution channels.
Six months later, things are going great. Then, two of your designers and your top saleswoman announce they are leaving for a competitor. You had the design employees sign a confidentiality and non-disclosure agreement (“CNDA”). But is that enough protection when you cannot monitor what they are discussing with your notoriously unscrupulous competitor?
You had the sales staff sign non-solicitation agreements preventing them from “soliciting” your customers. But, is that enough protection when you cannot monitor what tips your former saleswoman is providing her new teammates? When sales start to drop in favor of your competitor’s very similar new product or service, how do you disprove that your former saleswoman never “solicited” customers, but instead only fielded contacts generated by general advertisements?
CNDAs and non-solicitation agreements are worth having. But, they leave a business exposed to problems in proving what really goes on behind a competitor’s closed doors once former employees switch teams. Compounding the problem is that your former customers, who have started doing business with your competitor, may need to be witnesses should you go to court. They are not going to be happy to be dragged into a lawsuit. Their testimony will be colored both by you involving them in litigation and their new allegiance with your competitor. Even if you are able to prove what is going on behind closed doors, CNDAs and non-solicitation agreements provide inadequate protection.
As I am regularly reminded by folks seeking to ignore their non-competition agreements, South Dakota is a “right to work” state. The term “right to work” however is completely devoid of meaning. South Dakota Codified Laws 53-9-11 specifically authorizes non-competes as part of employment. However, there are limitations. Non-competes may be for a maximum of two years following termination of employment. Non-competes must be confined to a defined geographic area, but I have seen nationwide non-competes enforced. There are other nuances in SDCL 53-9-11 as well as court cases interpreting it. I have been involved in around fifty litigated or disputed non-compete cases, and I can safely say there are many novel, unique nuances within this seemingly straightforward area of the law. Accordingly, it is imperative to seek legal counsel when preparing non-competes for your employees to sign, and I would recommend counsel who has actual experience litigating the nuanced issues. Further, if you are hiring an employee with a non-compete, legal advice should be sought before simply hiring the employee or before turning away a quality candidate when there may be loopholes or nuances that may allow the employee to be employed productively by your business.
Mitch Peterson is a partner at Davenport, Evans, Hurwitz & Smith, LLP in Sioux Falls, who focuses his practice on commercial litigation, including non-compete agreements. This article was published in the March 25, 2014 edition of the Sioux Falls Business Journal.
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.