South Dakota Supreme Court Refuses to Enforce Covenants Not to Compete

In Granite Buick GMC, Inc. v Adam Ray, issued December 9, 2015, the South Dakota Supreme Court affirmed a judge's refusal to enforce separate covenants not to compete signed by two employees who left car dealerships in Rapid City.

With regard to the first employee, the trial court found that prior to signing his non-compete agreement, he had been told by his employer that the agreement would be enforced only against an employee who made a "lateral move" to a competitor and would not be enforced against employees if they "bettered themselves." The trial court determined that the employee had "bettered" himself by starting a competing business, despite the fact that he was making less money in his new employment. The court then found that the employer had never intended to honor its promise to enforce its non-compete agreements only against employees who moved laterally. The court concluded that the agreement had therefore been induced by fraud and was not enforceable.

As for the second employee, the trial court found that when he told the owner of the company he was leaving to start a new business, the owner told him that he would not come after him in "any way whatsoever" and wished him "best of luck." The trial court found that these statements constituted a waiver of the right to enforce the non-compete agreement, even though the owner testified that he was not aware of the employee's covenant not to compete when he allegedly made the statements.

The South Dakota Supreme Court affirmed the trial court's rulings as to both employees and denied the plaintiffs' requests to enforce the covenants not to compete.

This case teaches valuable lessons. Employers should not make any oral representations or promises to employees when presenting them with a non-compete agreement or any other restrictive covenant. Second, when an employee announces his or her resignation, the employer should not make any comment that could be construed as a waiver to enforce the employee's non-compete or other post-employment obligations. In fact, when employees resign, they should be sent a copy of their employment agreement and advised that all provisions of the agreement will be strictly enforced.

We are pleased to answer any questions you have regarding this decision or its implications.

Article Submitted by Attorney Tim Shattuck