Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In South Dakota

While Tennessee law generally prohibits any agreements between persons or corporations that tend to restrain trade, the courts have generally enforced non-competition agreements between employers and employees when they are:

• to retain existing customers;
• to protect trade or business secrets and confidential information; and
• to protect the employer’s investment in training or enhancing the employee’s skill and experience.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. South Dakota courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.

Reasonableness in Time and Geographic Scope

Factors considered to determine whether or not a non-competition agreement is reasonable include:

 

Examples of non-compete agreements that South Dakota courts have found to be reasonable include:

The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.