Employers: Mind What You Say When Discussing Non-Competes with Employees

A carefully drafted non-compete agreement is likely enforceable in South Dakota depending on its scope.  However, even if a non-compete agreement is enforceable, employers need to be careful, and think about what they say about non-competes, to ensure they do not waive their right to enforce the non-compete.

To waive a contractual agreement or a clause in the contract, there must be a purposeful action done or words spoken to relinquish the rights.  An employer, through its owners or management representatives, can waive contractual rights of an employment agreement by acting in a way that is not consistent with the employer’s rights under the contract or the employer’s intention to rely on the contract.  One way to “waive” goodbye to an employer’s rights to enforce its non-compete was shown in a case from 2015: Granite Buick GMC, Inc. v. Ray, 2015 SD 93, 872 N.W.2d 810. 

In Granite Buick, sales staff at a car dealership were required to sign non-compete agreements.  When Granite Buick’s General Manager presented the non-competes for the sales staff to sign, he told them the non-compete agreement would only be enforced by the company if the employee left and made a lateral move to a competitor.  Id. ¶ 2, 872 N.W.2d at 811.  He represented that if the employees “bettered themselves,” the non-compete would not be enforced.  He further told them if they left for a job that was a step up from a sales position, such as a management position, the non-compete would not be enforced.  Id.  What if employees left to start their own car dealership?

That’s exactly what happened in Granite Buick.  Two employees of other car dealerships, Granite Buick and McKie Ford, created Gateway Autoplex, LLC, and signed a lease agreement.  The two employees started their new dealership before they resigned from their respective employments with Granite Buick and McKie Ford.  The McKie Ford employee told McKie Ford’s sole owner that he was leaving the company to start a new dealership and shared his concerns that it would ruin the relationship between the employee and McKie Ford.  Id. ¶ 4, 872 N.W.2d at 813.  McKie Ford’s owner told the employee that it would not ruin any kind of relationship, and that McKie Ford would not go after the employee.  Id.  Instead of having any concern for protecting the company from competition, the owner told the employee that he “wish[ed him] the best of luck” in his new venture.  Id.  

However, after the employees actually left and started their new car dealership, Granite Buick and McKie Ford changed their minds.  They sued the employees and requested a Court Order enforcing the non-competes.  As a defense to the lawsuit, the two former employees argued Granite Buick and McKie Ford had waived their rights to enforce the non-competes. The case went to trial, and the waiver defense was presented to a jury.  The jury found Granite Buick and McKie Ford waived their rights to enforce the non-competes. 

Granite Buick and McKie Ford appealed to the South Dakota Supreme Court. After determining the companies had full knowledge of the non-competes, the South Dakota Supreme Court held that Granite Buick and McKie Ford had both waived their rights to enforce the non-competes.  Id. ¶ 12, 872 N.W.2d at 816.

Despite efforts to protect a business from unfair competition by current or former employees, business owners and management representatives need to know how a restrictive clause can be waived.  Lessons can be learned from Granite Buick: carefully choose what you tell employees who are leaving.  A friendly good luck and “we won’t come after you” may be used as evidence that the company waived its rights.  Similarly, watch what you say when you present employees with a non-compete.  Telling them specific examples of circumstances under which the company will enforce a non-compete will likely leave out some scenarios.  Companies work hard to protect their business from unfair competition; do not “waive” goodbye to those efforts by extending friendly goodbyes or making statements about the company’s intention to only enforce non-competes in specific instances.