Jan. 27, 2020

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

By Sander Kline

A recent ruling issued by U.S. District Judge Karen Schreier helps clarify the enforceability of employee nonsolicitation agreements. Most employers find themselves impacted from time to time by nonsolicitation agreements. Employers who are considering adding a nonsolicitation provision to their standard employment agreement or rolling out a new nonsolicitation agreement need to consider the enforceability of such provisions. Employers with new hires subject to a nonsolicitation agreement must carefully evaluate the risk of allowing or encouraging the violation of such a provision.

In Beef Products Inc. v. Hesse, the South Dakota Federal District Court considered a nonsolicitation provision signed by a sales executive. When that individual, Mike Hesse, switched companies, his nonsolicitation agreement prohibited him from soliciting away former co-workers. Beef Products, the former employer, alleges that Hesse did exactly that, hiring away at least five former employees.

In the lawsuit, Hesse argued that South Dakota law, which prohibits “contract(s) restraining exercise of a lawful profession, trade or business,” rendered the nonsolicitation agreement unenforceable. South Dakota law allows restraints on trade only when they fall into one of a few narrow categories: following the sale of the goodwill of a business, the dissolution of a partnership or in the context of an employee’s covenant not to compete. Beef Products argued that while the nonsolicitation agreement did not fall within any of these categories, it was not a restraint on trade in the first place.

Relying on prior decisions from the South Dakota Supreme Court and the South Dakota Federal District Court, Judge Schreier ruled that the nonsolicitation agreement did not rise to the level of a restraint on trade and was, therefore, enforceable. Accordingly, under Judge Schreier’s ruling, an appropriately worded agreement prohibiting a former employee from soliciting the employer’s employees is enforceable in South Dakota.  Although South Dakota’s state courts are not required to follow the District Court’s ruling, it should have a significant, persuasive effect.

The opinion may decrease the hesitation of former employers to bring claims, particularly when the employees at issue are important or the solicitation is egregious. It also may encourage employers to include nonsolicitation provisions in their employment agreements.

As an employer, you should track which employees are subject to nonsolicitation agreements, both from your company and former employers. You should consider carefully whether you are allowing or encouraging hires to violate an existing nonsolicitation agreement. And finally, don’t hesitate to contact your attorney with further questions. Visit woodsfuller.com for additional information.