Evolving legal landscapes make it crucial to rethink non-compete agreements and explore alternative safeguards.
Your top salesperson leaves and opens a competing dealership. Hardly unprecedented but probably not something you want to happen, partly because the employee knows stuff. So how can you protect your business?
The standard knee-jerk reaction is the non-compete agreement many dealership employees sign. But those documents (or similar portions of an employment contract) may not work out quite how you think. You may even find your state isn’t in favor of such agreements.
Paul Schwartz, president of Copier Careers, an industry recruiting firm, noted that non-compete and non-disclosure agreements are commonplace at office technology dealerships, and virtually all employees are subject to them. They typically last one to three years after a person leaves a company. “We always ask a candidate if he or she is subject to a non-compete, non-disclosure, or confidentiality agreement,” said Schwartz.
The Big Picture
All kinds of employees leave companies every day. Most are simply looking for more pay, different hours, another industry, or new opportunities—some are just bored. In most cases, an organization’s practices and policies are soon forgotten. Sometimes, knowledge of customer preferences, needs, practices, plans, and budgets can present real threats even if unintentionally used against you. Other details about how your dealership works, financials, your IT and security infrastructure, customer support, and more can be at risk. Then come your people.
Most salespeople are chameleons. Many can shift from selling office technology to selling almost anything else. They’re motivated by making the sale. For some, it’s not a big leap to imagine themselves running a dealership. Some may look at your business and think it’s easy money, noting that one of the major vendors doesn’t have a dealer within the next dozen or so ZIP codes. They make some calls, line up some dollars and a few people, blow some smoke at the OEM, and are ready to roll a few months after your door closes behind them. Can you slow them down?
Service techs are a different kind of threat. Most office technology is similar under its logo-clad skin, so a tech working on one brand can probably figure out another. However, training them on the models you sell wasn’t inexpensive, so a tech’s departure can present a significant loss in terms of skill and training. Furthermore, you don’t want a departed tech talking about your company and transferring their skill to another business. Although a tech may be somewhat less likely than a salesperson to open a dealership, Schwartz said that it’s not unheard of for a tech to work for another dealer or be a partner in a dealership led by a former salesperson.
Then there are the behind-the-scenes people who help keep your dealership running strong. “The march of technology means most or all of a dealership’s employees have access to proprietary knowledge of a business and its customers,” said Schwartz.
Protect Yourself
Non-compete agreements are the stuff of legend but may be less effective than they once were. There are basically two types of these agreements, only one of which is generally enforceable. The enforceable one prohibits someone selling a business from running a business that competes with the buyer for three to five years. Such non-competes are enforceable throughout the United States. The ones for employees are different and changing.
In April 2024, the Federal Trade Commission (FTC) issued a rule banning employee non-competes nationwide. Then, in September 2024, the Supreme Court disallowed this rule (part of the now-revised Chevron decision), stating the FTC had overstepped its bounds and leaving it up to federal judges or state courts to interpret and handle non-compete agreements. Schwartz thinks this may be a harbinger of the future. Although the SCOTUS ruling makes non-compete agreements part of business-as-usual, he thinks they’ll come under the control of individual states and ultimately go away.
Limitations aside, you can still craft elements of non-competes to serve specific situations. Labor law attorneys can easily place restrictions and limitations into an employment agreement or contract. For instance, an agreement could prohibit an employee’s new company from chasing your customers for business or place geographic limitations on the new business. It’s important to know what you would like to do, but bring in an employment or contract lawyer to make sure you’re covered.
Another Approach to Non-Competes
“Dealers use non-solicitation and confidentiality agreements (or clauses) to protect confidential information,” said Bob Goldberg, recently retired general legal counsel for the Business Technology Association (BTA). “These agreements are used with sales, service, technical, and administrative employees.”
Such agreements/clauses are outside the scope of non-compete agreements. More importantly, “these agreements are enforceable,” said Goldberg. For example, they could prohibit a former salesperson from soliciting your customers while working for another dealer or divulging your IT practices to a new employer. Remember that non-solicitation and confidentiality language may be embedded in employment agreements. Savvy job candidates may ask to have an employment agreement reviewed by a lawyer.
The intent of such an agreement may limit or prohibit a former employee from actions that can harm a former employer. However, that harm (damages in legal terms) may be in the eyes of a court and vary by state or the judge’s purview.
Don’t think it matters? Consider this: A local dealer for Brand Q isn’t nearby, but then one opens in your market, enticing your staff with dollars and benefits. Suddenly, those confidentiality and non-disclosure agreements can be very important.
Or this: Many employees possess portable skills. You don’t want your business practices and policies made public, so the clauses can help keep a lid on your dealership’s operations. It’s also not unreasonable to remind departing employees (in writing) that they remain bound by the time limits of the non-disclosure and confidentiality agreement and that the clock starts ticking when they leave your dealership. This is especially important when a departure isn’t the employee’s choice.
Avoid Court
Finally, although these are legal matters, you probably want to avoid going to court. If you prefer the courtroom, an established dealer seeking to enforce an agreement would normally go before a judge or magistrate for a temporary injunction prohibiting an employee from competing or using confidential information. Your lawyer may or may not be able to do this on your behalf. If you go this route, bring money because your attorney will have his hand out. Courtroom time is much more expensive than a meeting.
Despite the ministrations of your attorney, an agreement’s language can still be open to interpretation by a judge or magistrate. A new dealer can claim they’re prospecting for new business and that dozens of companies have been contacted, including many customers of other dealers. One judge may rule that soliciting business from a former employer’s customer is illegal. Another may say the buying decision is made by a customer who may be using several sources of information. For example, a former dealership employee sold machines made by Vendor C but now sells equipment made by Vendor J, which weren’t readily available until a new dealership opened. To a judge, the choice of office technology may be a business decision about what’s best for the company.
Although a judge may rule that poaching customers of an erstwhile employer is less than laudable, they may be unwilling to prevent a new dealer from soliciting business in a field where the dealer principal has demonstrated expertise. However, that judge may limit how a former employee may act based on their knowledge of a given customer. The language of non-disclosure and/or confidentiality agreements that may come into play has to be quite specific. This still doesn’t mean you’re home free.
Goldberg pointed out that a former employee may claim the information used isn’t truly confidential because it was known outside the company or that the duration of the agreement is excessive. An employment attorney is essential to covering all the bases (or responding to judges’ questions) and using the correct legal language for your state. Always remember that sales conversations between former employees and prospects aren’t public records.
Be Smart with Your Business
The object of all this is to protect your business. Look for gaps in your marketplace to help ensure you’re serving every customer’s need. You might need to add a line of products from another vendor. This may help keep a competitor out or limit the options of an employee who leaves to open their own operation in your market. Become familiar with employment laws in your state, bring in the appropriate lawyer, and get their strategy on the best approach for your company.
