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Are Noncompetes Enforceable?

Although standards vary from state to state, it can be difficult to enforce agreements designed to prevent former dealership employees from taking their skills — and their coworkers and your customers — to competitors.

September 2018, F&I and Showroom - Feature

by Christian Scali

Photo courtesy of creativecommons.org/Legistify
Photo courtesy of creativecommons.org/Legistify

The editor tells me there’s been a lot of chatter on social media about the enforceability of noncompete agreements in employment contracts. Given that the employee turnover rate at dealerships hovers around 40% annually — which is about the same for F&I managers but far below the more than 70% rate for sales consultants — I can see why. Just to put those percentages into perspective, the notoriously high turnover rate of the retail industry is around 13% annually.

The cost of this loss of talent — factoring in training expenses, lost sales, inexperienced sales staff, and the lack of continuity with customers — is substantial. So, again, it’s not surprising that dealerships often include noncompetes in employment contracts to prevent employees who go to work for competitors from bringing customer lists and coworkers with them. However, noncompetes that substantially impair a person’s ability to work and earn a living can be difficult to enforce.

"While customer nonsolicitation agreements may be considered unlawful noncompetes, especially in states like California, limited and tailored agreements not to solicit employees may be enforceable."

The specific jurisprudence on the enforceability of noncompetes varies substantially from state to state. For example, noncompetes are generally enforceable in Florida and Massachusetts but are all but outlawed in California and New Hampshire. Legislatures and courts place a high value on a person’s right to earn a living. They tend to disapprove of agreements that unreasonably restrict that right.

So how does a dealership in a state like California stop departing employees from pilfering coworkers and customers? First, an employee that solicits employees and customers during their employment may breach their duty of loyalty, particularly if they use confidential, proprietary, or trade secret information to do so. While an employee may make some preparation for their post-employment future, they owe their employer undivided loyalty until that employment ends — as an employee who prematurely competes with his or her employer may be liable for breach of fiduciary duty and breach of contract.

Second, the use of trade secret information against a former employer is unlawful, even after separation. The use of customer lists, or even intangible information such as a manager’s confidential knowledge of the compensation structure or pay of former team members, can run afoul of a state’s trade secret protection legislation.

For example, California’s Uniform Trade Secrets Act prohibits the misappropriation of trade secrets, whether or not an employee has a contract that does so. But the existence of such an agreement can further deter employees from engaging in such activity. Moreover, a trade secret agreement can impose liquidated damages for employee breaches, relieving employers of the need to prove damages and strengthening the agreement’s deterrent effect.

Third, some employees still do not understand that their activities on company computer systems and devices are not private and are subject to employer monitoring and retention. So they may leave behind crucial evidence of improper competitive activity before their departure. And such evidence is usually necessary to obtain an injunction against further misconduct.

Then there’s social media. Dealerships are retail industry leaders when it comes to embracing the use of social media outlets like Facebook and YouTube in their marketing and advertising campaigns. But without clear policies delineating the ownership and use of those accounts, the time and effort put into developing those tools can be lost. Worse yet, they can be used to a competitor’s advantage. Dealerships should enter into written agreements with formalized policies that clearly communicate and define how social media accounts will be handled.

Courts have provided some guidance in determining the ownership of social media accounts, and therefore the nature of the protection they are afforded following an employee’s departure. These considerations include the extent to which the account was created for the employer’s benefit; who set up the account; who decided what content to include in the account; whether the account was created before or during employment; who had access to the account and password; how the account was associated with the employer’s name or brand; and the value of the followers, fans, or connections. And when proper written policies are in place and appropriate privacy safeguards are followed, courts have provided social media metrics such as “friends,” “followers,” or “connections” trade secret protection.

While customer nonsolicitation agreements may be considered unlawful noncompetes, especially in states like California, limited and tailored agreements not to solicit employees may be enforceable. However, employers should consult with counsel before adding such provisions to their employment agreements due to the risk that an overbroad provision can void other parts of the agreement.

Attorney Christian Scali is the founder of Scali Rasmussen, an automotive industry practice that offers a range of services relating to advertising, consumer finance, franchise, trade secret protection, and more. Contact him at christian.scali@bobit.com.

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