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HB 1004: Kloucek Challenges Non-Compete Clauses

Rep. Frank Kloucek wants to strengthen worker rights by promoting the free market. His House Bill 1004 (the first bill submitted for the 2012 Legislative session on a legislator's own behalf) would amend SDCL 53-9-11 reduce the permissible length of non-compete clauses from two years to one year. Kloucek's bill similarly amends SDCL 53-9-12 to make clear that the one-year maximum on non-compete clauses applies to insurance agents, too.

Back during that glorious summer when Shawn Cable's banishment from KELO was the talk of the local Web, I opined that red-blooded capitalists ought to outlaw non-compete clauses. South Dakota is a right-to-work state. We don't let union membership stop workers from participating in the free market; why should we let former employers so interfere with former workers' rights? Limiting non-compete clauses should bring together Democrats who want to curb corporate power and Republicans who belief in fundamental free market principles.

Rep. Kloucek appears to be building exactly that sort of bipartisan support. HB 1004 sponsors include Kloucek's fellow Democrats Rep. Bernie Hunhoff and Senator Jason Frerichs. His lead sponsor in the Senate is Republican Jim Putnam. His House sponsors include known GOP boat-rockers Stace Nelson, Lora Hubbel, Lance Russell, and Patricia Stricherz. Let's see if Kloucek can cobble together a majority coalition in favor of worker rights against the GOP mainstream that favors capital over labor.


  1. troy jones 2011.12.28

    If you read virtually any projection of future high paying jobs, you will find they always High Technology, a sector that depends on both trade secrets and intellectual property. Non-compete clauses allow businesses to protect their trade secrets and intellectual property.

    South Dakota has a national reputation already as having the weakest non-compete laws. Ergo, under current law, we are at a competitive disadvantage for technology jobs. Weaken it and we will cement this weakness.

    Don't get me wrong. I have conflicting views regarding the merits of non-competes. However, there is a price and under-considered ramifications to this legislation that effects more than those who are asked to sign them. They include:

    1) If you have key employees in whom you invest intellectual property, you will not locate them in South Dakota. If this is substantive to your business, you will not locate in South Dakota.

    2) If a business is conducive to investing in employees, without non-compete protections, the business will choose other options (i.e. focusing on the business brand vs. personality brands. This is definitely the case in marketing positions. Less investment in people, less pay the people end up getting.

    If you live in a college town or diverse economy ala Sioux Falls/Watertown, weak non-compete laws impede overall economic development.

  2. Bill Fleming 2011.12.28

    I question the wisdom of defending non-competes in a depressed job market, Troy. So what if I take what I learned at my old company and start a new one? That just makes me a "job creator" right?

  3. troy jones 2011.12.28


    Eliminating non-competes completely will have a positive short-term effect but the long-term implications are negative. Innovation will be stilted and any company that sells nationally will not locate in South Dakota. The issue and effects are more complex than Cory and you seem to infer. Let me give you some examples:

    1) A business owner wants to sell his company. A promise by the seller to not compete gives assurance to the buyer the purchase price will not be for naught. Seller is willing to give it for a long period. This change will make the promise non-enforceable. Thus, despite a promise by the Seller, the law doesn't give comfort to the buyer. Transaction doesn't occur. Both lose.

    2) Company wants to send key employee to grad school or make other investment in employee. Short-term non-compete will not allow business to recoup investment. Employee doesn't get added skills that would result in higher pay. Both lose.

    3) Company (ala Kelo and Shawn Cable) wants to enhance "brand" of employee, will invest in creating personal brand, and wants to pay the employee more money. However, short non-compete creates risk competitor could "buy" the employee after "brand" is created without the investment. Employee and Company both want to do this. But lack of protection causes Company to not invest in employee. Both lose.

    South Dakota already has among the weakest non-compete statute in the nation. In my mind, it is a significant reason why we also have the least technology/intellectual property type of jobs in the nation. Cory laments the brain drain yet doesn't consider signficant reasons it occurs. California and Massachusetts have among the strongest. Who has technology jobs?

  4. Steve Sibson 2011.12.28

    Can the populist Democrat, with the support of the free-market Tea Party types, be able to defeat the monied "red-blooded capitalists"?

    [Cory, I like the "red-blooded capitalists" also symbolizes communism.]

  5. Steve Sibson 2011.12.28

    Troy, I think you have forgotten the role of patents.

  6. John Hess 2011.12.28

    As Troy is point out, the laws need to make sense. In Madison I've been told a tree trimming/lawn service (which appears to be very lucrative) has their employees sign non-compete contracts. If true, that's simply about controlling the market and needs to be balanced with the right to work.

  7. Bill Fleming 2011.12.28

    Yes, I'm familiar with all those arguments. And you're right. They don't mean much in SD already.

  8. troy jones 2011.12.28


    Patents do protect certain intellectual property but not all. More importantly, they do not protect trade secrets. Non-competes protect trade secrets. More importantly they induce investment in people.

    Question: Being opposed to government intrusion into private agreements, why do you support a law that would prohibit an employee and his employer from freely entering into an agreement longer than one year?

    Look don't get me wrong. I think there are places where long non-competes are contrary to the public interest (but again doesn't this run against your libertarian strain to place the freedom of individuals subserviant to the public interest?) but I also think there are places where they are appropriate. I would be more supportive of Frank's objective in some cases if it was part of a more comprehensive look at the issue more broadly (i.e. protecting investments in people and technology/trade secrets) and allowing a range of timeframes depending on the circumstance. But to carte blanche reduce the timeframe for all situations is an intrusion on both employer and employee from entering into certain relationships to their mutual benefit.

    Frankly Steve, I would have thought this is one matter we'd be in total agreement. What am I missing?

  9. Michael Black 2011.12.28

    I have had friends in the photography business that have had their studios devastated by an employee who stole their customer list and marketed themselves while still collecting a paycheck. It can happen to any business at any time.

  10. troy jones 2011.12.28


    Good point. I think that non-compete law needs to contemplate greater breadth than SD does. This would include matters like extra-ordinary investment in the employee and/or access to critical trade secrets/information. And allow buy-out clauses that decline over time. This is how many states (with support of business and employee rights groups) handle matters like non-competes that focus on "stealing" customers (which I think is Frank's focus).

    But, to just have a universal one-size fits all reduction like HB1004 does is not good for job creation, employers, or employees.

  11. John Hess 2011.12.28

    Good point Michael about moonlighting. But when there's not intellectual property should a business be able to prohibit an employee from being a future competitor? One of our local CPA's left the attorney's office where she worked, took the customer list and sent everyone letters to announce she had her own shingle. The attorney followed up with his own letters! Totally agree too basic of a law may be very unfair.

  12. caheidelberger Post author | 2011.12.28

    Troy, I take to heart your point about the importance of protecting intellectual property to promote high-tech knowledge-based business. If I read your last comment correctly, you feel HB 1004 could be improved with a more nuanced approach to different aspects of how former employees can compete. Is the non-compete clause itself too broad of an instrument? Can we narrow non-compete clauses to allow people to work wherever they want in whatever industry they want but somehow restrict their use of others' intellectual property?

  13. Steve Sibson 2011.12.28

    "Being opposed to government intrusion into private agreements, why do you support a law that would prohibit an employee and his employer from freely entering into an agreement longer than one year?"

    Troy, good point. The question becomes, do these agreements interfere with a free market. If an employee is underpaid versus his worth and sees his employer enjoying too much "economic profit", he should be allowed to leave and start his own business and compete against his former employer. That is what a free market should allow. The government's role is to insure that coercion and force is not used to prevent a properly functioning free market. If the non-competes are viewed as coercion and force that harms the free market, then it is within the proper role of the government to not allow such contracts. Free markets are not anarchies. The government does have a limited role.

    [CAH: stunning, lucid sanity from Mr. Sibson! Bookmark this comment!]

  14. Steve Sibson 2011.12.28

    non-competes that focus on “stealing” customers

    That should be against the law regardless of non-compete agreements, should customer lists or other property become stolen.

  15. Michael Black 2011.12.28

    Non compete agreement are unenforceable without a lawyer...Even then you might need a very sympathetic judge.

  16. LK 2011.12.28

    On " the importance of protecting intellectual property to promote high-tech knowledge-based business," I really don't believe that South Dakota will develop the business culture or the broader social culture that will attract such businesses.

    If an elite company is going to choose between Austin or Silicon Valley or South Dakota, I'm pretty sure South Dakota will lose no matter what how broad or narrow the state's non compete clauses are.

  17. troy jones 2011.12.28

    Cory: "Is the non-compete clause itself too broad of an instrument?"

    In some cases it is which is why I'm not a carte blanche defender of non-competes and nor am I opposed to some aspects being pursued by Frank.

    Cory: "Can we narrow non-compete clauses to allow people to work wherever they want in whatever industry they want but somehow restrict their use of others’ intellectual property?"

    The challenge is how you measure use of intellectual property. Non-Compete is clearer and minimizes what needs to be litigated. South Dakota existing law is too simple and basically unworkable in today's as you say "knowledge based" economy. Shortening it across the board makes it worse.

    Sibby: "do these agreements interfere with a free market."

    Not as much as this bill would. Free markets depend on freedom to enter into contracts. This is a blatant intrusion by defining what free people can enter into. Furthermore, they are critical to protecting property rights (trade secrets and intellectual property). Property is not just land and equipment.

    Again, both Cory and Sibby, don't get me wrong. I do think non-competes are sometimes hammers where a scapel would be better. Unfortunately, SD law in this regard is so simplistic we only allow a hammer. And, carte blanche shortening of the time frame just makes it more likely hammers will be used. We need a more comprehensive law on the matter to allow legitimate property rights protection which will also allow better "fluidity" of talent which is also necessary.

    Non-compete reform needs to include reform of intellectual property protection which is also something SD is woefully inadequate in (including some horrible case law). In general, I'm supportive of where both Cory and Sibby are coming from because I believe jobs and economic growth comes from economic freedom (which includes freedom to enter into contracts), investment in people, and investment in technology.

    Unfortunately, this bill will have the unintended consequence of working against your ultimate goal because it will inhibit both investment in people and technology.

  18. Steve Sibson 2011.12.28

    "Free markets depend on freedom to enter into contracts."

    Not if the contracts are entered into under coercion, force or fraud. Then the government needs to provide remedy. Again, we can't have anarchy.

  19. troy jones 2011.12.28

    Sibby: "That should be against the law regardless of non-compete agreements, should customer lists or other property become stolen."

    Well, if this is your belief, you absolutely must oppose this bill. The insurance agent clause is motivated to allow an agent to take his customer list (even in his head) to another house. And, this position actually argues you should want a longer period, not shorter. You are confusing me Sibby.

    LK: I couldn't disagree more. Any college town has a modicum of talent which can house small intellectual property types of businesses. But, if the intellectual property can't be protected, the business will not locate there. Minnesota became a medical products mecca not insignificantly becuase it has good intellectual property law and non-compete laws. I personally know of one start-up (ultimately sold to Stryker) where there was no way they would consider SD for this very reason (more intellectual property protection but non-compete's are a corollary component). I know because I advocated a relocation to SD where proximity to Avera/Sanford/SFalls Surgical Center could have been a positive.

  20. troy jones 2011.12.28

    Sibby: No contract is enforceable with coercion, force or fraud.

  21. Roger Elgersma 2011.12.28

    Companies need to compete based on their management ability and employees compete based on their talents. The company owns the customer list and the patents that the employee produced while working there. So the company can sue if they are robbed. Proving the theft might be easy sometimes and difficult other times. But when the company thinks they can own an employee beyond their term of employment is also theft. Good management can improve loyalty and loyalty can improve ones tendency to get more training from the company. The employee does not own the company's knowledge but they should own their own talent.

  22. Jana 2011.12.28

    So let's use Bill's agency as an example. Let's say he has a great graphic artist who serves Bill's clients very well. Then let's say that Bill finds out that this artist is a believer in the Knights of Templar, Mason hating Sibby lover and Bill let's him go. Or the employee decides that he can't work for a secular humorist...I mean humanist... like Bill. Is that employee bound by the non-compete rules?

    [CAH: "secular humorist"—brilliant! Jana, how much are royalties for using that bit of your intellectual property?]

  23. LK 2011.12.28


    I will admit that I don't have your inside knowledge. I will also admit to being overly influenced by Richard Florida's books and articles.

    With all due respect to Sioux Falls, I don't think minor league baseball, developmental league basketball, a relatively small music scene, and a rather conservative social attitude will attract knowledge based workers especially if one factors in climate.

    I may know too small of a sample, but the true computer geeks I know don't consider pheasant hunting a prime recreational activity.

  24. Steve Sibson 2011.12.28

    "You are confusing me Sibby."

    You don't need a non-compete to make theft of customer lists a crime.

    "No contract is enforceable with coercion, force or fraud."

    So if I can't have a job unless I sign a non-compete isn't coercion?

  25. Steve Sibson 2011.12.28

    Jana, sorry you are still in a state of denial. Humor is a way to avoid reality.

  26. Steve Sibson 2011.12.28

    More I think about the this the more I understand that non-competes are simply a way to preserve monopolies. Troy, that does not sound like something that fosters free markets.

  27. troy jones 2011.12.28

    Roger/Jana: I am pretty much in agreement with you. Non-competes can be abused and improperly restrict people from using their talents. They are also important components to protecting trade secrets and intellectual property or inducing investment in developing talent. The answer is a more comprehensive approach in these areas with regard to our laws.

    I'm also uneasy seeming to be so defending as it appears to I'm defending them in total. I am not. I just know this bill restricts freedom to contract (critical to free enterprise) as well as diminishes legitimate property rights. The answer lies in a more comprehensive solution. This is a sledge hammer.

  28. Bill Fleming 2011.12.28

    Jana. Secular humorist. I like it. ...and your scenario is closer to reality than you could ever possibly imagine. Maybe I'll write about it here sometime. Suffice it for now that I never try to prevent anyone from practicing their craft. It's just not my style.

  29. Steve Sibson 2011.12.28

    "I just know this bill restricts freedom to contract (critical to free enterprise) as well as diminishes legitimate property rights."

    Again Troy, a contract that preserves monopolies cannot be pro-free market. And the theft of legitimate property rights is not remedied by non-competes. In fact they only allow the benefit of the theft to be delayed.

  30. troy jones 2011.12.28


    Your libertarian impulses are at conflict with this bill and you are intellectually stretching to find merits in this bill.

    "You don’t need a non-compete to make theft of customer lists a crime."

    Actually, you do in practice. You are a salesman. You know your route by heart. You don't need a list to go steal the customers in your new business. The non-compete prevents you from using this "list."

    "So if I can’t have a job unless I sign a non-compete isn’t coercion?"

    Nothing prevents one from not accepting the terms of employment and a non-compete can be a legitimate term of employment. You are starting to sound like a big government guy out to protect the "little guy" from himself. Coercion is forcing someone to do something against their will. If a non-compete is a de facto coercion, wouldn't making them come to work on time coercion?

    "non-competes are simply a way to preserve monopolies"

    Steve, the same argument can be made against copyrights, patents, trade secret protections, etc and the abrogation of property rights. I've read so many of your comments vehemently defending property rights and freedom. I'm surprised to see you so cavalier about this form of property rights.

  31. Steve Sibson 2011.12.28


    The salesman is not stealing in your example. So if he wants to go to another employer or go into business for himself, the non-compete prevents that. And he could not get the job in the first place unless he does sign. Seems to me the employee is now trapped into working for his current employer unless he goes into another line of work. This does not sound like a properly functioning free market. It does seem like coercion.

    And I am not saying the employees can take the business away from the employer. That would violate property rights. Leaving the employer, buying your own assets and then competing head to head with your former boss is what a properly functioning free market would look like.

  32. Michael Black 2011.12.28

    Let's say I sell my business. Typical business practice would be for me to sign a non-compete agreement as part of the sale so I don't just restart another business right away in the same general location.

  33. Steve Sibson 2011.12.28

    "Steve, the same argument can be made against copyrights, patents, trade secret protections, etc and the abrogation of property rights."

    Troy, right. If a person wants property rights protected, then he needs to obtain monopoly protection from the government in the form of patents and copyrights. That is my point. Non-competes do not protect those rights. Seems they only prevent an employee from becoming a competitor.

  34. Steve Sibson 2011.12.28

    Michael, I don't believe your example is within the scope of the statutes this proposed legislation impacts.

  35. troy jones 2011.12.28


    If it is not "stealing", your prior statement doesn't make sense because the route the employer gave him was his customer list: "That should be against the law regardless of non-compete agreements, should customer lists or other property become stolen."

    When you said the quote before, I figured you were stronger against property rights than me as this is where I think non-competes are sometimes used improperly. Now, it appears you are weaker.

    But you are right. Non-competes do impede individual competition for a time. To throw out non-competes altogether is good for "competition" but it is contrary to property rights (intellectual property rights) or creating protections for investing in people.

    I want to stress. South Dakota law in this entire thing is in my opinion archaic, anti-free market, and anti-employee development. It needs a comprehensive look. This simplistic bill is just that- simplistic and will ultimately long-term decrease competition, job creation, etc. I want the same goal I think you want: a more free market.

    I do know it will make it worse.

    Steve, there is always a specific which drives this legislation. What is it? It might make some clarity come to light. I gave some examples of how I think this bill will be bad. Argue against them in specific.

  36. troy jones 2011.12.28


    Michael is exactly correct. This bill does affect this type of non-compete. Absolutely and unequivocably, especially if the seller agrees to stay on as an employee with the new buyer (now the employer) for a short transition period.

    South Dakota law in this regard is so antiquated it effectively decreases by law the value of a business. Let me explain.

    Many states allow long-term non-competes. In South Dakota they are only enforceable after two years if there is compensation. The employee can get out of it by just refusing the compensation.

    Business buyer wants a non-compete for five years. Seller wants to give it to him. In South Dakota, the buyer has to allocate part of the purchase price to compensation for the non-compete to insure the guy honors the deal they agreed to (which includes not competing). Seller has to pay current income taxes for this portion of the purchase price allocted to the non-compete. In some cases, a non-compete is critical to the deal being done and the buyer getting what he bargained for. But because the Seller has to pay income taxes (instead of capital gains) on the non-compete income, the net present after tax value of the business is diminished to the Seller. But, if the business was located in Minnesota which allows longer non-competes, the business is effectively worth more after tax.

    In the end Steve, this bill is designed to restrict the scope of contracts people are freely allowed to enter into. Your fidelity to free enterprise and property rights is definitely selective. The good news is this can't be on a 2011 Republican Platform scorecard as it contrary to the free enterprise and property rights plank.

  37. Jana 2011.12.28

    Troy, do you remember the specifics of the original bill? Just wonder who was driving that one as well as the one that Frank is proposing now. Do you suppose it was an employee group that is behind the existing legislation?

    You are right that the specifics matter.

    You know, if we weren't such an employee and union friendly state, I would be suspicious...sarcasm intended.

  38. Steve Sibson 2011.12.28

    "To throw out non-competes altogether is good for “competition” but it is contrary to property rights (intellectual property rights) or creating protections for investing in people."

    Again, we are arguing beyond the scope of this proposed legislation, which is to reduce the lenght of non-competes from 2 to 1 year.

    Amd Michael example is outside the scope because:

    "An employee may agree with an employer at the time of employment "

    It does not impact agreements to buy businesses. At least that is how I read it.

  39. Steve Sibson 2011.12.28

    "The good news is this can’t be on a 2011 Republican Platform scorecard as it contrary to the free enterprise and property rights plank."

    First off, this won't make the 2011 scorecard because this is 2012 legislation. Second, preventing competition is not a free market principle. And third, protecting monopolies as a property right needs further thought. I don't view customers to be "property", let alone "permanent property" owned by a monopoly.

  40. LK 2011.12.28


    I am not trying to be snarky with the following. It is a question I sincerely would like answered. You wrote,
    "Nothing prevents one from not accepting the terms of employment and a non-compete can be a legitimate term of employment. You are starting to sound like a big government guy out to protect the “little guy” from himself."
    it seems as if you believe that employer/employee negotiations are held on ato level playing field between parties with equal power. If so, I wish I had your optimistic view of human nature. I see them more as the negotiations Scrooge had with Bob Cratchit. I also don't believe in ghosts.
    I realize this is off topic on non compete clauses, and I do agree that intellectual property deserves protection.
    (Typed on phone, please excuse typos)

  41. Bill Fleming 2011.12.28

    Existing law protects all copyrights. Most if not all other property concerns can be protected by the terms of the employment contract without requiring a worker to cease practicing his/her craft. I'd really like to read the bill before commenting further, Troy's concerns notwithstanding.

  42. Jana 2011.12.28

    Sorry Steve "Jana, sorry you are still in a state of denial. Humor is a way to avoid reality." Should I have left the Knights of Templar out? Because we all know that you distrust the Mason's and Bill is a secular humorist...

    Here's another take on humor:

    "Some people say that a good laugh momentarily lightens the darkness. It takes the edge off anger and softens stress. A good joke can even temporarily replace the seriousness of life with a better-balanced perspective on it."

  43. Steve Sibson 2011.12.28

    "Some people say that a good laugh momentarily lightens the darkness. It takes the edge off anger and softens stress."

    Not so in the eyes of the one being mocked. It is a form of schoolyard bullying. Everyone is laughing but the victim.

  44. Bill Fleming 2011.12.28

    Sibby, no one is going to feel sorry for you when you get laughed at for peddling your goofy bullsh*t.

  45. Douglas Wiken 2011.12.28

    This has been an interesting discussion.

    Given a choice of Jana's humor or Steve's discredited- a- thousand- times- before boilerplate, I prefer Jana's humor.

  46. Bill Fleming 2011.12.28

    True story.

    One time I took a job with a competing agency as creative director and moved all my clients to my new boss's shop. They wanted me to sign an employment agreement, and since the deal involved leasing all the assets and equipment of my company for three years, I wanted a contract too. I was careful that my contract stipulated that my employment there was not "work for hire" which meant I retained all my copyrights.

    But I also signed a two year non-compete with them. The plan was that after the 3-year trial period we would become partners if all went well.

    Toward the end of my 3 years the company was doing quite well, and my boss decided to hire a manager who (as it turned out) didn't really like me very much (Can you imagine? Anyone not liking moi?)

    Anyway, they decided not to make me a partner afterall and fired me at the end of the deal.

    In order to honor the non-compete, we moved to another state for two years, keeping only two clients that I had brought with me because they told me flat out that the only reason they were doing business with my old boss was because I was there.

    For two years, the company I had helped develop made a lot of money based on their newly acquired reputation for doing good work. Many of the accounts were ones I developed for them.

    But by the time I came back to the state and opened up shop, the genius manager they had hired had recently been fired (because, as I told them, she was about half nuts) and the company was in free fall. Probably about half of their accounts called and asked us if we would take their business.

    Several of the employees of the old company asked us if they could come work for us as well. Our company was back up and running strong in a year.

    About a year after that, the people who had fired me called and asked if we were still interested in doing the partnership deal. We said yes and resumed being good friends and business partners. Later on we bought them out.

    The moral of the story is that, in least in our business, there isn't really any way to protect yourself from people who do better work than you do.

    Because nobody owns the customers.

  47. troy jones 2011.12.28


    You are supporting a bill that limits the ability of free people to enter into whatever contract tbe mutually desire. Period. Rationalize your restriction however works for you. Just don't pretend it is pro-freedom or free enterprise. That would be a lie. And if this is your your rationale is your vision of Republicanism, I consider your desire to kick me out a badge of honor.

    LK: Non-compete agreements are almost always most often used as a companion to items like employment agreements, extending benefits to employees, or other commitments. To look at them simply as a good or bad or an use/abuse of power is so simplistic to be essentially fallacious.

    I think SD law regarding non-competes and a host of related matters needs a comprehensive reform. Unfortunately, this bill has the depth of thought and unintended consequences to be frankly moronic.

    Since Sibby both has no intellectual basis for the good of this bill, doesnt seem to understand the context of how the are used, and cant rebut any of my statements about itsnegatives except to cry monopoly, it is obviously part of his agenda to define the GOP in his image and the 2012 report card, I am out of this discussion.

  48. John Hess 2011.12.28

    That was a great story Bill. The truth usually comes out in the end. Why no hard feelings for getting the axe? Did they discuss their poor judgement?

    Seems like South Dakota should be able to model a better law from another state that has already worked through the issues. Why entirely reinvent the wheel?

  49. caheidelberger Post author | 2011.12.28

    Great story, Bill! And fascinating discussion all around, y'all!

    "Practicing one's craft" vs. "property rights"—there's the sticky wicket. Non-compete clauses seem to say, "Well, we can't put intellectual property in a lock box, so to protect it, we have to infringe on the right to work." Maybe we're approaching a critique of the idea of intellectual property as a whole. Maybe some work products just can't be defined as the property of any one individual or entity.

    Consider my DSU experience: I learned a few things about HTML, CSS, and social media while taking classes at DSU. The knowledge I gained from professors, textbooks, and research informs some of what I do with this blog. How much of this blog does the Board of Regents thus own?

    A company may own a customer list, but does that mean a company owns the customers? Suppose I go work for Michael taking pictures. I help him take pictures of nice people all over southeast South Dakota. Then I decide to start my own photo business. I vow not to take any customer lists with me, but I want to set up shop at Lake Herman and do business in the same region. Is it really fair to say that I cannot advertise my services to the people of southeastern SD, or that I cannot go door-to-door looking for customers, even though some of those customers' names appear on my former employer's list?

  50. Donald Pay 2011.12.28

    In a small state a noncompete clause is an invitation for people to leave and not return. It's particularly bad for engineers and anyone employed in a high tech field. It's bad for the state. You end up with businesses that can't compete anywhere but in the wasteland of South Dakota.

  51. caheidelberger Post author | 2011.12.28

    Interesting, Donald. On the one hand, Troy is telling us that we can't develop those fields without strong non-compete clauses. On the other, you're telling us that such clauses make it hard to build competitive job markets in those fields. Which is the greater harm? Does South Dakota build those fields with more security for the owners or more fluidity for the labor market?

  52. Steve Sibson 2011.12.29

    "Rationalize your restriction however works for you."

    Troy, what part of the definition of "monopoly" you don't accept?

  53. Bill Fleming 2011.12.29

    John, through it all, the folks who hired (and then fired, and then partnered with) me remained close friends.

    And yes, we discussed everything. We always did. That's why we were such good friends, I suppose.

    Bottom line, it wasn't them I had the problem with. It was the hot-shot "manager" they hired. Later, my friends confided that after a year or so, one of them actually developed a nervous twitch from having to deal with her. Pretty funny. She gave me one in about a week. ;^)

  54. troy jones 2011.12.29


    I very much understand what a monopoly is. A person protecting legitimate property rights (intellectual property, trade secrets, etc.) is not a monopoly. You defining it as such to justify this your support for this bill doesn't make it so. You are not a deity.

    And because SD has antiquated and an insufficient comprehensive approach to protecting these matters, non-compete's end up being the only remedy. I'd like to see a lot less non-compete agreements but until we have better laws that protect these property rights and better allow employers to invest in employees, this is the best we have. To carte blanche reduce the only remedy is essentially anti-property rights.

  55. Bill Fleming 2011.12.29

    Troy, do you suppose Sibby's guardianship of the anonymity of the people doing the Republcan litmus test websites is a function of his contract with them?

    He has already told us that he advised them to go public with who they are, and that they declined. And now, when we ask him who they are, he tells us "none of your business."

    Interesting. Sibby's arguing out of both sides of his head again.

    Peculiar fellow, Sibby.

  56. Steve Sibson 2011.12.29

    Troy, again we have patents and copyrights to protect property rights. Non-competes only delay the theft, if that is the case. Non-competes are methods to protect monopolistic power, and are not conducive to a properly functioning free-market.

    "better allow employers to invest in employees"

    Non-competes would allow employers to abuse employees as the employee would not have the option to leave the company and go out on their own, or perhaps even go to another competitor. Troy, I am not the one who plays the role of deity here.

  57. Steve Sibson 2011.12.29

    "Interesting. Sibby’s arguing out of both sides of his head again."

    Bill, you are not making any sense. Sad that you continue with the deception.

  58. caheidelberger Post author | 2011.12.29

    Troy, could we (or friends of Frank) hoghouse HB 1004 to create the sort of property rights definitions and protections you say businesses need? Or how about this: let's amend HB 1004 to ban non-compete clauses completely, thus forcing management and labor to develop more detailed contracts that focus on intellectual property rights issues without kicking talent out of the marketplace. Would that work?

  59. troy jones 2011.12.29


    Frankly, if I was part of a group that deemed the following as issues that define the GOP philosophy, I wouldn't want my name released either.

    Process for excusing kids from school
    History standards
    Grandparents rights
    Custoday rights
    Birthing centers
    Hunting coyotes from snowmobiles

    At the same time, neglecting agriculture policy, tourism, job creation, major government spending, business regulations, major taxation etc.

  60. Bill Fleming 2011.12.29

    "Or how about this: let’s amend HB 1004 to ban non-compete clauses completely, thus forcing management and labor to develop more detailed contracts that focus on intellectual property rights issues without kicking talent out of the marketplace. "

    Yes. Good, Cory.

  61. Bill Fleming 2011.12.29

    Perfect. The one time Sibby and I are on the same side of an issue, he tells me I'm not making any sense. Just perfect.

  62. Steve Sibson 2011.12.29

    "The one time Sibby and I are on the same side of an issue, he tells me I’m not making any sense. "

    Yeah, we are on the same side and you are giving me crap. Crap that makes no sense.

  63. Bill Fleming 2011.12.29

    Oh. Imagine that. How goofy of me.

  64. troy jones 2011.12.29


    Non-competes are hardly used in "labor/management" matters. It is usually "owner/management" or "management/management" matters.

    Non-competes have their place. Probably the #1 use is integration with employment agreements. They are also used in business sale agreements.

    Another place they are used is in joint ventures (ala business with certain trade secrets/intellectual property desires to combine with a company that usually has manufacturing capability. In this case, the technology company insists on non-competes with not only the manufacturing company but certain employees of the manufacturer to promise not to use the technology outside the agreement). I know of an instance where one of my daughter's friends (two years out of college) signed one so her section of the company could get a contract. As a friend, she called me about this. When we worked through the benefits to her (raise, job security because of the contract), she was happy to sign it.

    DSU has many promising bank security ideas that could come to fruition but it wouldn't surprise me if key employees didn't have to sign non-competes. But, with a one year limit, my bet is the opportunity might end up outside South Dakota.

    I think your interest in having them relates to both your affinity to focus of DSU (and alot of what incubates off of college campuses) and how it is an encouragement for investing in employees. My observation of your views is if you took time (hundreds of hours) to study the matter, you would probably be advocating for lenghtening them beyond what I'd want to do. Here is why: the smallest companies (often those incubated off of campuses) use them to secure talent (employment agreement, stock options, and non-compete) which is then used to secure capital. Take away these options (or reduce their effectiveness) and you give an advantage to the bigger, established companies who have access to capital.

    My comments on here have centered on the trade secret/intellectual property matters as an example of the unintended consequences of this bill which don't seem to be even contemplated much less discussed. I selected this aspect because I thought Sibby's free enterprise bias would recognize both the intrusion of government on property rights and right to contract. I never foresaw he would think this is about monopolies (in fact, giving means to small companies to secure talent and capital is a temper on monopolies).

    It also gave me a chance to rant about a place where I think SD needs a comprehensive look at its laws on trade secrets/intellectual property. Liberal bastions California, Minnesota and Massachusetts and conservative bastions Texas and North Carolina get it. Rather than trying to ram through a complex matter by hoghousing this bill, I would love to see the legislature appoint an interim committee to study what these states do and come with a comprehensive package (ala the Uniform Commercial Code revisions we did what might be now decades ago) to address our state's shortcomings.

    This would allow a selective reform of length of terms of non-competes (some longer than two years and some even shorter than a year). I know some non-competes are too long or there is a better solution (if the SD law allowed it). Unfortunately, in SD, non-competes are the only remedy some businesses have to protect themselves. More arrows in the quiver will allow a better solution.

  65. Steve Sibson 2011.12.29

    "My comments on here have centered on the trade secret/intellectual property matters as an example of the unintended consequences of this bill which don’t seem to be even contemplated much less discussed. I selected this aspect because I thought Sibby’s free enterprise bias would recognize both the intrusion of government on property rights and right to contract. I never foresaw he would think this is about monopolies (in fact, giving means to small companies to secure talent and capital is a temper on monopolies)."

    Troy, this is evidence of just how far away we have wandered away from free markets. My testimony on HB 1230 used Hayek's Road to Serfdom to argue that centrally planning does not create the most efficient economy. The Republicans voted for it anyway, even when I showed how the big guys were getting governmental advantage over the little guys.

  66. Steve Sibson 2011.12.29

    "Hunting coyotes from snowmobiles"

    "neglecting agriculture policy"

    Troy, the landowners wanted to hunt coyotes from snowmobiles to protect their livestock.

  67. LK 2011.12.29

    "Non-competes are hardly used in “labor/management” matters. It is usually “owner/management” or “management/management” matters."

    Thanks for clarifying this pont. My earlier musing about contracts in general was based on a concern that labor management negotiations are rarely held on level playing field. The negotiotions that you describe have a far greater chance of being held on fair playing field.

    I think your solution of an interim committee makes perfect sense.

  68. troy jones 2011.12.29

    Steve, nice try to change the subject. This bill is an intrusion in free markets by the government by limiting the term of contracts free people can enter into and limit a mechanism for the market to protect trade secrets/intellectual property.

    But now that you mention Hayek, a major principle of his view of government was to protect the right to contract and property rights. He attributed the birth of civilization to development of private property. I suggest you read his microeconomic views regarding what he called "non-permanent goods" that encompassed trade secrets/intellectual property.

    Finally, you should consider his view that the "hidden hand" is more powerful than the "unhidden hand" (usually government intrusion). Your effort to limit this contract will only be met with another mechanism. Instead of manipulating a result as you are trying to do, Hayek would just allow whatever will happen to happen as the market will be self-regulating for the collective good.

    Steve, if you are going to quote someone like Hayek, I suggest you be sure to be consistent with his total philosophy.

    LK: No problem. As soon as I saw Cory's post, it inferred non-competes were de facto bad. They are not. I just wish they had all the proper compliments. Maybe someone will kill this bill and see the merits of a broader look.

  69. Steve Sibson 2011.12.29

    From the SDGOP platform:
    "We believe free, fair and competitive markets are best for both the producer and the consumer."

    Troy, owning the consumer is not a property right of a business. The result of the non-compete is to eliminate competition. The non-compete is a violation of the above SDGOP principle. The government should prohibit terms of contracts that are coercive and detrimental to the functioning of free competitive markets.

  70. troy jones 2011.12.29


    While you might believe you have an exclusive understanding of what is free enterprise, please give me an example of a single free enterprise economist or political philosopher who believes restricting contracts is free enterprise. Just one will suffice.

  71. Donald Pay 2011.12.29

    Probably the biggest users of non compete clauses are media corporations. Generally these companies can't get away with this on well-known national talent, but local news writers or on-air talent who are making a name for themselves in smaller markets find they have to switch markets (often states) in order to progress in their career. The media corps don't want someone who gains traction in town to move to a competing radio station, for example, talking listeners (and advertisers) with them. It's a way to keep from paying local journalists, local disk jockeys, etc. what they deserve.

  72. troy jones 2011.12.29


    I don't know how many of the "talent" of media corporations who are under non-competes but I suspect they are integrated as a part of employment agreements. Take away non-competes and they will lose their employment agreement. They usually go hand in hand.

    This said, I am sure there are dozens of industries in SD which use them more often than media corporations.

  73. Steve Sibson 2011.12.29

    "Just one will suffice."

    I already mentioned Hayek, who said the government's role is to prevent coercion and force. If those element's are found in a contract, then the government should rightfully intervene.

  74. LK 2011.12.29


    Did your copy of The Road to Serfdom leave out this paragraph?

    "There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision."

    It sounds to me as if Hayek might have accepted Obamacare.

  75. troy jones 2011.12.29

    And since Hayek was a firm believer in freedon to contract as one of the three basic principles of free enterprise, your position is clearly anti-Hayek. Hayek thought freedom to contract was so important to liberty that freedom of contract needs to be more closely safeguarded than freedom of speech, for if there is freedom of contract then freedom of speech will quickly reappear, but if there is no freedom of contract than freedom of speech will not long survive.

    Strike one. Find another.

  76. Donald Pay 2011.12.30

    Troy, contracts that deal with illegal or unconstitutional matters are not enforceable. If I contract with you to buy slaves, there is no way that contract will be upheld. In fact you and I will probably be spending some time in prison, no matter what Hayek says.

  77. troy jones 2011.12.30

    Don, I agree. Same with a non-compete which a signatory executed under coercion, duress, or fraud.

  78. Bill Fleming 2011.12.30

    Don and Troy, now you're zeroing in on it.

    An employer owns the intellectual property of his employee under "work for hire." Which means if he invents the next killer ap while on the bosses time clock, he has no rights to enjoy the fruits of his labor. Strike one.

    His boss can subsequently fire him at will because this is a "right to work" state. Strike two.

    And finally, because of the non-compete employment contract the guy had to sign to get the job in the first place, the poor schlub can't even practice his craft for the next employer or start his own company for the next two years. Strike three.

    That's no way to treat creative types, y'all.

    And that's why I'm with Kloucheck on this.

    (Besides, I love kolaches.)

  79. larry kurtz 2011.12.30

    Good discussion as the GOP incrementalizes reproductive rights. This could just as easily be about marriage v. civil contracts.

  80. Steve Sibson 2011.12.30

    "Strike one. Find another."

    No Troy, I don't. Hayek believed freedom of contract to be highly important to a properly functioning "competitive" free market, but he recognized limitations. In his chapter from "The Road To Serfdom" on Individualism and Collectivism, he stated that price fixing should not be allowable under freedom of contract. On the following page (87), he states:

    "The functioning of a competition not only requires adequate organization of certain institutions like money, markets, and channels of information--some of which can never be adequately provided by private enterprise---but it depends, above all, on the existence of an appropiate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible. It is by no means sufficient that the law should recognize the principle of private property and freedom of contract; much depends on the precise definition of the right of property as applied to different things."

    So by its very name "non-competes" inhibit the "functioning of a competition", and the legal system should not allow it. There are to be limits to freedom of contract. Second, I would argue that private property should not be the customers in the market. Customers should be free to chose among various suppliers of goods and services, and not owned by some business. Sounds like a form of tyranny to me.

    HB 1004 does not go far enough by simply reducing the term from two years to one. Non-competes should be eliminated all together.

    I would also like to note the Hayek stated at the beginning of the chapter that socialism includes "the creation of a system of 'planned economy' in which the entrepreneneur working for profit is replaced by a central planning body." HB 1230 and other policy positions of the SDGOP is sending us down the road to serfdom. Instead of a bunch of smaller-scaled entrepreneurs competing in a competitive free market, we have more and more public/private partnerships...or in other words "corporate socialism", where the bigger you are the bigger the influence you have over the decision making of the government's "central plan". Charging a small entrepreneurs an excise tax only to deliver it to big corporations for projects over $5 million is flat out wrong.

    The SDGOP is far too influenced by the Chamber of Commerce and these so-called economic development corporations, who are an out growth of the New World Order's Council on Foreign Relations. I learned that while researching the issue of City Managers.

  81. troy jones 2011.12.30

    Bill, I have six comments:

    1) You are also with Sibby. :)

    2) I've said from the beginning there are (in other states) and should be better vehicles for protecting trade secrets/intellectual property than non-competes as they are often a hammer when a scapel is more effective. Unfortunately, SD law doesn't allow/enforce scapels. So a hammer is used.

    3) Your example could be what I'm referring to depending on the facts. I am subject personally to at least a dozen non-competes integrated into confidentiality agreements. Probably half could better meet the needs of my client with another vehicle and be less onerous to me. Unfortunately, SD intellectual property law isn't robust enough to legitimately protect my client.

    4) There are some facts/circumstances that would determine whether your example is too onerous (but needed because of another weakness in our law). What did the employer offer in exchange for the non-compete? Was it reasonable and commensurate with the value of the non-compete? Did the employer fulfill their obligation?

    5) I'm totally for rectifying/providing better solutions for non-competes to lessen their use. However, I can't support this carte' blanche solution because of its impact on so many places where they are necessary, appropriate, and even the two year limit is too short. The "cure" is worse than the disease.

    6) I run across alot of people/entreprenuers who want to abrogate a non-compete. There are two questions I ask: Did they coerce you to sign it? Did they give you what they promised? Nearly every time there was no coercion and the other person met their obligation. The problem is the person wants to re-trade the deal/not fulfill their portion of the contract.

    I can't help but notice the change in Sibby's stance. Early on he defended customer lists as deserving protection but seems to have softened. This tells me the impetus for this is one who wants to abrogate his non-compete/non-solicitation agreement, freely entered into and for which the other party fulfilled his obligation. In the end, the "impetus" is to use the power of the state to allow him to break his contract. If I'm correct, Steve's sense of honor should be pricked as well as his opposition for using the government to thwart private agreements. If I'm incorrect, I'd love Steve to give the details of the impetus (as I asked earlier). It might point to a different solution/bill that doesn't have all the unintended consequences I've mentioned.

  82. Bill Fleming 2011.12.30

    Troy, this could be one of those rare instances where you, Sibby and I are all on approximately the same page (we're probably only one kolache away from scratching out a better bill with Frank.)

    What I really appreciate is the detail in which you have examined this issue here. It's a real service to your states business community and I hope it can enjoy the largest possible audience and discussion.

    Such discussions are typically eclipsed by goofball stuff like Howie, Sibby's and the JBS's bogus polls and whatever off-the-wall, far-right road apples they can pick up and throw at the legislative wall to see if it sticks.

  83. Steve Sibson 2011.12.30

    Bill, so you don't think HB 1004 will be on the 2012 Republican Voting Scorecard?

  84. Steve Sibson 2011.12.30

    "If I’m incorrect, I’d love Steve to give the details of the impetus (as I asked earlier)."

    Troy, that would be simple: the role of the state is to protect competition, not monopolistic capitalism, or also known (but much less) by the label "corporate socialism".

  85. troy jones 2011.12.30


    I suggest you read Hayek's "The Constitution of Liberty" which is his treastise on the "condition of men is which coercion by others is reduced as much as possible in society." Specifically he defines coercion on pages 133 and 134. Absent coercion, freely negotiated contracts are sancrosanct (sp?) and the only role of government is to insure their enforcement. In this section, he even addresses your concerns about monopolies.

    Thoughout this trestise, Hayek talks about the more pernicious "coercion" is that exercised by the government to infringe upon private contracts. This bill is exactly an example of what he refers to in this treastise.

    I think you also need to read "Law, Legislation, and Liberty" where Hayek mentions "law of legislation" which comes from the government and the "law of liberty" which comes from free people entering into interpersonal agreements. As you might suspect, Hayek gives preeminence in most cases to "law of liberty" and "law of legislation" must be used sparingly because it too often doesn't consider unintended consequences and is "pernicious" or selective to favor one over another.

    In any case, Hayek was as much a legal mind as an economist. If he condemned non-compete agreements as monopolistic, one of the pre-eminent writers about monopolies surely would have mentioned it. Furthermore, non-competes are a good/service (including property he called "non-permanent goods") bargained for which Hayek vehemently advocated its importance to free enterprise under "freedom to contrat." Finally, non-compete agreements are no more "anti-competitive" than patents or other measures to protect intellectual property. In fact, they provide the means for up-starts to accumulate capital to compete with larger companies (who have economic advantage to gain monopolistic positions).

    Hayek would not support your position. In fact, it is anathema to his basic premises.

  86. Steve Sibson 2011.12.30

    Troy, did Hayek specifically state that non-competes should be allowed?

  87. troy jones 2011.12.30


    One final effort with regard to Hayek.

    Hayek is associated with the Austrian school of economic philosophy which grew out of the 15th Century writings of Aquinas. From this came the "Late Scholastics" who were the preeminent and original advocates of property rights and freedom to contract.

  88. troy jones 2011.12.30


    Since his "freedom to contract" views are pretty broad and preeminent and he described numerous items that were monopolistic, it is certainly easy to infer. I don't think he also specifically said you are free to sell your car either.

  89. Steve Sibson 2011.12.30

    Troy, I understand. I am an advocate of property rights, but no business should own the customers. That is monopolistic. I am an advocate of freedom to contract, but not when it undermines competition. That is monopolistic too.

    Since you have such a grasp of Austrian Economics, why are you not critical of the SDGOP's attempts to centrally plan the economy? Seriously, this politicy position violates conservative limited government principles and worse yet...centrally planned economies are not as efficient as competive free markets. That argument is clear from Hayek. I made that argument, using his work, during the Senate State Affairs committee hearing on HB1230 last session. Only one Republican voted against that bill. That is really sad Troy. Now this issue will be before the people in 2012. This will only help the Democrats, who opposed it for all the wrong reasons. They only want the money to go into their special interest's pockets.

  90. troy jones 2011.12.30

    I agree. Customers should be free to procure services and goods whereever available. And, yes, non-competes can impact/restrict what is available. But the "restriction" is the result of another prior legitimate contract (freely entered into which Hayek articulates can be enforced).

    Regarding my comments on Hayek, they are to explain your reference to him is not applicable with regard to non-competes.

    Regarding HB1230, Hayek was not as clear on permissable activities of government as he is on contracts. Additionally, and more pertinently, he specifically mentioned public utility endeavors as potentially appropriate uses of government because infrastructure might enhance individual freedom. I need to think about Hayek and HB1230 to really infer how he might have thought specifically.

    On the surface, his first question is does this restrict individual liberty (specifically). I'm not sure HB1230 does this.

    In "Constitution of Liberty", Hayek allowed for eminent domain (for even items such as parks and recreation) as well as certain subsidies for the public good. Granted, he is restrictive but they are not carte blanche bad. In discussing this he uses terms like "consensus" and "interest" of the "community" which I infer the smaller the governmental entity, the greater power for these items.

  91. Rep Frank Kloucek 2012.01.22

    Thanks for all the great input! Rep Frank

  92. Pam 2012.03.09

    Guys- very basic question for you. Does my non-compete clause prevent me from speaking to an ex-client where the conversation is nothing to do with business? He was a friend before I brought him in as a client, and now my ex-company is saying I am not alllowed to speak to him AT ALL. Can they do that?!!

  93. caheidelberger Post author | 2012.03.09

    Pam! Fascinating Constitutional question! None of us here are lawyers, so don't trust us much farther than you can kick us.

    That said, the answer should be no, they can't do that. You have freedom of speech and association that even a contract cannot abridge. Unless there is specific language in the contract you signed saying you cannot associate in any way whatsoever with former clients, the company is going beyond its rights over you. If your contract explicitly forbids only business-related activity, the company's got nothing on you. The company may say, "Oh, but if you are chatting, how do we know the conversation won't turn to business secrets?" Your response at that point is, "Prove it. Innocent until proven guilty."

    Other opinions from our armchair legal experts?

Comments are closed.