Those of us who practice employment law find ourselves, with increasing frequency, dealing with the preparation and negotiation of employee non-compete agreements, and the handling of disputes concerning such agreements. A “non-compete agreement” is any restrictive covenant entered into between employer and employee that restricts post-employment activities of the employee. This includes both non-competition and non-solicitation clauses.
Six years ago, in Healthcare Svcs. of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604, 609-10 (Mo. banc 2006), the state Supreme Court articulated the following principles for determining whether a non-compete agreement is valid and enforceable:
- The law seeks to balance the competing concerns between employer and employee. On one hand, employers have a legitimate interest in engaging a highly trained workforce without the risk of losing customers and business secrets after an employee leaves his or her employment. On the other hand, employees have a legitimate interest in having mobility between employers to provide for their families and advance their careers. Further, although the law favors the ability of parties to contract freely, contracts in restraint of trade are unlawful.
- A non-compete agreement will be enforced if it is demonstratively reasonable, i.e. “if it is no more restrictive than is necessary to protect the legitimate interests of the employer.”
- A non-compete agreement must be narrowly tailored temporally and geographically and must seek to protect legitimate employer interests beyond mere competition by a former employee. Accordingly, it is enforceable “only to the extent that the restrictions protect the employer's trade secrets or customer contacts.”
- The employer bears the burden of proof that the non-compete agreement protects its legitimate interests in trade secrets or customer contacts and that the agreement is reasonable as to time and geographic space.
This year, in Whelan Security Co. v. Kennebrew, 379 S.W.3d 835 (Mo. banc 2012), the Supreme Court took the occasion of reviewing in detail another non-compete agreement (actually, two separate agreements with the same company), in which the Court applied the principles set forth in Copeland.
Whelan Security provides security guard services nationwide, with 38 branches in 23 states. Whelan hired W. Landon Morgan as a branch manager for its Nashville, Tennessee, office, under an employment agreement. Morgan was responsible for operations, sales, and marketing, which required him to meet with clients and gave him access to client records and employee files. Whelan hired Charles Kennebrew as the director of quality assurance for Whelan's Dallas office, also under an employment agreement. Kennebrew's duties included managing the operations, clients, and customers of the office, which gave him access to employee and financial records of the company. He was in contact with Whelan's customers in various parts of Texas. Both employment contracts contained non-competition and employee non-solicitation clauses.
Kennebrew's employment agreement prohibited him from:
(1) For a period of two years, soliciting Whelan customers, or prospective customers whose business was being sought during the last 12 months of Kennebrew’s employment.
(2) Soliciting any Whelan employees.
(3) Working for a Whelan competitor within 50 miles of his Whelan work location(s).
(4) Working for a Whelan customer or prospective customer whose business was being sought during the last 12 months of Kennebrew’s employment.
Morgan’s agreement had the same restrictions, except that his employee non-solicitation clause contained a one-year prohibition, rather than two.
After Kennebrew and Morgan left the company and took other jobs, Whelan sued to enforce the restrictions in their non-compete agreements. The trial court ruled in favor of Kennebrew and Morgan, granting them summary judgment on the grounds that the non-competition and non-solicitation clauses were overbroad and unenforceable.
The Supreme Court reversed, and held:
(1) The “existing customer” non-solicitation clauses were overbroad, in that they prohibited contact with any customer of Whelan, anywhere in the nation, regardless of whether the employee knew it was Whelan’s customer or previously dealt with that customer. Both Kennebrew and Morgan served customers in geographically limited areas. However, courts in Missouri have the authority to give effect to an overly restrictive non-compete clause by refusing to give effect to its unreasonable terms, or modifying the terms of the contract to be reasonable. In this case, the existing customer non-solicitation clause was modified so that Kennebrew and Morgan were only prohibited from soliciting customers they had dealt with during their employment with Whelan.
(2) The “prospective customer” non-solicitation clauses were overbroad, because this could include any business in the country that could potentially benefit from increased security services, and would encompass solicitation of prospective customers, no matter how tenuous the relationship between Whelan and the prospect, or how detached Kennebrew and Morgan were from Whelan’s solicitation. This clause was held unenforceable.
(3) The clauses prohibiting Morgan from soliciting Whelan’s employees was held enforceable. In Morgan’s case, there was a one-year restriction, and R.S.Mo. 431.202 is a “safe harbor” provision which says that an employee non-solicitation covenant of up to one year is presumed reasonable when its purpose is to protect confidential or trade secret business information, relationships with customers or suppliers, goodwill, or company loyalty. In Kennebrew’s case, the restriction was two years, and the court held that there were triable issues of fact as to whether the longer restriction was reasonable under the circumstances; thus, it vacated the trial court’s grant of summary judgment on this point, and remanded for further proceedings.
Missouri courts have long recognized that non-compete agreements are enforceable, but only to the extent they are reasonable as to geographic scope and duration, and are reasonably designed to protect the company’s legitimate business interests. Anyone who is drafting or reviewing a Missouri non-compete agreement should become well familiar with the Supreme Court rulings in the Copeland and Kennebrew cases, as well as the provisions of section 431.202.