The Missouri Supreme Court decided an important case a few months ago involving non-competition and non-solicitation provisions in employment agreements. In Whelan Security Co. v. Kennebrew, the Supreme Court enforced a non-competition agreement and modified non-solicitation agreements against out-of-state former employees.
My labor and employment colleague, Gerry Richardson, wrote a blog post about the Whelan decision soon after it was filed in August 2012, and he included the following takeaways for employers:
- Limit post-employment restrictions on customer solicitations to those customers with whom the employee interacted.
- Use the one-year safe harbor for post-employment restrictions on a former employee’s solicitation of employees.
- Include a statutorily recognized purpose for an employee non-solicitation obligation longer than one year in the text of the non-compete agreement, such as protection of confidential or trade secret business information, relationships with customers or suppliers, the employer’s goodwill, or loyalty to the employer.
- Avoid general post-employment non-compete obligations with geographic scopes of more than a 50-mile radius from the employee’s last workplace with the employer and durations of greater than two years after the termination of employment.
Healthcare Services of the Ozarks, Inc. v. Copeland: Trade secrets and customer relationships
Gerry also discusses Healthcare Services of the Ozarks, Inc. v Copeland, a 2006 Missouri Supreme Court decision regarding non-competition agreements. Copeland focused on the protection of an employer’s trade secrets and customer contacts.
In Copeland, the court succinctly summarized the competing interests of employer and employee that are involved in non-competes:
There are at least four valid and conflicting concerns at issue in the law of non-compete agreements. First, the employer needs to be able to engage a highly trained workforce to be competitive and profitable, without fear that the employee will use the employer’s business secrets against it or steal the employer’s customers after leaving employment. Second, the employee must be mobile in order to provide for his or her family and to advance his or her career in an ever-changing marketplace. This mobility is dependent upon the ability of the employee to take his or her increasing skills and put them to work from one employer to the next. Third, the law favors the freedom of parties to value their respective interests in negotiated contracts. And fourth, contracts in restraint of trade are unlawful. [citations omitted]
The court then articulated the principles governing enforcement of non-competition agreements, focusing on the protection of trade secrets and customer contacts:
Missouri courts balance these concerns by enforcing non-compete agreements in certain limited circumstances. Non-compete agreements are typically enforceable so long as they are reasonable. In practical terms, a non-compete agreement is reasonable if it is no more restrictive than is necessary to protect the legitimate interests of the employer. Non-compete agreements are enforceable to the extent they can be narrowly tailored geographically and temporally. In addition, such restrictions are not enforceable to protect an employer from mere competition by a former employee, but only to the extent that the restrictions protect the employer’s trade secrets or customer contacts. Missouri law in this regard follows the “modern rule,” which Lord Atkinson summarized in Herbert Morris, Ltd. v. Saxelby, as follows:
He (employer) is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use. He is also entitled not to have his old customers by solicitation or such other means enticed away from him. But freedom from all competition per se apart from both these things, however lucrative it might be to him, he is not to be protected against. He must be prepared to encounter that even at the hands of a former employee.
The Supreme Court then analyzed whether Healthcare Services of the Ozarks had a protectable interest in trade secrets and its customer base. The court concluded that Healthcare Services hadn’t demonstrated a protectable interest in trade secrets but that it had demonstrated a protectable interest in its customer contacts; thus, the non-compete agreements at issue were valid and enforceable. (Neither the two-year duration of restrictions nor the 100-mile radius geographical restrictions were at issue on appeal.)
Whelan Security Co. v. Kennebrew
Whelan involved the enforcement of non-competition and non-solicitation provisions in the employment agreements of two former employees of a security services company, Charles Kennebrew and Langdon Morgan. Each contract prohibited the former employee, for two years after termination of employment, from working for a business that competed with Whelan within a 50-mile radius of any location where the employee had provided services on behalf of Whelan. The agreements also contained a two-year restriction against soliciting customers and prospective customers and against soliciting Whelan’s employees, and a two-year restriction on working for Whelan’s customers and prospective customers. (Morgan’s employee non-solicitation clause was for one year, while Kennebrew’s was for two years.)
Kennebrew resigned from Whelan to set up his own security services company and Morgan joined the new company soon after it started. The company directly competed with Whelan in Houston, where the company replaced Whelan as the security services provider at a condominium complex and hired some of Whelan’s employees at the complex. Whelan sued to enforce the restrictive covenants in Kennebrew’s and Morgan’s employment agreements. The trial court refused to enforce the employment agreements and granted summary judgment in favor of Kennebrew and Morgan, stating that “the employment agreements at issue in this case, as written, are overbroad, not reasonable as to time and space and therefore are not valid.”
Customer non-solicitation clauses
The Missouri Supreme Court held that the customer non-solicitation restrictions were too broad as written, because they were not limited geographically and there was no other language that would have limited the scope of the provisions, such as to customers with which Kennebrew and Morgan had contact with while working for Whelan. The prospective non-solicitation restriction was also too broad, not to mention the fact that the Missouri Supreme Court questioned in Copeland whether an employer has a legitimate interest in prospective customers.
However, Missouri courts can modify unreasonable non-competition agreements. The Supreme Court stated that “when the provisions of a non-compete clause impose a restraint that is unreasonably broad, appellate courts still can give effect to its purpose by refusing to give effect to the unreasonable terms or modifying the terms of the contract to be reasonable.” Accordingly, the Missouri Supreme Court modified Whelan’s customer non-solicitation agreements to limit their scope to those customers with whom Kennebrew and Morgan dealt during their employment with Whelan and eliminating the restriction regarding prospective customers.
Employee non-solicitation clauses
The employee non-solicitation clauses in the employment agreements prohibited Kennebrew and Morgan from soliciting any employees or agents of Whelan for a period of two years after termination of their employment. Morgan’s one-year prohibition is per se reasonable under section 431.202.2 of the Revised Statutes of Missouri, which provides a safe-harbor for employee non-solicitation clauses in favor of an employer that last no longer than one year. However, there was a genuine issue of fact as to the purpose of Kennebrew’s non-solicitation provision, which is important in determining enforceability under section 431.202. The Supreme Court remanded the case on this issue without reaching the question of whether a two-year restriction was reasonable under the circumstances.
Non-competition clause — Kennebrew
The court held that Kennebrew’s two-year, 50-mile non-compete was enforceable, stating, “Considerable precedent in Missouri supports the reasonableness of a two-year non-compete agreement for an operations manager that is limited to 50 miles from where services were rendered by the employee.” (Note that some of the cases cited by the court enforced geographic restrictions of 100 miles or more.) However, genuine issues remained as to whether Kennebrew violated the covenant, so the issue was remanded. (The enforceability of Morgan’s non-compete wasn’t at issue in the litigation because Whelan didn’t allege a violation of the covenant in its petition.)
For a more detailed discussion of Whelan see Missouri Supreme Court Reaffirms That Missouri Is A Pro Non-Compete Jurisdiction, Enforcing Non-Competition and Modified Non-Solicitation Agreements Against Non-Resident Former Security Company Employees at the Trading Secrets blog.