Defenses to the Enforcement of Non-Competes
We have a thorough understanding of the defenses that may be raised in connection with the actual or threatened enforcement of non-compete agreements. Our experience in handling non-compete litigation has informed us of the wide variety of legal and equitable defenses that may be raised in opposition to attempted enforcement of a non-compete agreement, which include but are not limited to those discussed below. Our experience and knowledge of potential defenses allows us to provide our clients sound advice and vigorous representation before and during litigation over the enforcement of non-compete agreements.
Prior Material Breach
Where an employer first breaches an employment agreement, it is barred from seeking enforcement of a covenant not to compete. Ozark Appraisal Serv., Inc. v. Neal, 67 S.W.3d 759, 764 (Mo. Ct. App. 2002). The policy underlying this legal principle is that a party to a contract should not be able to enforce its benefits where he is the first to violate its terms. See id.
A key issue with respect to this defense is often whether a prior breach of the agreement is material. The defense is most often raised when an employer is alleged to have unilaterally changed the terms and conditions of the employee's employment, contrary to the terms of the parties' employment or compensation agreement. See, e.g., Ozark Appraisal Serv., 67 S.W.3d at 764.
In Ozark Appraisal Serv., Inc., the employee—a real estate appraiser—signed an employment agreement with her employer—an appraisal company—that included not only a restrictive covenant, but also a provision stating she could only be terminated for certain conduct or behavior. Id. at 762-65. A few years into the employment relationship, the employer attempted to institute an accounting system for which its appraisers would pay a monthly fee. Id. The employee objected to the accounting system and stated her intention to refuse to use or pay for it. Id. Her employer responded that the last employee who objected to the system was fired and that the employee should accept the system “or else.” Id. The employee then left her employer’s premises and never returned, considering herself to have been terminated by her employer, as she was unwilling to use or pay for the accounting system. Id. She then began working in competition with her former employer. Id. Her former employer filed suit to enforce the non-compete agreement.
The trial court and Missouri appellate court held that the former employer committed a prior material breach of the agreement by terminating the employee's employment for a reason not permitted under her employment agreement. Id. at 764-65. The courts found the employer's demand and threat with respect to the new accounting system constituted a unilateral change in the terms and conditions of the employee’s employment, which meant that the former employer was the first to materially breach the parties’ agreement. Id.
It should be noted that, if an employer commits a prior material breach, but the employee does not complain for an extended time period, the employee may be found to have waived the employer's breach. For example, if an employer were to change the compensation structure to the employee's detriment, but the employee waited to complain until he was in litigation over his non-compete five years later, the court may find that the employee waived the breach and will enforce the non-compete against him. See, e.g., Forms Mfg., Inc. v. Edwards, 705 S.W.2d 67, 70 (Mo. Ct. App. 1985).
Even where an employee cannot prove a prior material breach, he or she may still raise the defense of unclean hands where the other party seeks injunctive relief based on alleged breach of a non-compete agreement. See State ex rel. Leonard v. Sherry, 137 S.W.3d 462, 471 n.8 (Mo. banc 2004) (“The chief remedial defenses to equitable claims are the unclean hands defenses and laches”); Sigma-Aldrich Corp. v. Vikin, 451 S.W.3d 767, 771 (Mo. Ct. App. 2014) (an injunction is an action in equity). In general, the unclean hands doctrine means “[a] party who participates in inequitable activity regarding the very issue for which it seeks relief will be barred by its own misconduct from receiving relief.” Kim v. Mercy Clinic Springfield Comm., 556 S.W.3d 613, 618 (Mo. Ct. App. 2018) (noting “[w]hat is material is not that the plaintiff’s hands are dirty, but that he dirties them in acquiring the right he now asserts”).
Termination without Cause
One of the first issues that legal counsel must often address in non-compete cases is whether the employee’s employment was terminated with or without good cause. The general rule in Missouri is that, if the employer discharges an employee without good cause, a court may refuse to order injunctive relief to enforce the employee’s non-compete. See Property Tax Representatives v. Chatam, 891 S.W.2d 153, 156 (Mo. Ct. App. 1995); Showe-Time Video Rentals, Inc. v. Douglas, 727 S.W.2d 426, 430-433 (Mo. Ct. App. 1987) (affirming denial of injunction where contract was terminated without good cause); but see Superior Gearbox Co. v. Edwards, 869 S.W.2d 239, 245 (Mo. Ct. App. 1993) (affirming grant of injunction where employee was terminated for good cause). However, one Missouri court has suggested that this analysis may, and can, lead to a different result when considering non-solicitation agreements. Chatam, 891 S.W.2d. at 158.
Another defense often raised is that an employer waived its right to enforce a non-compete agreement because the employer has not enforced it in the past against other employees. The success of this defense is often dependent upon the specific facts of a case, such as the number of the past instances of failing to enforce the non-compete, how recent those instances are, and whether other employees had the same type of job as the employee at issue. See Emerson Elec. Co. v. Rogers, 418 F.3d 841, 845 (8th Cir. 2006).
If you are seeking a better understanding of non-compete law defenses, contact our office directly to review the situation. We may be reached at (314) 645-4100 or by email at firstname.lastname@example.org.