Enforcing Non-Compete Agreements
The attorneys with our Firm have substantial experience handling enforcement of non-compete agreements. Our practice ranges from counseling employers on potential enforcement of non-compete agreements, to advising and defending employees accused of breaching them. In either scenario, we aggressively represent our clients and know the substantive and procedural rules and rights at issue in such legal proceedings. Such knowledge and experience in non-compete disputes are critical to successfully navigating and resolving these actions, through settlement, trial or otherwise.
Elements of Enforcing a Non-Compete Agreement.
The purpose of enforcing a non-compete agreement is to protect an employer from unfair competition by a former employee who has or had access to the employer’s trade secrets or customer contacts by virtue of his or her former employment. The law is clear that fair protection of the employer is the objective of non-compete enforcement—not punishment of the employee or prevention of competition. See Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 842-46 (Mo. banc 2012).
To make and sustain a claim for breach of a covenant not to compete, one must allege and prove the following:
- The existence of a valid covenant not to compete;
- Breach of the agreement, actual or anticipated, by the employee;
- The existence of actual, quantifiable damages proximately caused by the breach of contract, if damages are sought.
In some cases, it is advisable for an employee to bring a declaratory judgment action to determine the validity or scope of a covenant not to compete. If the employee is the plaintiff in a declaratory judgment action, then the petition must set forth the existence of a justiciable controversy by alleging facts showing the employee has been threatened with enforcement action by the former employer. See Brown v. Rollet Bros. Trucking Co., 291 S.W.3d 766 (Mo. Ct. App. 2009). It is also often advisable to request immediate injunctive relief from a court to prevent irreparable harm and preserve the status quo until the court can conduct an evidentiary hearing on the claimed breach. See Paradise v. Midwest Asphalt Coatings, Inc., 316 S.W.3d 327 (Mo. Ct. App. 2010) (holding no obligation to plead or prove actual breach of covenant when seeking injunctive relief).
Validity of Covenants Not to Compete
Perhaps the most frequently litigated issue in actions on covenants not to compete is whether the covenant is valid and enforceable.Missouri courts have upheld covenants not to compete if they fulfill three conditions:
- They must be supported by consideration;
- They must serve to protect legitimate interests of the employer; and
- They are demonstratively reasonable in scope, including time and geography.
See, e.g., Whelan, 379 S.W.3d at 841-42. Geographical limits are not always essential to the validity of a covenant not to compete, if the agreement is drafted to include other limitations on its scope (e.g., limiting contact only with customers with whom the employee actually dealt during employment) or the employee in fact had extensive contact with a substantial number of the employer’s customers, regardless of location. See Whelan, 379 S.W.3d at 843-46.
Missouri courts have recognized that continued at-will employment constitutes consideration for a non-compete agreement where the employer provides the employee with continued access to its protectable assets and relationships by virtue of his or her employment. JumboSack Corp. v. Buyck, 407 S.W.3d 51, 55-57 (Mo. Ct. App. 2013). Promotions and compensation increases can also constitute consideration to support such a covenant, but are not required. Id.; Morrow v. Hallmark Cards, Inc., 273 S.W.3d 15, 28-29 (Mo. Ct. App. 2008).
Nonetheless, Missouri courts have found, where a covenant not to compete is incorporated in a contract other than an employment contract, such as a shareholder agreement, and there is no statement in the covenant that it served to protect any special interest of the company and no additional consideration was specified, the purported covenant not to compete may fail for lack of “sufficient” consideration. Sturgis Equip. Co., Inc. v. Falcon Indus. Sales Co., 930 S.W.2d 14 (Mo. Ct. App. 1996).
Missouri only recognizes two interests protectable by a reasonable covenant not to compete: the employer’s trade secrets and customer contacts. Healthcare Svcs. of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604 (Mo. banc 2006). Ordinarily, an employer does not have a protectable interest in a third party’s customers, and it is not clear that a third-party beneficiary could enforce a covenant not to compete. JTL Consulting, LLC v. Shanahan, 190 S.W.3d 389 (Mo. Ct. App. 2006).
With respect to customer contacts, the purpose of an enforceable covenant not to compete must be to prevent a former employee from unfairly making use of former contacts with a former employer’s customers to the former employer’s disadvantage. Consequently, for “customer contacts” to be protectable, the employee must have contact with and influence over a stock of regular customers, or a “trade following.” See Copeland, 198 S.W.3d at 613; see also Kessler-Heasley Artificial Limb Co., Inc. v. Kenney, 90 S.W.3d 181 (Mo. Ct. App. 2002) (employee contacts with prosthetic patients referred to employer sufficed to warrant enforcement).
The term “trade secrets” is sometimes used loosely to include confidential information or secrets of a business. See, e.g.,Healthcare Svcs. of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604 (Mo. banc 2006). However characterized, the employer must prove that the information is actually, among other things, secret and not readily duplicated by competitors without inside knowledge. Id. at 610-11. Importantly, an employer has both a statutory and common law right to protection of trade secrets, even without a covenant not to compete. Wilson Mfg. Co. v. Fusco, 258 S.W.3d 841 (Mo. Ct. App. 2008).
Missouri courts generally enforce a non-compete agreement if it is demonstrably reasonable. A non-compete agreement is reasonable if:
- It is no more restrictive than necessary to protect the legitimate interests of the employer;
- It is narrowly tailored temporally and geographically;
- It seeks only to protect legitimate employer interests beyond mere competition by a former employee.
Whelan, 379 S.W.3d at 841-42. The employer bears the burden to prove that a 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. However, under certain circumstances, the court may modify an otherwise overbroad covenant not to compete and enforce it in a more limited fashion that the employer proves is reasonable to protect its specific interest at issue. Whelan, 379 S.W.3d at 844-45. Missouri has thus appeared to adopt some form of what has been called the “blue pencil rule,” permitting a court to modify the parties’ agreement under certain circumstances and enforce it only to the limited extent that it is found reasonable.
Some covenants not to compete, however, may be found wholly unreasonable or not appropriate for modification and partial enforcement.The Missouri Supreme Court has not yet addressed or delineated the line between a modifiable covenant not to compete and one that is not modifiable; however, appellate courts have weighed in from time to time and it is clear a trial court has discretion to refuse to modify a covenant and grant partial relief if it concludes enforcement of a covenant, as drafted, would be unreasonable. See Whelan, 379 S.W.3d at 844 n. 6; see also Sigma-Aldrich Corp. v. Vikin, 451 S.W.3d 767 (Mo. Ct. App. 2014).
Parties often seek immediate injunctive relief from a court when they believe an actual or threatened breach of a non-compete has occurred. This is often a critical step in the trajectory of a non-compete lawsuit; success at this stage of the proceedings is significant. In seeking injunctive relief, a party does not need to prove that actual damage has already occurred; rather, it generally suffices if the party seeking enforcement shows that there is a real potential for damage to result from the former employee’s alleged conduct that breaches the agreement, such as the employee having the opportunity to use contacts and influence customers. See, e.g., Washington Cty. Mem. Hosp. v. Sidebottom, 7 S.W.3d 542, 545 (Mo. Ct. App. 1999); Paradise, 316 S.W.3d at 329.
If you are seeking a better understanding of non-compete law in Missouri, contact our office directly to review the situation. We may be reached at (314) 645-4100 or by email at email@example.com.