- Missouri Cases Illustrate Enforceability of Well-Drafted Non-Competition Agreements
- May 6, 2013
- Law Firm: Jackson Lewis P.C. - White Plains Office
Non-competition agreements in Missouri are enforceable where they are reasonable and necessary to protect an employer’s legitimate interests. Two decisions from Missouri courts enforcing non-competition agreements illustrate how restrictions on recent employees’ ability to compete with their former employer can be drafted.
Supreme Court Decision
In Whelan Security v. Kennebrew, 379 S.W.3d 835 (Mo. 2012), the Missouri Supreme Court enforced a non-competition clause, provided guidance on non-solicitation of customers, and reaffirmed Missouri’s reasonable reformation approach to non-competition agreements.
A Dallas-based former manager left Whelan Security to form a new company and shortly thereafter was joined by a Nashville-based former Whelan manager. They both were subject to covenants restricting them for two years from (a) working for a competing business within 50 miles of any location where they had provided services for Whelan, (b) soliciting any customers of Whelan, and (c) soliciting any employees of Whelan.
Whelan Security sought to enjoin the two former employees based on the agreements. The request was denied by the trial court, which entered summary judgment in favor of the employees, finding the restrictions overbroad and not reasonable in duration and geographical scope. The Missouri Court of Appeals reversed, but the matter was transferred to the Missouri Supreme Court.
The high court observed Missouri courts generally will enforce non-competition agreements if they are no more restrictive than necessary to protect the legitimate interests of the employer. Further, such agreements must be narrowly tailored temporally and geographically and are enforceable only to the extent the restrictions protect the employer’s trade secrets or customer contacts.
Here, the Court held the customer non-solicitation provisions were overbroad and unenforceable. As written, they applied to all of Whelan Security’s existing customers throughout the nation, regardless of whether the former managers had ever dealt with them. The Court noted that such a broad clause might be enforceable in some circumstances (such as where an employee worked for a smaller employer and was engaged with most of the customers), but not in this case. The Supreme Court accordingly reformed, applying the reasonable reformation approach, the overbroad provisions by limiting the restriction to customers with whom the former managers had dealt during their employment. The Court also held the agreements’ two-year 50-mile radius territorial prohibitions on customer solicitations were enforceable, consistent with precedent.
As to the employee non-solicitation provision, the Court noted that under Missouri’s employee non-solicitation statute, section 431.202(3), RSMo Supp. 2011, a one-year period was per se reasonable and enforceable. But the disputed provision covered two years. The Court concluded that a genuine issue of material fact existed under the statute as to the reasonableness of this period and remanded the issue to the trial court.
Eastern District of Missouri
In TLC Vision (USA) Corp. v. Freeman, 2012 WL 5398671 (E.D. Mo. Nov. 2, 2012), the Eastern District of Missouri broadly enforced a non-competition agreement against an Oklahoma-based group of former employees. The five former employees left their employer and formed a new company operating refractive eye surgery centers in Tulsa and Oklahoma City. They were parties to employment agreements restricting them for one year from competing in the Tulsa and Oklahoma City markets, from soliciting referral sources, and from soliciting other TLC employees. The agreements included provisions agreeing to apply Missouri law and consenting to jurisdiction in Missouri courts in connection with any disputes that might arise under these contracts.
Oklahoma law (Title 15 O.S. section 219.A) significantly limits non-competition agreements. Such agreements are void if they go beyond restricting the former employee from soliciting “the sale of goods, services or a combination of goods and services from the established customers of the former employer.” The restrictions at issue exceeded those bounds. It also was unclear whether referral sources would be treated as “established customers of the former employer” under Oklahoma law if they regularly refer business but do not engage in direct transactions.
The former employees challenged the enforceability of the Missouri choice-of-law clause and asserted Oklahoma law should apply in passing on the agreements. They argued that as Oklahoma residents who had worked for TLC in Oklahoma, Oklahoma had a materially greater interest in the outcome of the dispute. The federal court rejected this argument, holding each state had a substantial interest in the validity of the agreements and there was no indication Oklahoma had a materially greater interest in the matter. Consequently, the court applied Missouri law to the matter. As the restrictions were reasonable under Missouri law, the court enjoined the former employee from continuing to operate centers in Tulsa and Oklahoma City and from soliciting referral sources.
Notably, the former employees filed a collateral action in Oklahoma state court. That matter was removed to federal court in Oklahoma which held the Missouri federal court should be allowed to decide the relevant issues because it had been filed first in Missouri.
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Both decisions provide important lessons to employers both on implementing non-competition agreements and developing litigation strategy. Employers should ensure restrictive covenants are consistent with restrictions previously recognized under state law. For example, for employees in Missouri, employers should consider using the 50-mile restriction recognized in Whelan Security and applying the solicitation guidance from the Missouri Supreme Court, as well as the time limitation from the Missouri employee non-solicitation statute. National employers should review their agreements on a state-by-state basis since a single national agreement likely will not meet the recognized limits for all states.
As to implementation and litigation, TLC Vision highlights the importance of properly drafted choice-of-law and choice-of-forum clauses, and recognizes the importance of initiating litigation quickly in a preferred forum.