What Is a Non-Compete Agreement?
A non-compete agreement, also known as a restriction agreement, is essentially a contract between an employee and an employer in which the employee agrees to follow certain restrictions related to her employment. The most common type of non-compete restriction is an agreement that prohibits an employee from working for a competitor for a certain period of time after leaving her employment. There are other types of "non-compete" restrictions including those that limit an employee’s ability to recruit clients, solicit clients or employees away from the past employer, and those that prevent an employee from starting her own competing business .
Given that the purpose of a non-compete is to restrict an employee’s right to engage in certain employment, an enforceable non-compete must be narrowly drafted to protect the employer’s legitimate business interests without unduly restricting the employee’s right to work. Employers may use non-compete agreements to prevent employees from leaving and competing with the employer by either joining with a competitor or starting a competing business. In Missouri, non-competes are analyzed under the rule of reason, meaning the court will enforce a non-compete that is reasonable to protect the employer’s legitimate business interests, but won’t enforce one that is not so limited in scope. The rules related to non-competes differ from those that apply to other types of restrictive agreements, such as non-solicitation agreements or non-piracy agreements.
Enforceability in Missouri
The enforceability of non-compete agreements falls clearly within Missouri’s judicial sphere for open interpretation. What this means is that the courts retain wide deference and discretion to mold the application of non-compete covenants on a case-by-case basis, looking at each set of circumstances and evaluating the reasonableness in light of the facts presented. However, the court will not look back at these cases and apply what they previously ruled as being reasonable because if the evidence is in line with the facts of the prior case, it would be fair to say that the result will be the same. This information becomes important when the employer is drafting a non-compete covenant or if an employee has had a material change in their employment status to seek out legal counsel.
Generally, the law in Missouri states that such non-competition clauses contained in an employment contract are enforceable only if the restrictions they impose upon the employee are reasonable with regard to the circumstances. Missouri courts have been established when determining that a covenant not to compete will not be enforced unless "having in mind the territorial limits involved[,] the consideration given to the employee," the restriction is found to be as a matter of law reasonable. One unique Missouri statute is for physicians and they have been held to be invalid as a restraint of trade and against public policy under ยง 448.12, RSMo 2000.
Essential Elements of Missouri Non-Competes
Given the failure of most courts to enforce most non-compete agreements in Missouri, attorneys for employers dwelling in Kansas City or St. Louis should be sure to have all essential components of a non-compete provision spelled out in the agreement. These components include time duration, geographic scope of the provision, and the business interest sought to be protected by the provision. For instance, if you are seeking to limit an employee for six months, spell it out; if you are limiting the employee from having contact with key clients, spell it out; if you are limiting the employee geographically to just a few states, spell it out, so the courts remain on course with some of the more liberal interpretations such as those set forth the Cardinal Health decisions. It should also be remembered that if the issue ever arises, it is going to be the Missouri courts (not some New York appellate court) who will interpret the non-compete provision.
Rights and Protections for Employees
Familiarity with their rights and protections under Missouri law is paramount for employees faced with the choice of signing a non-compete agreement.
One of the few specific provisions that Missouri law makes in this area is its recognition of a "tender-back" rule that requires an employee who wishes to avoid the restrictive covenant in an employment contract to first relinquish the benefits of the contract before attempting to void it. Boyer v. W.W. Grainger, Inc., 215 S.W.3d 193, 194 (Mo. App. E.D. 2006). In practical terms, this means that an employee must tender-back to his employer any consideration he has already received from the contract prior to seeking relief by the courts. The tender-back requirement does not, however, require the employee to give back other employment benefits such as raises or commissions he may have received prior to filing suit against the employer. St. Louis Testing Laboratories, Inc. v. Berrios, 530 S.W.2d 799, 805 (Mo. App. E.D. 1975).
The narrow situations where a Missouri court will invalidate a non-compete agreement fall into three categories. One, that the contract is unfairly one-sided or oppressive to the employee. Two, that the employee was fraudulently induced to enter into the contract. For example, the employee’s consent to the provision was induced by promises made by the employer that the employer had no intention of fulfilling. Morrison Exterminating Co., Inc. v. Raile, 800 S.W.2d 666, 668 (Mo. App. E.D. 1990). Third, that by the time of the suit, the circumstances of the agreement have changed so much that continued enforcement of the agreement would be unreasonable. Such circumstances may include changes in technology that render performance impossible or changes in the marketplace that make the provisions of the agreement no longer necessary for the protection of the employer.
In some cases, even if the non-compete agreement is deemed to be legally valid, a Missouri court might nonetheless refuse to enforce the covenant in entirety. The court may instead choose to limit the covenant’s restriction in time and/or geographical area. The Missouri courts have refused to require strict enforcement of the terms of a non-compete agreement against an employee where doing so would amount to abrogating that employee’s existing marketable skills. Casey v. Hallmark Cards, Inc., 929 S.W.2d 679, 683-84 (Mo. App. W.D. 1996).
In addition to those defenses, Missouri law further protects employees to the extent that their employment contracts with their employers are not supported by a sufficient legal basis. The elements necessary for establishing that the employment contract is supported by a sufficient legal basis, however, do overlap in many respects with those substantive defenses applicable to non-compete agreements. Importantly, Missouri courts have held that for a contract to be enforceable, there must be some consideration present beyond bringing the parties together. Dyer v. Clark, 686 S.W.2d 485, 487 (Mo. App. W.D. 1985) (citations omitted). An at-will employee who has signed an employment contract for a fixed term has not provided his employer with any consideration because he remains free to leave the employment of that employer at any time. Id., citing Brizendine v. Missouri Surgical Center, Inc., 619 S.W.2d 331, 333 (Mo. App. K.C.A. 1981). An employee’s mere continued employment is insufficient to constitute consideration of the non-compete agreement. Dyer, 686 S.W.2d at 487.
In Missouri, whether an employer has a legitimate interest justifying the enforcement of a non-compete agreement is determined by examining the interests that the employer seeks to protect, and assessing whether the non-compete agreement’s restrictions indeed serve that purpose or if they need to be limited in scope. For example, Missouri courts have repeatedly held that a non-compete agreement may be enforced when it is aimed at protecting trade secrets, confidential information, customer lists, or valuable contacts.
Recent Cases and Trends
The interpretation and enforcement of covenants not to compete continues to be the subject of litigation in Missouri. Missouri courts have interpreted non-compete agreements, though not a contract of adhesion, as being subject to reasonableness and that they must protect the employer’s legitimate business interest.
Recently, the Missouri Supreme Court upheld the enforceability of a non-competition agreement against a dentist. In Myrick v. D & SKS 1 Associates, LLC (Mo. Oct. 12, 2015), the high court applied a three-prong test to determine the validity of the contract. There are three factors to consider in determining whether a non-competition agreement is enforceable:
o Whether the restraints are supported by adequate consideration;
o The length of the restraint; and
o Whether the restraints are reasonably limited as a matter of time and territory.
In Myrick , the plaintiff argued, among other points, that "(1) the five-year timeframe serves no purpose when ‘a dentist’s practice has the capacity to grow rapidly…"; and (2) if he did not purchase the firm, he had no need to build a "substantial practice." The same can be true of the geographic limitation and whether it serves a legitimate business interest.
In another case, the Missouri Courts have also enforced a non-compete provision that lasted for many years. In American Eagle (Mo. Ct. App. 2011), after some review of prior Missouri cases, the Court of Appeals held that even a 10 year restriction could be enforceable. Missouri Courts have also indicated that the issue or industry should be considered in determining whether the duration is reasonable.
Advice for Employers and Employees
Employers should not use "standard" agreements. They should have a qualified attorney prepare or review the agreement. Repeatedly, I see non-competes for sales people that are too broad and cover all customers the employer has even if the employee had no contact with them. Non-competes should be drafted to protect only the good will earned by the employee during the employment.
If the agreement is draft too broadly the Court can refuse to enforce the non-compete for the entire time period. The key word is "reasonable," the non-compete must be reasonable in terms of geographic area, time and activity restrictions.
Specific advice to employees: Be careful signing any agreement that has a non-compete clause. Understand how your new employer is going to treat you when you leave. On occasion, employers may decide that a non-compete has been invoked and they stop paying commissions, destroy files, etc. Make sure the agreement has adequate provisions that require the employer to pay the employee for work performed. Make sure there is adequate consideration for the non-compete clause, sometimes a bonus, an increase in salary or something else if the employee signs. There should never be a forfeiture of stock or other incentives if the employee continues to work after signing the non-anncompete. Employees should always consider in advance whether they want to work for the potential employer before signing a non-compete.
Alternatives to Non-Competes
The Missouri courts have already hinted that non-competition agreements may not be necessary in every situation to protect the interests of an employer. There are several other legal instruments and strategies that may provide sufficient protection to an employer without resorting to a non-competition agreement. All of these alternatives can be utilized in the employment contract directly, in a policy manual, or as a separate stand-alone document.
Learned Profession. Employees who are considered to be learned professionals have special status under Missouri law and part of the analysis of whether a restriction against such employees is enforceable is whether the restriction on competition is necessary to protect the employer’s business interests. Learned professionals include attorneys, accountants, poets, musicians, journalists and physicians. Some courts have gone so far as to say that even if there is a protectable interest and a reasonable restriction on competition, the employer may not be able to enforce the restriction against learned professionals because learned professions already have an encumbrance in place.
Anti-Piracy Agreements. Tractor companies may have no need to bind their employees to a post-employment covenant not to compete , but they do have a need to protect the information they consider proprietary. Missouri courts have recognized a claim of misappropriation of trade secrets under the Missouri Uniform Trade Secrets Act. A claim under this act depends upon both the existence of a legitimate trade secret and a breach of confidence. Missouri courts have held that the failure to return the company’s proprietary and confidential information upon termination of employment will serve as a basis for a claim.
Confidentiality/Non-Disclosure Agreements. Missouri courts are willing to consider reasonable restrictions on an employee’s ability to use an employer’s confidential information to pursue his own business and/or to disclose it to third parties. As long as the concern of protecting confidential information exists, it is a proper subject for limitation under Missouri law. However, Missouri courts will not enforce provisions that attempt to prevent employees from working for a competitor merely because the employee has to rely on some of his former employer’s confidential information and thus may have an unfair advantage. Missouri employers want to take care; the provision needs to be narrowly tailored and the former employer needs to be able to demonstrate at least some purpose for the information that is being protected.