Employment agreements have become a popular tool in the business world, in both big and small business. Employment agreements establish vital terms and avoid misunderstandings such as “at-will” or other termination provisions. Most employment agreements will contain at least one type of restrictive covenant, such as a covenant not to disclose confidential information.
Restrictive covenants are no longer contrary to public policy in Missouri, yet they still are not favored by the courts. Generally, an employer cannot extract enforceable restrictive covenants merely to protect himself from competition by an employee. Courts are looking at the reasonableness of the restriction. Whether the restraints imposed by a restrictive covenant in an employment agreement are reasonable is determined by considering all attending circumstances and whether enforcement serves the employer’s legitimate business interests. The essence of the law is that restrictive covenants will be enforced only if legitimate protectable interests of the employer are served, and will not be enforced if merely as punishment of the former employee for having left employment. The party attempting to enforce a restrictive covenant has the burden of demonstrating the necessity to protect the claimant’s legitimate business interest.
Restrictive covenants generally fall into three categories: non-solicitation, non-disclosure and non-competition. While each covenant will be discussed below, oftentimes there is no bright line between the name placed on the covenant, and thus are frequently grouped together and simply called “Covenants Not to Compete.”
Covenant of Non-Solicitation
One of the “protectable interests” of an employer is customer contacts and the goodwill generated by those contacts. The rationale for protecting customer contacts is that a customer’s goodwill toward a company is often attached to the employer’s individual employees, and the employer’s product or service becomes associated in the customer’s mind with the employees. The employee is in a position to exert a special influence over the customer and entice the customer’s business away from the employer. It is this special influence which justifies enforcement of non-solicitation covenants.
In deciding whether to enforce this type of covenant, Missouri courts will look to the quality, frequency and duration of the employee’s exposure to the customers. Moreover, the employer must prove that it has a stock of customers who regularly deal with the employer. An employer’s customer list must be more than a listing of firms or individuals that could be compiled from directories or other generally available sources. It is only when the customer list represents selective accumulation of information based upon past selling experience, or when considerable time and effort have gone into compiling the customer list, that the solicitation will be enjoined.
Before an employer can claim to have a protectable interest in its customer contacts, the employer must have a stock of customers who regularly deal with the employer. Courts have defined a “customer” as one who repeatedly has business dealings with a particular tradesman or business.
An employer seeking to enforce a restrictive covenant of non-solicitation does not need to show actual damages to enforce the covenant if the covenant is lawful and the opportunity to influence the employer’s customers exists.
Covenant of Non-Disclosure
Covenants of non-disclosure, or confidentiality agreements, is another type of restrictive covenant frequently integrated into employment agreements or provided as a separate agreement unto itself. The Missouri courts have recognized a “protectable interest” in an employer’s proprietary information and trade secrets.
It is not the general skills and knowledge that an employee acquires during his tenure with an employer that are protected. Rather, it is the plan and processes developed by the employer and disclosed to an employee while the employer-employee relationship existed and which are unknown in the industry and which give the employer an advantage over the competition that is the “protectable interest.”
There are two types of disclosure, actual and inevitable. If an employee removes from an employer’s premises tangible items such as price books, lead sheets, financial information, distribution, marketing and manufacturing strategies and methods, etc., and utilizes such tangible trade secrets, then there is actual disclosure.
Inevitable disclosure may occur when the employee has been so involved with the employer’s trade secrets that they cannot help but consider the trade secrets while performing their duties for a competitor. In order to secure relief against an inevitable disclosure, an employer must show that a former employee will be making decisions for a competitor in the same areas covered by the employee’s former employment. Moreover, an employer must demonstrate inevitability exists that the nature of the secrets at issue and the nature of the employee’s past and future work justify an inference that the employee cannot help but consider secret information.
In a case from Illinois, a federal court issued injunctive relief in favor of a soft drink company and against a former general manager for the company on the basis of inevitable disclosure. Notwithstanding that the former employee and representatives of the new employer had different distribution systems and marketing plans for their company’s drinks, the court found that the former employee’s access to inside information, specifically marketing, manufacturing and distribution strategies, especially as some related to sports drinks, demonstrated inevitability that the former employee would rely on the former employer’s trade secrets in his new job. Perhaps pushing the court to this finding was its reluctance to believe either that the former employee would refrain from disclosing the trade secrets in his new position, or that the new employer would ensure that the former employee would not disclose such trade secrets.
In a Missouri case involving competing tax preparation companies, the circuit court refused to find that there existed inevitable disclosure. Here, the court found, unlike in the above-referenced sports drink case, that the former employees, while very proficient and well respected in the industry, would not be making decisions of the same type required while employed with their former employer. The court dismissed the former employer’s arguments that mere exposure to trade secrets created an inference of inevitable disclosure.
Covenant Not to Compete
Temporary and spatially limited restrictive covenants that protect an employer’s legitimate protectable interests from unfair competition by a former employee and that do not impose unreasonable restraints on the employee are enforceable. A covenant not to compete must be limited in duration and geographically.
The standard for determining the reasonableness of the scope of a covenant not to compete is whether the limitations are no greater than fairly required for protection of the employer’s legitimate business interests. Courts will assess the reasonableness of a covenant not to compete by thoroughly considering the surrounding circumstances, which includes the subject matter of the contract, purpose to be served, situations of the parties, and extent of the restraint and the specialization of the business.
Non-competition covenants are carefully restricted by the courts because the covenants deal with restraints on commerce and limit an employee’s freedom to pursue his or her trade and ability to earn a living. However, where the conduct is egregious, courts are not afraid to fashion an appropriate remedy.
In one case where a 50-mile geographical scope was provided in a covenant not to compete restriction, a prosthetist initially set up a competing business within the exclusion zone. Upon opening his initial facility, patients of the former employer sought out the prosthetist’s services. Subsequently, the former employee opened a second facility outside that 50-mile radius area and only saw the former employer’s patients there. The court, in enforcing the covenant not to compete, held that the former employee violated the terms of the non-compete clause because he had already affected the former employer’s former patients. Thus, even though the second facility was outside the 50-mile exclusion zone, the court enforced the non-compete provision as to both existing and future patients of the former employer, regardless of the location where treatment was to occur.
Restrictive covenants may be enforced through injunctive relief. To prevail, a party must show: (1) the threat of irreparable harm; (2) the state of balance between the perceived harm and the injury that granting the injunction will inflict on other parties in the litigation; (3) that the movant will succeed on the merits; and (4) the public interest.
If a temporary restraining order (TRO) or preliminary injunction is granted by the court, such relief is conditioned on the movant posting a bond. Quite often, the expense of posting such a bond can derail the efforts to obtain enforcement, especially with smaller companies.