It seems like a simple notion: a restrictive covenant only works if it takes effect during the time period mandated by the covenant. For instance, a two-year covenant not-to-compete must be declared enforceable and take effect within the two-year time frame. Otherwise, the restrictive period will have already passed by the time the covenant is declared enforceable, thereby rendering the covenant moot. But what if a prolonged litigation process makes this impossible? Is the employer simply out of luck, and is the employee in the clear? Not according to a recent decision by the Missouri Court of Appeals.

On November 29, 2011, the Missouri Court of Appeals issued a decision in Whelan Sec. Co. v. Kennebrew recognizing that an employer—or another party having contractual rights—may lose a part of the benefit of the bargain if forced to sit upon those rights. In the case of a non-compete clause, an employer may lose its right to compel an employee to sit out of the marketplace for some time after the employee’s employment has ended.

In Whelan, the defendant employees had significant contact with the employer’s clients during their employment. One of the defendants resigned from his employment in December 2008, while the other resigned in August 2009. On January 4, 2010, the plaintiff employer brought suit against both defendants to enforce restrictive covenants in their employment contracts. The restrictive covenants had a two-year duration and a 50-mile radius. The trial court granted summary judgment in favor of the defendants, concluding that the employment agreements at issue, as written, were overbroad and not reasonable as to time and space and were therefore not valid.

On appeal, the Missouri Court of Appeals reversed the trial court decision. In its opinion, the appellate court reiterated that public policy approves restrictive covenants in employment contracts because the employer has a proprietary right in its stock of clients and their goodwill, and if the covenant is reasonable otherwise, the court will protect the asset against appropriation by an employee. Accordingly, a restrictive covenant is not per se unreasonable if the prohibition is against the solicitation of the employer’s clients and customers. Specifically with regard to the restrictive covenants at issue in Whelan, the court held that the restriction against soliciting clients for a period of two years within a 50-mile radius was not unreasonable on its face.

Notwithstanding the foregoing, due to the protracted litigation process, the two-year restriction mandated by the non-compete agreements had already passed by the time the Court of Appeals rendered its decision. Thus, the court was unable to issue an injunction on behalf of the plaintiff enjoining the defendants from violating the terms of the non-competition agreements. The court was unwilling to enforce the two-year injunction period from the date of the judgment, stating that this would unjustly penalize the defendants, one of whom had established a successful business from the ground up starting nearly two years earlier.

Despite the lack of authority to issue an injunction, the court made clear that this did not mean that the plaintiff had no relief against the defendants. To be sure, the court noted that the purpose of restrictive covenants is to prevent financial loss to employers from competition with former employees. Therefore, the appellate court remanded the case back to the trial court for a determination as to whether the defendants had, in fact, violated the restrictive covenants. The court made clear that if the trial court on remand found that the defendants had breached the restrictive covenants, the plaintiff would be allowed to recover its actual pecuniary losses due to those breaches—as opposed to being awarded an injunction against the defendants.

The Missouri Court of Appeals’ decision in Whelan is important for both employers and employees. The court essentially recognized that the only feasible way to enforce a restrictive covenant in favor of an employer and still protect an employee from an unjust penalty if a drawn-out litigation process renders the restrictive covenant moot is to allow the parties to present evidence on the employer’s actual financial losses resulting from the breach of the restrictive covenant. The decision reiterates that employers still have recourse against a breaching employee in such a situation. And the language of Whelan suggests that this is still the case even if the employer initially claimed that it had “no adequate remedy at law.” As for employees, they need to understand that a clever delaying tactic will not absolve them from liability for breaching a restrictive covenant in their employment contract.

While the exact value of actual pecuniary losses to an employer from a breach of a restrictive covenant would indeed be difficult to ascertain, Missouri has made it clear that employers have the right to compensation for those losses when an injunction is no longer possible.

As either an employer or an employee, it is important to understand the laws governing restrictive covenants.