Introduction to Non-Compete Agreements
Non-compete agreements, also known as non-competition agreements, are legal contracts used by employers to prevent employees from competing with the business for a certain amount of time after their employment ends. The idea is that the employee will not use the secrets and knowledge he or she learned while employed by the business, and will not open a competing business, for the specified period of time.
Most often, non-compete clauses are used in situations where the employee opens his or her own similar business after leaving employment. However, there are other occasions when the agreement should be observed:
•If the employee starts working for a competing company within the specified time frame of the non-compete clause.
•If the employee quits or is terminated, but the company has maintained business relations with him or her for six months or longer after the termination .
By signing a non-compete agreement, the employee agrees to not use any non-public information obtained during the course of employment after they leave. This can include information such as third-party contacts, trade secrets, trade practices and other confidential information about the business.
Missouri courts generally favor the enforcement of non-compete agreements, except when they pose an unreasonable restriction on the ability of the worker to make a living. Courts will, however, enforce a non-compete contract as long as its language is reasonable with respect to the scope of the activity, time and geographical area it covers.
If you have questions about a non-compete agreement you’ve signed, consult with an experienced St. Louis business attorney.
Legal Framework in Missouri
Missouri non-compete law is governed by common law and statutory rules. Two statutes are particularly relevant to covenants not to compete in Missouri: 417.453 (the Missouri "Covenant Not to Compete Law") and 431.202 (the "Missouri Uniform Trade Secrets Act"). In addition, the statute of frauds, § 432.020, and the doctrine of unconscionability, § 433.200, provide guidance to courts that are asked to enforce restrictive covenants. Lastly, Missouri courts have determined that the public policy (exception) doctrine plays a substantial role in the enforcement of restrictive covenants.
Section 417.453 (the Missouri "Covenant Not to Compete Law") governs covenants not to compete in Missouri. It provides that a covenant not to compete will be enforceable as long as, among other things, (1) the employer has a protectable interest—i.e., a protectable "customer relationship;" (2) the duration and geographic scope of the restriction is deemed reasonable by the court, considering the value of the protectable interest asserted (among other factors); and (3) the covenant does not impose an undue hardship upon the former employee.
Section 431.202 (the "Missouri Uniform Trade Secrets Act") does not affect the enforceability of covenants not to compete under Missouri law. Furthermore, covenants not to disclose trade secrets do not impair a former employee’s joint and several liability for misappropriating and/or stealing the employer’s trade secrets or confidential information.
The Missouri statute of frauds (section 432.020) requires that contracts that cannot be performed within one year are enforceable only if the agreement is "in writing and signed by the party to be charged therewith or by his agent." Whether or not a covenants not to compete falls within the statute of frauds depends on whether the agreement can be performed in one year. Courts have interpreted the language of the statute of frauds generally in favor of finding that a restrictive covenant is not subject to the statute of frauds in the employment context. A promise to "refrain from working for a competitor of the employer for one year after leaving the employ of the company" cannot be performed in less than one year but does not fall within the Missouri statute of frauds. Similarly, an agreement with a two year duration has often been found not to fall within the statute of frauds. That said, the length (or length and breadth) of restrictive covenants in Missouri are often found to be subject to review and revision according to the statute of frauds.
The Doctrine of Unconscionability is a contract defense that courts may apply when covenants not to compete are so oppressive that they shock the conscious. Whether or not a non-compete is unconscionable in Missouri is judged according to the totality of the circumstances. Missouri Courts have frequently refused to enforce covenants not to compete that are found to be unconscionable in their entirety. The defenses of unconscionability and lack of consideration have become increasingly important in Missouri non-compete litigation in the last few years.
Recently, the Missouri Supreme Court issued a unanimous opinion in the case Metro Am. Servs. Inc. v. McConnell that held, among other things, that a covenant not to compete was unconscionable because, in part, the employee received no separate gift or sum of money when he signed the covenant. The court, however, held that the covenant was enforceable because it was enforceable at the employee’s request, and the court limited the injunction to eight months, the time set forth in the contract.
In addition, Missouri also recognizes the public policy (exception) doctrine as a potential defense to covenants not to compete. Missouri Courts will decline to enforce non-competes where doing so would violate and/or frustrate a law with a public interest purpose: notice of sale and licensing statutes.
Enforceability Factors in Missouri
When it comes to non-compete agreements in Missouri, the enforceability of these covenants is commonly tied to their ability to meet specific criteria. Missouri law generally considers a non-compete to be a valid restriction if it is deemed reasonable in terms of time, geography and scope. According to Leadbetter v. Axiom, 515 S.W.3d 402 (Mo. Ct. App. 2017), "[T]he relevant limitation period to determine the reasonableness of a covenant not to compete must be measured from a date other than that on which the covenant was executed." In weighing the various factors, Missouri courts do take into account the interests of the employee, employer, and the public in order to determine whether the agreement in question serves a legitimate business interest.
Therefore, while an employer seeking to enforce a non-compete should have a clear rationale for doing so, employees should also be cognizant of this and avoid taking employment that may be viewed as a threat to the interests of a previous employer. For example, if a former employee should violate the non-compete by competing directly against the former employer, they allow it to appear that the covenant is necessary for that employer to compete.
Disputes and Challenges in Practice
Several challenges to non-compete agreements are commonly litigated. These include: (a) whether the non-compete agreement is valid in the first place; (b) whether it is valid as applied to the specific employee who has signed the agreement; and (c) whether it has been breached by the former employee.
Therefore, these three issues are often at the center of non-compete litigation, typically with parties’ disputes over the validity of the agreement, its legal enforceability, and its application to a specific situation routinely coming before the court at the outset of the lawsuit. When it appears that the parties will disagree as to the enforceability of the non-competition provision, the court will usually first determine whether the agreement is valid. The issue of "validity" often focuses on whether the noncompetition provision constitutes a restrictive covenant or is a contractual commitment with consideration. From a legal standpoint, entering into such an agreement will only be considered a binding contract if it is supported by consideration – usually found in the form of money, stock options, or a new job. When such an agreement is made for little or no consideration at all, Missouri courts have been known to declare such agreements invalid. Therefore, the employer must support the non-compete with some benefit.
Complying with the Law While Protecting Business Interests
Employers can help protect their business interests legally by making sure they have a well-drafted non-compete agreement in place with essential employees.
Restrictions on competition can be enforced in Missouri in a wide variety of factual circumstances, so long as the employer’s business interests are legitimate and the restrictions fit within Missouri’s legal framework.
It is important for employers to know how to frame their restrictions. A non-compete covenant must always be based on a protectable interest and limited in scope and duration. Employers typically show protectable interests by demonstrating that they have a legitimate business interest in preventing former employees from competing, such as:
To determine whether a covenant is reasonable under the circumstances, courts often analyze whether (1) the restraint is supported by consideration; (2) the scope of the restriction is narrowly tailored; and (3) whether the restraint has an appropriate duration.
A review of relevant case law suggests that the enforceability of non-compete agreements in Missouri may vary widely even when the interests being protected, the types of restrictions imposed and the nature and scope of the prohibited business activities are strikingly similar.
In the past, Missouri courts have struck down non-compete agreements with brief duration periods; restrictions limited to a geographic region where the parties’ businesses do not overlap; and restrictions requiring employees to refrain from certain acts , such as solicitation of customers where there are allegations that a sale was made without solicitation.
Courts have questioned restrictions covering former employees’ post-termination employment with competitors. Missouri courts have been willing to enforce non-compete agreements against former employees when the employees were being terminated for cause. In some instances, courts have been willing to enforce non-compete agreements against former employees that were not being fired, but were being laid-off or placed on inactive status.
When drafting restrictive covenants in Missouri, it is best to be conservative and to include only those restrictions which are absolutely necessary and are reasonably related to the business and the protection of its interests. Courts of appeal will sometimes enter a new and more far-reaching covenant of their own choosing rather than enforcing the covenant drafted by the parties. This does not mean that all Missouri courts will reach the same conclusion. Missouri courts in some instances have been willing to alter the scope of the agreement rather than void it entirely, but in some instances, strategic wording may make a difference. Perhaps the best protection is to make sure you have a well-drafted agreement beforehand.
What to Do When You Are Bound
If you’ve signed a non-compete agreement and are wondering what to do now that you’ve left your job, you have several options.
- Comply with it. This means allowing it to dictate the way you do your job from now on. This could mean that you no longer work in the field you’re trained in or that you can no longer work for a competitor. However, this may be the best option if you have concerns about possible injunctions, fines or judgments placed against you.
- Reach out to your former employer. If your employer is honest, they’ll tell you if your non-compete is still in effect. If not, you did not violate your contract with them and you can find another job without violating a legal agreement. But, this is not always the most tactful option and should really only be done if you have a non-compete that has already expired.
- Seek a new job. Again, if your non-compete does not extend to your potential new employer, you won’t be breaking any contracts and avoiding any legal consequences.
- Fight the non-compete. You can challenge the agreement as soon as you no longer work for the company and it’s better to challenge it sooner rather than wait until they force the issue in court. However, you may wish to do so in order to avoid agreeing to unreasonable terms.
Remember: courts will enforce reasonable, limited non-compete contracts that are meant to protect the company’s legitimate business interests. You may wish to fight a non-compete agreement in order to avoid ruining your professional and financial future. A Missouri employment lawyer who understands non-compete contracts and Missouri’s non-compete laws may be able to help you secure a desirable outcome – one that allows you to make a living without fear of being dragged into a long and unnecessarily expensive lawsuit.
Instead of Non-Competes
An alternative to non-competes for many businesses are non-disclosure agreements. Much of the knowledge your employee possesses of your business is not public information. Your competitors would likely be very dissatisfied to learn about the things your employee encountered that your business does to maintain your competitive edge. This protects a lot of your valuable trade secrets without requiring you to put so much pressure on your employees.
Non-disclosure agreements are not as likely to limit your employee to work only for your business. It will be much more difficult for your competitors to reverse engineer your processes if they cannot talk to your employees or to access your business location without anyone knowing. This way you can save a lot of the pressure on your employees by ensuring their protection from the eyes of your competition , while still protecting the secrets of your business from those same competitors.
Equally viable options are non-solicitation agreements. This agreement would limit the employee’s ability to solicit business from clients for which they had personal contact with and resulted in substantial revenue for your business. This way a client who learned of your business from an employee could not simply decide to leave business with you by having that same employee start the new business of a competitor.
This agreement can either ensure that your employee cannot solicit customers that they dealt with while working at your company, or more closely limited to prevent them from soliciting your best customers away to a competitor for whom they will most likely work with based on that customer’s insistence. In order to compel specificity from the employee in regards to their prohibition from soliciting your competitors past clients, you may want to include the timeframe of the non-compete. This agreement can even be limited to one particular customer, if your business is that specialized.