Opinion
handed down August 14, 2012
Whelan Security Company
(Whelan) appealed a trial court’s conclusion that its non-compete agreements
with two employees was overbroad and unreasonable in time and space. The
Supreme Court of Missouri held that the non-compete agreements were
unreasonable, but modified the agreement to fit the intent of the parties.
I. Facts and Holding
Whelan Security Company
provides security guard services around the country.[2] Whelan is incorporated
in Missouri and has branches in 23 other states.[3] W. Landon Morgan worked at
Whelan as a branch manager for the Nashville, Tennessee office from 2006 until
2008.[4] Charles Kennebrew, Sr., was hired in 2007 as director of quality
insurance for the Dallas, Texas office.[5] Kennebrew stayed with Whelan until
the beginning of 2009.[6] Both had access to confidential client and employee
information in their positions.[7]
Both Morgan and Kennebrew
signed non-competition and employee non-solicitation clauses in their
employment contracts.[8] Kennebrew’s clauses prevented him, for a period of two
years, from soliciting existing customers of Whelan or prospective customers
sought during the previous 12 months, from soliciting employees of Whelan, from
working for a competing business within 50 miles of any Whelan location, or
from working for a customer of Whelan’s.[9] Morgan’s clause had the same
preventions, but was only for a period of one year rather than two.[10]
After resigning from Whelan,
Kennebrew started his own security company called Elite Protective Services
LLC.[11] Morgan joined shortly after the company was formed.[12] In late 2009,
Kennebrew sought the business of a client of Whelan’s and also spoke to
employees of Whelan about working for him.[13] The client terminated their
contract with Whelan and switched to Kennebrew’s company, as did some of the
employees.[14]
Whelan sought an injunction
against Kennebrew and Morgan for violating their non-competition employment
contracts.[15] The trial court granted summary judgment to Kennebrew and Morgan
because it thought the agreements were overbroad as to time and space.[16]
On appeal, the Supreme Court
of Missouri agreed with the trial court that the non-solicitation clause were
overbroad.[17] The non-solicitation clauses did not include any limiting
language regarding the geographic scope of the agreement.[18] There were no
facts showing that Kennebrew and Morgan had contacts throughout the nation so
the agreement did not need to be a national prohibition, according to the
Court.[19] The clauses are also too broad because they prevented Kennebrew and
Morgan from soliciting all prospective customers of Whelan’s in the past 12
months no matter what the relationship between the prospective customer and
Whelan was.[20] Therefore, the Court modified the agreement to restrict
Kennebrew and Morgan from soliciting any existing customers they had dealt with
during their employment at Whelan.[21]
The Court also held that the
duration of the agreement against Morgan was per se reasonable because it was
for less than one year.[22] However, the Court could not determine if
Kennebrew’s agreement was reasonable because there was a genuine issue of
material fact as to the purpose of his agreement.[23] Because Kennebrew’s
agreement was for a period of two years, it is not per se reasonable and the
trial court needed to analyze the purpose of the agreement to determine if it
is reasonable.[24] The trial court must look to parol evidence to determine the
intent of the parties regarding Kennebrew’s agreement.[25]
The Court held that both the
customer non-solicitation clauses in the agreements were overbroad.[26] It
modified the contracts to make them reasonable and enforceable.[27] However,
there were genuine issues of material fact as to the purpose of Kennebrew’s
contract so the case was remanded.[28]
II. Legal Background
Non-compete agreements are
enforceable in limited circumstances; otherwise Missouri courts consider them
restraints on trade. Because these agreements are not favored, the enforcing
party has the burden of proving that it is necessary to protect legitimate
interests and it is reasonable.[29]
The four main concerns when
analyzing non-compete agreements are: 1) the employer needs a highly trained
workforce without being afraid employees they hire will steal secrets or
customers after leaving the employer, 2) the employee must be able to change
jobs and advance his career, 3) parties should be free to negotiate contracts
of their choosing, and 4) contracts that restrain trade are not legal.[30]
The courts will enforce a
non-compete agreement if it is reasonable as to time and space and the
restrictions protect the employer’s trade secrets or “customer contacts.”[31]
“Customer contacts” are “essentially the influence an employee acquires over
his employer’s customers through personal contact.”[32] But this does not mean
that there must be a secret customer list that the employee stole from the
employer before leaving.[33]
When considering if an
agreement is reasonable as to time and space, a court will look at all
“attending circumstances and if enforcement serves the employer’s legitimate
interests.”[34] This includes factors such as the technical and competitive
nature of the industry and confidential or sensitive information the employee
gained through employment.[35] The court will also look at what geographic
areas the employer has protectable interests in to determine whether the
agreement is geographically reasonable.[36] The courts have not stated a
specific time or distance that is per se unreasonable, but Missouri law states
that an agreement is per se reasonable if it is for one year or less.[37] If it
is more than one year, the courts will look to the circumstances and purpose of
the agreement to determine if it is reasonable.
III. Comment
The Court’s decision upholds
Missouri’s longstanding common law that non-compete agreements are enforceable
against employees. It also emphasizes that in determining if an agreement is
reasonable, the court will do a fact-specific inquiry. In this case, the Court
did not hold that nation-wide non-compete agreements are per se unreasonable. Instead,
the Court looked at the circumstances of the specific business involved and
determined it was unreasonable for this business and these employees.
Businesses should look at
their non-compete agreements closely and determine if they are reasonable and
necessary to protect their business. It is important that businesses make them
no more restrictive than necessary; otherwise a court may modify the agreement
or determine that it is unenforceable altogether.
- Melissa Cullmann
[1] No. SC92291 (Mo.
Aug. 14, 2012) (en banc), available at
http://www.courts.mo.gov/file.jsp?id=56107. The West reporter citation is
Whelan Security Co. v. Kennebrew, 379 S.W.3d 835 (Mo. 2012) (en banc).
[2] Id. at 2.
[3] Id.
[4] Id. at 2-3.
[5] Id. at 2.
[6] Id. at 3.
[7] Id. at 2.
[8] Id.
[9] Id. at 3.
[10] Id.
[11] Id.
[12] Id. at 4. Whelan
knew that Kennebrew intended to start this business but they did not believe it
would be in competition with Whelan. Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 8.
[18] Id. at 9.
[19] Id. at. 10.
[20] Id. at. 11.
[21] Id. at 13.
[22] Id. at. 15.
[23] Id.
[24] Id. at 16.
[25] Id.
[26] Id. at 18.
[27] Id.
[28] Id.
[29] Payroll Advance,
Inc. v. Yates, 270 S.W.3d 428, 434 (Mo. App. S.D. 2008).
[30] Healthcare
Services of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604, 609-10 (en banc
2006).
[31] Id. at 610.
[32] Id. 611.
[33] Osage Glass, Inc.
v. Donovan, 693 S.W.2d 71 (en banc 1985).
[34] Silvers, Asher,
Sher & McLaren, M.D.s Neurology, PC v. Batchu, 16 S.W.3d 340, 344 (Mo. App.
W.D. 2000).
[35] Id.
[36] Orchard Container
Corp. v. Orchard, 601 S.W.2d 299, 303 (Mo. App. E.D. 1980).
[37] RSMo § 431.202.2
(2001).
