Tuesday, August 14, 2012

Whelan Security Co. v. Charles Kennebrew, Sr., and W. Landon Morgan[1]

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).