Last year, Missouri passed Senate Bill 103, which limits the scope of covenants not to compete, or restrictive covenants, between the “owner” of a business and the business itself should the relationship between the owner and the business end.
Five states — California, Colorado, Minnesota, North Dakota, and Oklahoma — ban covenants not to compete in almost all circumstances, and others are considering them, possibly taking cues from the Federal Trade Commission’s recent rule banning most non-competes. What does the future hold for these provisions? And what should attorneys keep in mind when representing employers, or former employees, in these kinds of cases? Here’s a closer look at this timely issue.
Falling Out of Favor
The trend in state laws reining in restrictive covenants reflects the policy against them, says Kim Kirn, a labor and employment attorney and mediator at USA&M. “In Missouri, the employer has the burden to prove the reasonableness of the non-compete. A non-compete agreement must be narrowly tailored geographically and temporally,” says Kirn. “Restrictive covenants are not enforceable to protect an employer from mere competition by a former employee, but only to the extent that they protect the employer’s trade secrets or customer contacts.”
Several factors are driving these provisions out of favor. “COVID has changed everything: employees are working from home; employees bring their own devices to use for work; and the Great Resignation, among others,” she says. “Courts do not like to enforce non-competes and Missouri, like plenty of other states, have caselaw voiding overbroad non-compete clauses … Missouri’s new statute addresses business owners selling their businesses and gives those sellers some protection in their future professional endeavors.”
The Challenges of Litigation
Non-compete cases can be expensive and time-consuming to litigate. “Claims concerning non-compete agreements are fact-intensive and do not lend themselves to being resolved by motions for summary judgment,” says Rob Litz, mediator/arbitrator and president of USA&M. “Some of the issues of fact in these cases include whether the actions of the former employee violated to terms of the agreement, whether the agreement is reasonable and enforceable according to its terms, and whether there was a prior material breach by the employer, as well as whether the damages claimed by plaintiff are speculative.
“The Missouri Supreme Court described some of the factual issues in Healthcare Services of the Ozarks, Inc. v. Copeland, 198 S.W. 3d 604 at 611 (Mo Banc 2006) stating: ‘The quality, frequency, and duration of an employee’s exposure to an employer’s customers are crucial in determining the covenant’s reasonableness,’” he adds.
Complicating matters is the high level of emotion these cases often involve. “Attorneys should be aware of the tendency for these cases to involve the expression and discussion of personal emotions of betrayal, ingratitude, dashed hopes and expectations, damage to economic, career and family security, damage to reputation, broken trust and loss of friendships,” says C.J. Larkin, an attorney, mediator, and arbitrator at USA&M.
Choosing Alternative Dispute Resolution (ADR) Over Litigation
For the foregoing reasons, ADR is often an appealing choice for these types of cases. “Having all claims resolved in one arbitration proceeding benefits all parties. The employer and former employee are not the only parties in many of these cases,” says Litz. “The new employer who hired the former employee of the plaintiff is often a named defendant, having to defend claims of tortious interference with the non-compete agreement … and arbitration provides a level of confidentiality not available in litigation since the hearings are closed to the public.”
Mediation can also give the parties more remedies — such as modification of the non-compete — that wouldn’t be available at trial. It can also help the parties preserve the relationship as they are likely to continue to work in the same industry.
Draft Provisions Narrowly
Restrictive covenants must be narrowly construed to withstand a challenge. In states that allow these provisions, they fail generally because “there has been ‘overreach’ by the employer in a few areas: geographical area, duration, and activities prohibited,” says Larkin. “Usually, covenants focus on contact with the employer’s customer base; for example, leaving with the employer’s customer/client contact lists or files or trying to take customers/clients with them.”
Instead of a non-compete, employers can consider other options that “can preserve a positive relationship between the employer and the departing employee,” says Kirn. “They include: (1) garden leave — the employer pays the employee’s salary during the effective period of the non-compete, but the employee renders no service and has a duty of loyalty to the former employer; (2) safety net — the employer pays money to the departing employee representing the employee’s sale back to the employer of the book of business s/he developed. Payout is generally staggered over the non-compete period; and (3) client purchase agreements — with the price agreed upon in advance, if the departing employee wants to service any existing customers, the departing employee pays the former employer the agreed-upon price. In effect, the departing employee pays for the right to service the customers.”
The Future of Non-Competes
So, what does the future hold for non-competes? That likely will depend on the state you live and practice in, but as states continue to regulate covenants not to compete, savvy employers (and their attorneys) will look for ways to protect their business interests that will withstand judicial scrutiny.
