Understanding the Fine Print: Things to consider before you sign
When a business makes a deal with another company, be they a supplier, a manufacturer, or an end user, the only terms most people think about are the type, quantity, and price of the good or service being bought and sold. The remaining terms, often written in small print and located in dense paragraphs on the back of a purchase order, order acknowledgment or other types of prewritten agreements are often overlooked or dismissed as “boilerplate” language that really doesn’t matter.
When a dispute arises over the goods or service, however, the fine print often becomes the most important part of the agreement. Below are some helpful hints to avoid agreeing to terms that can come back to haunt you:
Everything is Negotiable. The golden rule to remember in reviewing any prewritten agreement is that everything is negotiable. Indeed, courts will view your signature on an agreement as evidence that you have negotiated and agreed to each and every term. So, no matter how standard a pre written agreement, purchase order, or order acknowledgment may appear, read each paragraph closely and keep your pen handy. While you may find some agreements really are “take it or leave it,” do not assume this is the case. If you find something in the fine print that offends you, cross it out and place the burden on the other side to object to your changes.
Warranties. The law provides that all products come with an implied warranty of merchantability-a guarantee that the product will perform as described. This implied warranty, however, as well as express promises about product performance made by a salesman, can be lawfully disclaimed by the seller. If you are selling goods, the disclaimer should be written in bold type and must include the phrase “WARRANTY OF MERCHANTABILITY” to be effective. If you are buying goods, read the fine print carefully for any such disclaimers and cross-out the same. In addition, if you are promised a warranty for a specific period of time, make sure it becomes part of the written agreement.
Limitation on Damages. If something goes wrong with a good or service, the harmful consequences may extend well beyond the price of the good or service. Like warranties, however, a seller or service provider can limit the amount of recoverable damages to things like the “cost or repair or replacement” or the “total value of the contract.” If you are purchasing a product or service, make sure that you do not give up your right to recover any additional consequential damages your business may suffer as a result of a defective product or service. If you are a seller of a product or service, on the other hand, is wise to try to limit such damages to the cost to repair or replace the defective product or service so that you do not become saddled with every consequence that arises from a defect in your product or service.
Attorney Fees. The decision to include an attorney fee provision in an agreement should be based on two factors: (a) the relative resources of each party; and (b) the nature of the potential dispute. For example, a landlord would generally want an attorney fee provision in a lease because, more often than not, a dispute between the landlord and tenant will involve the failure to pay rent, a cause of action on which the landlord is likely to succeed. If your business sells products on a cash basis, on the other hand, an attorney fee provision could encourage litigation by an unsatisfied customer that might not otherwise occur.
Venue/Jurisdiction. The state and county in which litigation must occur is often the deciding factor in whether or not to pursue a claim against another party. Do not agree to a venue or jurisdiction provision that requires your business to file its claim in another state. The transactional costs associated with litigating on the west coast, on the east coast, or in a foreign country could make it difficult or impossible to justify filing an otherwise valid claim.
Risk of Loss. If a product is being delivered by ground, air or sea, there is always a risk that the product could be damaged along the way. For the seller, it is important to shift the risk of loss to the buyer from the moment it leaves the warehouse. Obviously, a buyer should not agree to assume the risk of loss until the good arrives at your door.
Dispute Resolution. Many pre-written agreements require that any dispute be resolved through private arbitration rather than through the court system. When deciding whether to include such a provision in an agreement, keep the following in mind. Arbitration is generally less formal and less expensive because it places the entire case into the hands of one person, the arbitrator. Trial is generally more formal and more expensive because it requires a judge, jury and, in most cases, a right to appeal.
Give the Agreement to Your Attorney Before You Sign. The time, effort and cost of having your attorney review a contract before you sign is infinitely smaller than the time, effort and cost of having your attorney prosecute or defend a lawsuit that turns on the fine print.
When a dispute arises over the goods or service, however, the fine print often becomes the most important part of the agreement. Below are some helpful hints to avoid agreeing to terms that can come back to haunt you:
Everything is Negotiable. The golden rule to remember in reviewing any prewritten agreement is that everything is negotiable. Indeed, courts will view your signature on an agreement as evidence that you have negotiated and agreed to each and every term. So, no matter how standard a pre written agreement, purchase order, or order acknowledgment may appear, read each paragraph closely and keep your pen handy. While you may find some agreements really are “take it or leave it,” do not assume this is the case. If you find something in the fine print that offends you, cross it out and place the burden on the other side to object to your changes.
Warranties. The law provides that all products come with an implied warranty of merchantability-a guarantee that the product will perform as described. This implied warranty, however, as well as express promises about product performance made by a salesman, can be lawfully disclaimed by the seller. If you are selling goods, the disclaimer should be written in bold type and must include the phrase “WARRANTY OF MERCHANTABILITY” to be effective. If you are buying goods, read the fine print carefully for any such disclaimers and cross-out the same. In addition, if you are promised a warranty for a specific period of time, make sure it becomes part of the written agreement.
Limitation on Damages. If something goes wrong with a good or service, the harmful consequences may extend well beyond the price of the good or service. Like warranties, however, a seller or service provider can limit the amount of recoverable damages to things like the “cost or repair or replacement” or the “total value of the contract.” If you are purchasing a product or service, make sure that you do not give up your right to recover any additional consequential damages your business may suffer as a result of a defective product or service. If you are a seller of a product or service, on the other hand, is wise to try to limit such damages to the cost to repair or replace the defective product or service so that you do not become saddled with every consequence that arises from a defect in your product or service.
Attorney Fees. The decision to include an attorney fee provision in an agreement should be based on two factors: (a) the relative resources of each party; and (b) the nature of the potential dispute. For example, a landlord would generally want an attorney fee provision in a lease because, more often than not, a dispute between the landlord and tenant will involve the failure to pay rent, a cause of action on which the landlord is likely to succeed. If your business sells products on a cash basis, on the other hand, an attorney fee provision could encourage litigation by an unsatisfied customer that might not otherwise occur.
Venue/Jurisdiction. The state and county in which litigation must occur is often the deciding factor in whether or not to pursue a claim against another party. Do not agree to a venue or jurisdiction provision that requires your business to file its claim in another state. The transactional costs associated with litigating on the west coast, on the east coast, or in a foreign country could make it difficult or impossible to justify filing an otherwise valid claim.
Risk of Loss. If a product is being delivered by ground, air or sea, there is always a risk that the product could be damaged along the way. For the seller, it is important to shift the risk of loss to the buyer from the moment it leaves the warehouse. Obviously, a buyer should not agree to assume the risk of loss until the good arrives at your door.
Dispute Resolution. Many pre-written agreements require that any dispute be resolved through private arbitration rather than through the court system. When deciding whether to include such a provision in an agreement, keep the following in mind. Arbitration is generally less formal and less expensive because it places the entire case into the hands of one person, the arbitrator. Trial is generally more formal and more expensive because it requires a judge, jury and, in most cases, a right to appeal.
Give the Agreement to Your Attorney Before You Sign. The time, effort and cost of having your attorney review a contract before you sign is infinitely smaller than the time, effort and cost of having your attorney prosecute or defend a lawsuit that turns on the fine print.
Oral Contracts: Are Handshake Deals Still Enforceable?
As the saying goes, “a handshake just doesn’t mean what it used to.” This common phrase has some truth to it, to be sure, but it does not accurately reflect Missouri law when it comes to the enforceability of an oral contract.
Yes, there are circumstances where a Missouri court would not enforce an oral agreement. For example, if the oral agreement concerns the sale of real property, a court would not enforce the agreement unless there was some writing evidencing the terms of the agreement.
But generally speaking, an oral contract is just as enforceable as a written contract. This is especially true when the person seeking to enforce the oral agreement has provided goods or services to another who claims they do not owe anything for the goods or services. Missouri courts will not allow a person to accept the benefit of someone else’s goods or services without payment.
This remains true even if the parties never actually agreed on a price to be paid for the goods or services.
Under such circumstances, the parties may not have even technically entered into a contract because a key term of the contract—the price—was not agreed to. Nevertheless, Missouri courts will force the person who accepted the goods or services to pay for the “reasonable value” of the goods or services.
A great example of this can be found in a case known as Cotner Productions, Inc. v. Snadon (“Cotner”). In Cotner, the plaintiff introduced the defendants to a well known Las Vegas performer for the purpose of allowing the defendants to pitch the idea of opening a theater in Branson where the performer would be the headlining act. Neither the plaintiff nor the defendants prepared or signed a written contract. Further, the parties never agreed on a specific price to be paid by the defendants for the introduction. The parties only discussed the idea that the plaintiff would be paid a percentage of the value obtained by the defendants if they were successful in recruiting the performer for a show in Branson.
On this limited evidence, the trial court entered a judgment in favor of the plaintiff for more than $300,000, an amount that was later upheld by the Missouri Court of Appeals.
The court’s reasoning was simple: the defendants accepted the benefit of plaintiff's work in arranging the meeting between the performer and the defendants; and the value of this work could be quantified based on the testimony of an expert with knowledge of the industry. The fact that the parties had no written agreement had no affect on the outcome of the case.
So the next time you find yourself on the short end of a handshake deal, do not assume that you cannot get your day in court. An oral contract is, for the most part, just as enforceable as a written contract under Missouri law.
Yes, there are circumstances where a Missouri court would not enforce an oral agreement. For example, if the oral agreement concerns the sale of real property, a court would not enforce the agreement unless there was some writing evidencing the terms of the agreement.
But generally speaking, an oral contract is just as enforceable as a written contract. This is especially true when the person seeking to enforce the oral agreement has provided goods or services to another who claims they do not owe anything for the goods or services. Missouri courts will not allow a person to accept the benefit of someone else’s goods or services without payment.
This remains true even if the parties never actually agreed on a price to be paid for the goods or services.
Under such circumstances, the parties may not have even technically entered into a contract because a key term of the contract—the price—was not agreed to. Nevertheless, Missouri courts will force the person who accepted the goods or services to pay for the “reasonable value” of the goods or services.
A great example of this can be found in a case known as Cotner Productions, Inc. v. Snadon (“Cotner”). In Cotner, the plaintiff introduced the defendants to a well known Las Vegas performer for the purpose of allowing the defendants to pitch the idea of opening a theater in Branson where the performer would be the headlining act. Neither the plaintiff nor the defendants prepared or signed a written contract. Further, the parties never agreed on a specific price to be paid by the defendants for the introduction. The parties only discussed the idea that the plaintiff would be paid a percentage of the value obtained by the defendants if they were successful in recruiting the performer for a show in Branson.
On this limited evidence, the trial court entered a judgment in favor of the plaintiff for more than $300,000, an amount that was later upheld by the Missouri Court of Appeals.
The court’s reasoning was simple: the defendants accepted the benefit of plaintiff's work in arranging the meeting between the performer and the defendants; and the value of this work could be quantified based on the testimony of an expert with knowledge of the industry. The fact that the parties had no written agreement had no affect on the outcome of the case.
So the next time you find yourself on the short end of a handshake deal, do not assume that you cannot get your day in court. An oral contract is, for the most part, just as enforceable as a written contract under Missouri law.
The Role of the Missouri Court of Appeals
Trial court judges are not perfect and, like all people, they occasionally make mistakes. The Missouri Court of Appeals exists to give litigants a forum to address these mistakes, whether perceived or real, and to seek a remedy for any harm caused by the mistake. The Court of Appeals is not, however, a forum to address every conceivable mistake.
In a case without a jury, a trial court judge’s primary role is two-fold. He or she must decide: (1) what the true facts are based on his or her assessment of the credibility of the witness testimony and other evidence; and (2) how Missouri law applies to the facts.Mistakes can be made in connection with either of these issues.
From the perspective of the parties, the former is often the most important: Did the judge accurately determine the true facts of the case? If a party believes a judge is mistaken about the facts, and this perceived mistake affects the outcome of the case, that party’s first reaction may be to appeal the judge’s findings of fact to the Missouri Court of Appeals.
From the perspective of the Missouri Court of Appeals, however, the latter is really the only issue that matters: Did the judge accurately state the law of Missouri and did the judge correctly apply the law to the facts? The reason for this is that a judge sitting on the Court of Appeals did not see any of the witnesses testify and cannot make an independent judgment about the credibility of the witnesses. Only the judge sitting on the bench at trial is in a position to determine the credibility of witnesses and, therefore, the trial judge is the only one in a position to determine the true facts of the case.
As a rule of thumb, therefore, the Court of Appeals is generally only willing to review perceived mistakes by a trial court judge that concern the judge’s statements about what the law of Missouri is, and how the law of Missouri applies to the case facts (as separately determined by the judge). The Court of Appeals is generally not a place for a party to re-try the facts of their case.
In a case without a jury, a trial court judge’s primary role is two-fold. He or she must decide: (1) what the true facts are based on his or her assessment of the credibility of the witness testimony and other evidence; and (2) how Missouri law applies to the facts.Mistakes can be made in connection with either of these issues.
From the perspective of the parties, the former is often the most important: Did the judge accurately determine the true facts of the case? If a party believes a judge is mistaken about the facts, and this perceived mistake affects the outcome of the case, that party’s first reaction may be to appeal the judge’s findings of fact to the Missouri Court of Appeals.
From the perspective of the Missouri Court of Appeals, however, the latter is really the only issue that matters: Did the judge accurately state the law of Missouri and did the judge correctly apply the law to the facts? The reason for this is that a judge sitting on the Court of Appeals did not see any of the witnesses testify and cannot make an independent judgment about the credibility of the witnesses. Only the judge sitting on the bench at trial is in a position to determine the credibility of witnesses and, therefore, the trial judge is the only one in a position to determine the true facts of the case.
As a rule of thumb, therefore, the Court of Appeals is generally only willing to review perceived mistakes by a trial court judge that concern the judge’s statements about what the law of Missouri is, and how the law of Missouri applies to the case facts (as separately determined by the judge). The Court of Appeals is generally not a place for a party to re-try the facts of their case.
The Law of Non-compete Agreements in Missouri
In Missouri, non-compete agreements are enforceable, but only to the extent necessary to:
Protect an employer’s legitimate interest in its CUSTOMER CONTACTS; and Protect an employer’s legitimate interest in its TRADE SECRETS.
The geographic and time constraints contained in non-compete agreements must be tailored to protect these legitimate, protectable interests of the employer.
See, Healthcare Services of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604, 611 (Mo. banc 2006) (“Non-compete agreements are enforceable to the extent they can be narrowly tailored geographically and temporally. In addition, such restrictions are not enforceable to protect an employer from mere competition by a former employee, but only to the extent that the restrictions protect the employer’s trade secrets or customer contacts.”) (citations omitted) (emphasis added).
Competing Policy Goals
Four competing policy goals have shaped the law of non-compete agreements in Missouri. Two favor employers, and two favor employees.
Pro-Employer Policy Goals
First, employers “need to be able to engage a highly trained workforce to be competitive and profitable, without the fear that the employee will use the employer’s business secrets against it or steal the employer’s customers after leaving employment.” Id. at 610-11.
Second, the “law favors the freedom of parties to value their respective interests in negotiated contracts.” Id.
Pro-Employee Policy Goals
Third, employees require mobility in order to provide for their families, and this mobility “is dependent upon the ability of the employee to take his or her increasing skills and put them to work from one employer to the next.” Id.
Fourth, contracts in restraint of trade are unlawful under Section 416.031(1) RSMo. (“Every contract, combination or conspiracy in restraint of trade or commerce in this state is unlawful”). Non-compete agreements are considered contracts in restraint of trade under Missouri law. Healthcare Services of the Ozarks, Inc., 198 S.W.3d at 613-14.
Balancing Competing Policy Goals
The Missouri Supreme Court states that the law of non-compete agreements in Missouri is the result of balancing the four competing interests above.
In my mind, the second and fourth policy goals—the freedom to contract and restraint of trade—essentially cancel each other out. The real balancing act is between the employer’s right to protect its business investments, and the employee’s right to earn a living through the skills they acquire over time.
On one end of the spectrum, it could be argued that an employer has a legitimate, protectable interest in everything it invests in, including all of the skills and knowledge an employee learns on the job. Thus, an employer should be able to prevent a former employee from working for any competitor that might benefit from the former employee’s skills and knowledge.
On the other end of the spectrum, it could be argued that an employee earns all of the skills and knowledge he or she learns on the job. Thus, he or she should be free to market these skills and knowledge to obtain the best employment possible.
To balance these competing policy goals, the Missouri Supreme Court has determined that an employer’s only legitimate, protectable interests are in customer contacts and trade secrets, and that an employee can essentially walk with any skills or knowledge he or she acquires on the job that do not constitute customer contacts or trade secrets.
Customer Contacts.
Customer contacts are “essentially the influence an employee acquires over his employer’s customers through personal contact.” Schmersahl, Treloar & Co., P.C. v. McHugh, 28 S.W.3d 345, 349 (Mo. App. 2000). The key is whether the employee who signed the non-compete agreement “is in a position to divert business from her old employer to her new one.” Osage Glass, Inc. Donovan, 693, S.W.2d 71 (Mo. banc 1985). Both Schmersahl and Osage are cited by the Missouri Supreme Court in Healthcare Services of the Ozarks.
When determining the reasonableness of a non-compete agreement that seeks to prevent a former employee from using customer contacts, the “quality, frequency, and duration of an employee’s exposure to an employer’s customers are crucial” factors. Healthcare Services of the Ozarks, 198 S.W.3d at 612, citing Washington County Memorial Hospital v. Sidebottom, 7 S.W.3d 542, 545 (Mo. App. 1999).
Customer contacts are not the same thing as a customer list. Customer contacts are the relationships an employee makes with customers, and not just the customer’s contact information.
Examples of employees with customer contacts include:
Each of the above the above trades require direct, personal contact with an employer’s customer base, and any relationship developed between the employee and customer is essentially owned by the employer. As such, the employee subject to a non-compete agreement cannot use these customer relationships to compete with his or her former employee. [NOTE: I say “essentially” owned, because customer contacts are not protectable in the absence of a non-compete agreement. Western Blue Print Co., LLC v. Roberts, 367 S.W.3d 7 (Mo. banc 2012)].
It is also worth noting that the Supreme Court in Whelan Sec. Co., supra, refused to enforce the non-compete fully—it limited enforcement to the solicitation of customers that the employee had dealt with personally during his employment, and refused to apply the provision to “all” existing customers or to prospective customers.
See also, Payroll Advance, Inc. v. Yates, 270 S.W.3d 428 (Mo. App. 2008), in which the Southern District refused to enforce a non-compete against a payday loan employee, in part, because of a lack of substantial customer contacts—she helped customers fill out loan applications, but did not have a personal relationship with customers.
Trade Secrets.
Section 417.453 RSMo. defines a trade secret to mean: “information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique, or process, that:
Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and
Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Please note that the listed categories of business information are not ‘trade secrets’ in and of themselves, unless the business information is also “secret.” Secrecy, however, does not mean absolute secrecy. It means that the employer must take reasonable precautions to protect the information from becoming general knowledge ascertainable by a competitor.
When analyzing whether certain business information constitutes a trade secret, Missouri courts consider six (6) factors:
The extent to which the information is known outside of the employer’s business; The extent to which the information is known by employees and others involved in the employer’s business; The extent of measures taken by the employer to guard the secrecy of the information; The value of the information to the employer and to his competitors; The amount of effort or money expended by him in developing the information; The ease or difficulty with which the information could be properly acquired or duplicated by others.
Customer Lists
The process of determining whether a trade secret exists is obviously fact intensive, but two cases involving customer lists may shine a light on the subject. As discussed above, ‘customer lists’ are not the same as ‘customer contacts’. If customer lists are to be protected, they must be constitute trade secrets as a result of the employer’s efforts to maintain the secrecy of the list and because the customers are not generally known in the industry. Central Trust and Inv. Co. v. Kennedy, 2013 WL268687 (Mo. App. 2013) (holding that a customer list or database is only protectable if an employer takes the necessary steps to protect the information as a trade secret).
In Central Trust, the Court found that contact information for 200 customers located on the phone of a former employee did not constitute trade secrets under the six-factor test set forth above for the reasons that: (1) the employment contract did not contain a provision requiring that customer contact information be kept confidential; (2) the employer shared its customer list with local banks and other affiliates; (3) all employees had access to the customer list and no employees were subject to confidentiality provisions; (4) the employer had not filed claims against other former employees who left with customer lists; (5) the employer used some customers in advertising campaigns; (6) each client had the ability to choose their service provider; and (7) the employee failed to submit evidence showing the value of the customer list to it and its competitors. See also, Brown v. Rollet Bros. Trucking Co., Inc. 291 S.W.3d 766 (Mo. App. 2009) (holding that the employer—a trucking company—had no protectable interest in its customer list because the same was available through industry sources that were generally available to the public).
In Cape Mobile Home Mart, Inc. v. Mobley, 780 S.W.2d 116 (Mo. App. 1989), the Eastern District found that a customer list and other business information constituted trade secrets for the following reasons: (1) the information was not available to the public or the employer’s competitors; (2) the employer made a significant effort to advise each of its employees of the confidential nature of the information and to admonish each of them to refrain from disseminating that information to the public and especially competitors—including a $1,000 fine; (3) the information would enable a competitor to structure and operate its own facility to compete successfully with the employer; and (4) a competitor could use the information to determine its own risk of success or failure in competition with the employer.
Time and Geographic Restraints.
In my review of case law, it appears the Missouri courts will generally enforce the time and geographic restrictions contained in non-compete agreements, provided the court also finds that the non-compete is necessary to protect the employer’s customer contacts or trade secrets.
As a result, it is not uncommon to find cases enforcing a three (3) year time restriction, or to find cases enforcing county-wide, state-wide, or even nationwide geographic limitations. Osage Glass, Inc. v. Donovan, 693 S.W.2d 71 (Mo. banc. 1986) (3 years); Mid-States Paint & Chemical Co. v. Herr, 746 S.W.2d 613 (Mo.App. E.D. 1988) (3 years); Superior Gearbox Co. v. Edwards, 869 S.W.2d 239 (Mo.App. S.D. 1993) (5 years); USA Chem., Inc. v. Lewis 557 S.W.2d 15, 18 (Mo.App. W.D. 1977) (throughout specific counties); Furniture Mfg. Corp. v. Joseph, 900 S.W.2d 642, 644 (Mo.App. W.D. 1995) (statewide); Superior Gear Box Company v. Edwards, 869 S.W.2d at 248 (nationwide).
Nevertheless, Missouri law requires that time and geographic restrictions must be “narrowly tailored” to protect an employer’s legitimate interests in its customer contacts and trade secrets. Healthcare Services of the Ozarks, 198 S.W.3d at 611. Under this rule, Missouri courts have narrowed and refused to enforce overly broad time and geographic limitations; Missouri courts have also inserted restrictions where none existed. See, e.g. Payroll Advance, Inc. v. Yates, 270 S.W.3d 428 (Mo. App. 2008) (refusing to enforce geographic limitations broad enough to prevent the former employee from working for any competitor within 50 miles of any branch office of the employer); Orchard Container Corp. v. Orchard, 601 S.W.2d 299 (Mo. App. 1980) (reducing 200-mile geographic limitation to 125-miles because employer had not solicited customers more than 125 miles away); AEE-EMF, Inc. Passmore, 906 S.W.2d 714 (Mo. App. 1995 (reducing time constraint from 5 years to 3 years); Sigma Chemical Company v. Harris, 794 F.2d 371 (8th Cir. 1986) (inserting geographic limitations into non-compete agreement that contained none).
Thus, in each case, an analysis should be done to determine the market area of the employer’s customer contacts, as well as the time necessary to wither personal relationships between an employee and customers; to build new customer relationships with other employees; to eliminate or substantially lessen the value of trade secrets.
Courts Equitable Ability to Blue-Line Non-Compete Agreements
As the cases above show, Missouri courts have modified and amended the specific terms of a non-compete to make them enforceable. To my knowledge, no Supreme Court case has directly affirmed the specific ability of a trial court to modify or amend the terms of a non-compete, but the Supreme Court did affirm the judgment in Orchard Container Corp., supra, which reduced the 200-mile geographic limitation to 125-miles because employer had not solicited customers more than 125 miles away.
The Missouri Court of Appeals, Western District, did expressly confirm a trial court’s ability to blue-line a non-compete agreement in Mid-States Paint & Chemical Co. v. Herr, 746 S.W.2d 613, 617 (Mo. App. 1988) (“this court [has] recognized that an unreasonable restriction against competition in a contract may be modified and enforced to the extent that it is reasonable, regardless of the covenant’s form of wording. *** We conclude the trial court did not exceed its equitable authority by modifying the restrictions of the covenant not to compete”). The trial court in Mid-States reduced the geographic limitation from 350 miles to 125 miles, and reduced the time restriction from three years to two years, because the majority of the employer’s customers were located within 125 miles.
Duty of Loyalty (during employment).
An employee’s duty of loyalty prevents the employee from competing with her employer during the course of her employment. Scanwell Freight Express STl, Inc. v. Chan, 162 S.W.3d 477, 480 (Mo. en banc 2005). It does not prevent an employee from looking for new employment, speaking to potential employers, or otherwise making plans beyond her current employment. Id. An employee is permitted under Missouri law to purchase a rival business and make other arrangements to directly compete with her employer while still being employed. Id. at 481. The duty of loyalty is simply designed to prevent an employee from actually competing with her employer during employment by, for example, soliciting customers or disseminating trade secret information.
Protect an employer’s legitimate interest in its CUSTOMER CONTACTS; and Protect an employer’s legitimate interest in its TRADE SECRETS.
The geographic and time constraints contained in non-compete agreements must be tailored to protect these legitimate, protectable interests of the employer.
See, Healthcare Services of the Ozarks, Inc. v. Copeland, 198 S.W.3d 604, 611 (Mo. banc 2006) (“Non-compete agreements are enforceable to the extent they can be narrowly tailored geographically and temporally. In addition, such restrictions are not enforceable to protect an employer from mere competition by a former employee, but only to the extent that the restrictions protect the employer’s trade secrets or customer contacts.”) (citations omitted) (emphasis added).
Competing Policy Goals
Four competing policy goals have shaped the law of non-compete agreements in Missouri. Two favor employers, and two favor employees.
Pro-Employer Policy Goals
First, employers “need to be able to engage a highly trained workforce to be competitive and profitable, without the fear that the employee will use the employer’s business secrets against it or steal the employer’s customers after leaving employment.” Id. at 610-11.
Second, the “law favors the freedom of parties to value their respective interests in negotiated contracts.” Id.
Pro-Employee Policy Goals
Third, employees require mobility in order to provide for their families, and this mobility “is dependent upon the ability of the employee to take his or her increasing skills and put them to work from one employer to the next.” Id.
Fourth, contracts in restraint of trade are unlawful under Section 416.031(1) RSMo. (“Every contract, combination or conspiracy in restraint of trade or commerce in this state is unlawful”). Non-compete agreements are considered contracts in restraint of trade under Missouri law. Healthcare Services of the Ozarks, Inc., 198 S.W.3d at 613-14.
Balancing Competing Policy Goals
The Missouri Supreme Court states that the law of non-compete agreements in Missouri is the result of balancing the four competing interests above.
In my mind, the second and fourth policy goals—the freedom to contract and restraint of trade—essentially cancel each other out. The real balancing act is between the employer’s right to protect its business investments, and the employee’s right to earn a living through the skills they acquire over time.
On one end of the spectrum, it could be argued that an employer has a legitimate, protectable interest in everything it invests in, including all of the skills and knowledge an employee learns on the job. Thus, an employer should be able to prevent a former employee from working for any competitor that might benefit from the former employee’s skills and knowledge.
On the other end of the spectrum, it could be argued that an employee earns all of the skills and knowledge he or she learns on the job. Thus, he or she should be free to market these skills and knowledge to obtain the best employment possible.
To balance these competing policy goals, the Missouri Supreme Court has determined that an employer’s only legitimate, protectable interests are in customer contacts and trade secrets, and that an employee can essentially walk with any skills or knowledge he or she acquires on the job that do not constitute customer contacts or trade secrets.
Customer Contacts.
Customer contacts are “essentially the influence an employee acquires over his employer’s customers through personal contact.” Schmersahl, Treloar & Co., P.C. v. McHugh, 28 S.W.3d 345, 349 (Mo. App. 2000). The key is whether the employee who signed the non-compete agreement “is in a position to divert business from her old employer to her new one.” Osage Glass, Inc. Donovan, 693, S.W.2d 71 (Mo. banc 1985). Both Schmersahl and Osage are cited by the Missouri Supreme Court in Healthcare Services of the Ozarks.
When determining the reasonableness of a non-compete agreement that seeks to prevent a former employee from using customer contacts, the “quality, frequency, and duration of an employee’s exposure to an employer’s customers are crucial” factors. Healthcare Services of the Ozarks, 198 S.W.3d at 612, citing Washington County Memorial Hospital v. Sidebottom, 7 S.W.3d 542, 545 (Mo. App. 1999).
Customer contacts are not the same thing as a customer list. Customer contacts are the relationships an employee makes with customers, and not just the customer’s contact information.
Examples of employees with customer contacts include:
- A wealth manager or accountant. Schott v. Beussink, 950 S.W.2d 621 (Mo. App. 1997) (CPA);
- An account manager or salesperson. Emerson Elec. Co v. Rogers, 418 F.3d 841 (8th Cir. 2005) (manufacture’s sales representative to retailers); Whelan Sec. Co. v Kennebrew, (Mo. banc. 2012) (manager/salesperson for security company); and
- A medical provider. Silvers, Asher, Sher & McLaren v. Batchu, 16 S.W.3d 340 (Mo. App. 2000) (neurologist); Kessler-Heasley Artifical Limb Co., Inc. v. Kenney, 90 S.W.3d 181 (Mo. App. 2002) (employee fitted patients with artificial limbs and braces).
Each of the above the above trades require direct, personal contact with an employer’s customer base, and any relationship developed between the employee and customer is essentially owned by the employer. As such, the employee subject to a non-compete agreement cannot use these customer relationships to compete with his or her former employee. [NOTE: I say “essentially” owned, because customer contacts are not protectable in the absence of a non-compete agreement. Western Blue Print Co., LLC v. Roberts, 367 S.W.3d 7 (Mo. banc 2012)].
It is also worth noting that the Supreme Court in Whelan Sec. Co., supra, refused to enforce the non-compete fully—it limited enforcement to the solicitation of customers that the employee had dealt with personally during his employment, and refused to apply the provision to “all” existing customers or to prospective customers.
See also, Payroll Advance, Inc. v. Yates, 270 S.W.3d 428 (Mo. App. 2008), in which the Southern District refused to enforce a non-compete against a payday loan employee, in part, because of a lack of substantial customer contacts—she helped customers fill out loan applications, but did not have a personal relationship with customers.
Trade Secrets.
Section 417.453 RSMo. defines a trade secret to mean: “information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique, or process, that:
Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and
Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Please note that the listed categories of business information are not ‘trade secrets’ in and of themselves, unless the business information is also “secret.” Secrecy, however, does not mean absolute secrecy. It means that the employer must take reasonable precautions to protect the information from becoming general knowledge ascertainable by a competitor.
When analyzing whether certain business information constitutes a trade secret, Missouri courts consider six (6) factors:
The extent to which the information is known outside of the employer’s business; The extent to which the information is known by employees and others involved in the employer’s business; The extent of measures taken by the employer to guard the secrecy of the information; The value of the information to the employer and to his competitors; The amount of effort or money expended by him in developing the information; The ease or difficulty with which the information could be properly acquired or duplicated by others.
Customer Lists
The process of determining whether a trade secret exists is obviously fact intensive, but two cases involving customer lists may shine a light on the subject. As discussed above, ‘customer lists’ are not the same as ‘customer contacts’. If customer lists are to be protected, they must be constitute trade secrets as a result of the employer’s efforts to maintain the secrecy of the list and because the customers are not generally known in the industry. Central Trust and Inv. Co. v. Kennedy, 2013 WL268687 (Mo. App. 2013) (holding that a customer list or database is only protectable if an employer takes the necessary steps to protect the information as a trade secret).
In Central Trust, the Court found that contact information for 200 customers located on the phone of a former employee did not constitute trade secrets under the six-factor test set forth above for the reasons that: (1) the employment contract did not contain a provision requiring that customer contact information be kept confidential; (2) the employer shared its customer list with local banks and other affiliates; (3) all employees had access to the customer list and no employees were subject to confidentiality provisions; (4) the employer had not filed claims against other former employees who left with customer lists; (5) the employer used some customers in advertising campaigns; (6) each client had the ability to choose their service provider; and (7) the employee failed to submit evidence showing the value of the customer list to it and its competitors. See also, Brown v. Rollet Bros. Trucking Co., Inc. 291 S.W.3d 766 (Mo. App. 2009) (holding that the employer—a trucking company—had no protectable interest in its customer list because the same was available through industry sources that were generally available to the public).
In Cape Mobile Home Mart, Inc. v. Mobley, 780 S.W.2d 116 (Mo. App. 1989), the Eastern District found that a customer list and other business information constituted trade secrets for the following reasons: (1) the information was not available to the public or the employer’s competitors; (2) the employer made a significant effort to advise each of its employees of the confidential nature of the information and to admonish each of them to refrain from disseminating that information to the public and especially competitors—including a $1,000 fine; (3) the information would enable a competitor to structure and operate its own facility to compete successfully with the employer; and (4) a competitor could use the information to determine its own risk of success or failure in competition with the employer.
Time and Geographic Restraints.
In my review of case law, it appears the Missouri courts will generally enforce the time and geographic restrictions contained in non-compete agreements, provided the court also finds that the non-compete is necessary to protect the employer’s customer contacts or trade secrets.
As a result, it is not uncommon to find cases enforcing a three (3) year time restriction, or to find cases enforcing county-wide, state-wide, or even nationwide geographic limitations. Osage Glass, Inc. v. Donovan, 693 S.W.2d 71 (Mo. banc. 1986) (3 years); Mid-States Paint & Chemical Co. v. Herr, 746 S.W.2d 613 (Mo.App. E.D. 1988) (3 years); Superior Gearbox Co. v. Edwards, 869 S.W.2d 239 (Mo.App. S.D. 1993) (5 years); USA Chem., Inc. v. Lewis 557 S.W.2d 15, 18 (Mo.App. W.D. 1977) (throughout specific counties); Furniture Mfg. Corp. v. Joseph, 900 S.W.2d 642, 644 (Mo.App. W.D. 1995) (statewide); Superior Gear Box Company v. Edwards, 869 S.W.2d at 248 (nationwide).
Nevertheless, Missouri law requires that time and geographic restrictions must be “narrowly tailored” to protect an employer’s legitimate interests in its customer contacts and trade secrets. Healthcare Services of the Ozarks, 198 S.W.3d at 611. Under this rule, Missouri courts have narrowed and refused to enforce overly broad time and geographic limitations; Missouri courts have also inserted restrictions where none existed. See, e.g. Payroll Advance, Inc. v. Yates, 270 S.W.3d 428 (Mo. App. 2008) (refusing to enforce geographic limitations broad enough to prevent the former employee from working for any competitor within 50 miles of any branch office of the employer); Orchard Container Corp. v. Orchard, 601 S.W.2d 299 (Mo. App. 1980) (reducing 200-mile geographic limitation to 125-miles because employer had not solicited customers more than 125 miles away); AEE-EMF, Inc. Passmore, 906 S.W.2d 714 (Mo. App. 1995 (reducing time constraint from 5 years to 3 years); Sigma Chemical Company v. Harris, 794 F.2d 371 (8th Cir. 1986) (inserting geographic limitations into non-compete agreement that contained none).
Thus, in each case, an analysis should be done to determine the market area of the employer’s customer contacts, as well as the time necessary to wither personal relationships between an employee and customers; to build new customer relationships with other employees; to eliminate or substantially lessen the value of trade secrets.
Courts Equitable Ability to Blue-Line Non-Compete Agreements
As the cases above show, Missouri courts have modified and amended the specific terms of a non-compete to make them enforceable. To my knowledge, no Supreme Court case has directly affirmed the specific ability of a trial court to modify or amend the terms of a non-compete, but the Supreme Court did affirm the judgment in Orchard Container Corp., supra, which reduced the 200-mile geographic limitation to 125-miles because employer had not solicited customers more than 125 miles away.
The Missouri Court of Appeals, Western District, did expressly confirm a trial court’s ability to blue-line a non-compete agreement in Mid-States Paint & Chemical Co. v. Herr, 746 S.W.2d 613, 617 (Mo. App. 1988) (“this court [has] recognized that an unreasonable restriction against competition in a contract may be modified and enforced to the extent that it is reasonable, regardless of the covenant’s form of wording. *** We conclude the trial court did not exceed its equitable authority by modifying the restrictions of the covenant not to compete”). The trial court in Mid-States reduced the geographic limitation from 350 miles to 125 miles, and reduced the time restriction from three years to two years, because the majority of the employer’s customers were located within 125 miles.
Duty of Loyalty (during employment).
An employee’s duty of loyalty prevents the employee from competing with her employer during the course of her employment. Scanwell Freight Express STl, Inc. v. Chan, 162 S.W.3d 477, 480 (Mo. en banc 2005). It does not prevent an employee from looking for new employment, speaking to potential employers, or otherwise making plans beyond her current employment. Id. An employee is permitted under Missouri law to purchase a rival business and make other arrangements to directly compete with her employer while still being employed. Id. at 481. The duty of loyalty is simply designed to prevent an employee from actually competing with her employer during employment by, for example, soliciting customers or disseminating trade secret information.