On Tuesday, October 10, 2017, the United States Supreme Court denied certiorari in Nosal v. United States, 16-1344. Nosal asked the Court to determine whether a person violates the Computer Fraud and Abuse Act’s prohibition of accessing a computer “without authorization” when using someone else’s credentials (with that other user’s permission) after the owner of the computer expressly revoked the first person’s own access rights. In denying certiorari, the Court effectively killed the petitioner’s legal challenge to his conviction in a long-running case that we have extensively covered here, here, here, here, here, here, and here (among other places). The denial of certiorari leaves further development of the scope of the CFAA in the hands of the lower courts. Continue Reading Supreme Court Refuses to Hear Password-Sharing Case, Leaving Scope of Criminal Liability Under Computer Fraud and Abuse Act Unclear
In a recent ruling by the Supreme Court of Kentucky, Creech v. Brown (June 19, 2014), the court affirmed that in Kentucky, noncompetition agreements must be supported by adequate consideration in order to be enforceable. The circumstance addressed by the court involved an employee who was presented with a noncompetition and confidentiality agreement after working for the employer for 16 years. The employee was offered no payment, no change in employment terms, and was not threatened with termination if he failed to execute the agreement. The court held that under this set of facts there was a lack of consideration and the court deemed the agreement unenforceable. The ruling makes clear that while consideration is necessary, it may be deemed from after-the-fact changes in employment circumstances.
While the Supreme Court has taken some heat in the past for seeming to misunderstand technology and how it impacts the normal person’s life, with Riley v. California the Court demonstrated not only an unexpected fluency with how mobile phone technology has evolved, but also with how it has caused our daily sphere of privacy expectations to evolve. Just like when the police want to rifle through your house, when they want to go through your phone, the Chief Justice makes it very simple – get a warrant.
The Missouri Supreme Court recently issued a decision, Whelan Security Co. v. Kennebrew, et al., 2012 Mo. LEXIS 167, reaffirming Missouri as a pro non-compete jurisdiction for employers.
The Court’s decision makes clear that Missouri courts applying Missouri law will enforce non-competition and customer non-solicitation and employee non-solicitation agreements that are reasonable and necessary to protect legitimate interests against Missouri employees and non-resident employees.
In December 2008, two employees of Whelan Security Company (a Missouri company with 38 branches in 23 states), – Charles Kennebrew and Landon Morgan – resigned from their positions in Whelan’s Dallas and Nashville offices, respectively. Curiously, Kennebrew was assigned to the Dallas office because of a non-compete agreement he had with his previous employer. Soon after their resignations, Kennebrew and Morgan allegedly joined forces to start their own small security company – Elite Protective Services. Trouble began to brew in November 2009, when Elite successfully solicited the business of Park Square Condominiums, one of Whelan’s Houston-based clients, and also hired some of Whelan’s employees.
Kennebrew and Morgan had signed non-solicitation and non-competition agreements during their employment with Whelan. Specifically, for a period of two years after his employment, Kennebrew’s agreement restricted him, in pertinent part, from the following actions:
1) Solicit, take away or attempt to take away any customers or the business or patronage of any such customers or prospective customer(s) whose business was being sought during the last twelve months of employee’s employment;
2) Solicit, interfere with, employ, or endeavor to employ any employees or agents of employer; and
3) Working for a competing business within a fifty mile radius of any location where employee provided or arranged for employer to provide services.
Morgan’s agreement contained the same provisions; however, his agreement had a one year, rather than two year, prohibition.
With these agreements in hand and following the events at Park Square, Whelan filed suit, seeking both damages and a preliminary injunction. Whelan alleged that Kennebrew and Morgan violated their agreements. Whelan alleged that Kennebrew solicited Park Square’s business and that Elite had signed a contract with Park Square. Whelan alleged that Morgan solicited Whelan’s Park Square employees and that Elite retained several of Whelan’s Park Square employees. The trial court denied Whelan’s request for a preliminary injunction, and both sides then filed motions for summary judgment. The court denied Whelan’s motion but granted the defendants’ motion, finding that “the employment agreements at issue in this case, as written, are overbroad, not reasonable as to time and space and therefore are not valid.”
Whelan appealed, and the Missouri Supreme Court returned a decision that is, on the whole, quite favorable to employers and their ability to enforce non-competition and customer and employee non-solicitation agreements against Missouri employees and non-resident employees. While the court found that some of the covenants were unreasonable as written, the Court modified the covenants and enforced them to give effect to the intent of the parties.
Specifically, with respect to Kennebrew’s and Morgan’s agreements, the Court found as follows:
1) The customer non-solicitation clauses (for both prospective and existing customers) were overbroad because they lacked geographic limitations. The Court recognized that the two employees could not have “had significant contact with a substantial number of Whelan’s customers throughout the nation.” The Court, however, only declared unenforceable the provision’s prohibition on soliciting prospective customers. The Court reasoned that the prospective customer non-solicitation clauses prevented the employees from soliciting any business that Whelan sought as a customer in any of its 38 branches. The Court found that preventing the employees from soliciting any prospective customers throughout the nation would not protect Whelan from “the influence an employee acquires over his employer’s customers through personal contact,” which was a protectable interest under Missouri law, but instead would impermissibly protect Whelan from competition altogether. The Court indicated that under certain scenarios a prohibition on the solicitation of prospective customers could be permissible if for a legitimate purposes and tethered to prospective customers that the employee actually solicited, rather than tenuous and detached relationships.
The Court permitted the existing customer non-solicitation clause to remain but modified it to apply only to those customers with which Morgan or Kennebrew had contact in the last year of their employment. The Court reasoned that although Morgan and Kennebrew had significant client contact in their respective branch offices and possibly in the Houston area, there was no disputed facts showing that they had significant contact with a substantial number of Whelan’s contacts throughout the nation such as to warrant a national prohibition.
2) Morgan’s one-year employee non-solicitation clause was reasonable and enforceable because it complied with Missouri Revised Section 431.202(4), which renders an employee non-solicit provision “per se reasonable if the duration is for a period of one year of less.” The Court found that there was a genuine factual dispute regarding the purpose of Kennebrew’s two-year prohibition that needed to be resolved by the trial court. On remand, Whelan will need to demonstrate that the clause is to protect “[c]onfidential or trade secret business information” or “[c]ustomer or supplier relationships, goodwill or loyalty, which shall be deemed to be among the protectable interests of the employer” under Revised Section 431.202(3).
3) Kennebrew’s non-competition clause was enforceable, but a factual dispute remained over whether Kennebrew’s actions violated the clause and specifically whether he provided services in Houston while working in Whelan’s Dallas office. You will recall that he was working out of the Dallas office to avoid a violation of his non-compete with a previous employer.
In the end, this mix of enforcing, modifying, and returning questions to the trial court brings to light several salient points regarding employee non-competes in Missouri:
1) Missouri is a state that is very friendly for employers wishing to enforce non-competes. As Ken Vanko astutely pointed out, the Court’s ruling “beg[s] the question of whether that [the] validated non-compete achieves the same purpose as the partially invalidated non-solicitation covenant.” Further, the Court stated that in analyzing non-compete agreements, “the protection of the employer, not the punishment of the employee, is the essence of the law.” Furthermore, Missouri courts are also willing to modify overly broad non-solicitation and non-competes in order to render them enforceable.
2) Non-solicitation of employee provisions shall be conclusively presumed to be reasonable if their post-employment duration is no more than one year. The Court stated that “even if an employee non-solicitation covenant seeks to protect interests not identified in Section 431.220(3), it is nonetheless per se reasonable if its duration is for a period of one year or less.”
3) That said, one year is not an absolute limit for employee non-solicitations provisions in Missouri. Even agreements that exceed one year “can still be reasonable based on the facts of the case.” When venturing into these grounds, employers would do well to clearly state the legitimate purpose of the provision under Section 431.220(3) in the agreement, as a lack of clearly defined purpose is what stymied the Court when analyzing Kennebrew’s two-year employee non-solicitation clause and the Court remanded that issue to the trial court.
4) Missouri courts may scrutinize prohibitions on soliciting prospective customers. Special care should be given to tethering such provisions to prospective customers that the employee actually solicited, rather than tenuous and detached relationships, as well as stating the legitimate purposes for such provisions in the agreement. The Court indicated that under certain scenarios a prohibition on the solicitation of prospective customers could be permissible if tethered to prospective customers that the employee actually solicited, rather than tenuous and detached relationships. Although the Court did reject the prospective customer non-solicitation clause in this case, in addition to recognizing that more narrowly tailored covenants may be enforceable, it also recognized that prospective customer information, if it rises to the level of a trade secret, is also independently protectable under Missouri’s trade secrets act.
5) Missouri courts will enforce non-compete and customer and employee non-solicitation agreements against non-resident employees for alleged violations occurring outside of Missouri.
As previously reported on this blog, the Virginia Supreme Court recently issued an important new non-compete decision which impacts the enforceability of non-compete agreements in Virginia and serves as a reminder that employers may want to review their agreements with employees and update them as appropriate. Here is a Seyfarth One Minute Memo on this important new case.