Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 14

FACTS In June of 1998, Payroll Advance, Inc. entered into an employment contract with Barbara Yates, which contained a covenant not to compete. It is customary for each of Payroll's branch offices to employ a sole employee at each branch and that sole employee is the manager of that particular branch. On November 19, 1999, as a condition of her continued employment, Payroll presented Yates with the Employment Agreement which included a provision entitled ''NON-COMPETE'' (''the covenant not to compete''). This provision provided:
[Yates] agrees not to compete with [Payroll] as owner, manager, partner, stockholder, or employee in any business that is in competition with [Payroll] and within a fifty-mile radius of [Payroll's] business for a period of two (2) years after termination of employment or [Yates] quits or [Yates] leaves employment of [Payroll].
On November 8, 2007, Yates was fired for cause. Approximately thirty-two days after being terminated Yates obtained employment with Check Please, one of the Payroll's competitors. At Check Please, Yates performed basically the same duties as she had when employed with Payroll.
On February 7, 2008, Payroll filed a complaint against Yates for: (1) injunctive relief to prevent Yates from soliciting its clients for her new employer, and to stop her from using client information she purportedly obtained from her time with Payroll and (2) damages for breach of contract for violation of the covenant not to compete together with attorney fees and costs. The trial court found ''[n]o evidence exists that, following [Payroll's] termination of [Yates'] ten year period of employment, [Yates] removed any customer list or other documents from [Payroll's] place of business [or] … made any personal or other contact with any previous or present customer of [Payroll's] business or intends to do so.''
The trial court further determined that if the covenant not to compete were enforced as requested, Yates would be prohibited from engaging in employment with any payday loan business in at least 126 cities situated in Missouri, Arkansas, and Tennessee. Further, Yates could also be prohibited from employment at a bank, savings and loan company, credit union, pawnshop, or title-loan company within Missouri, Arkansas, and Tennessee. Accordingly, the trial court found in favor of Yates holding that the Employment Agreement's noncompete covenant signed by the parties was not valid in that it was ''unreasonable under the facts and circumstances of the particular industry, agreement, and geographic location here involved.'' Payroll appealed.
DECISION Judgment affirmed.
OPINION Barney, J. ''Generally, because covenants not to compete are considered to be restraints on trade, they are presumptively void and are enforceable only to the extent that they are demonstratively reasonable.'' [Citations.] ''Noncompetition agreements are not favored in the law, and the party attempting to enforce a noncompetition agreement has the burden of demonstrating both the necessity to protect the claimant's legitimate interests and that the agreement is reasonable as to time and space.'' [Citation.]
There are at least four valid and conflicting concerns at issue in the law of non-compete agreements. First, the employer needs to be able to engage a highly trained workforce to be competitive and profitable, without fear that the employee will use the employer's business secrets against it or steal the employer's customers after leaving employment. Second, the employee must be mobile in order to provide for his or her family and to advance his or her career in an everchanging marketplace. 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. Third, the law favors the freedom of parties to value their respective interests in negotiated contracts. And, fourth, contracts in restraint of trade are unlawful. [Citation.]
''Missouri courts balance these concerns by enforcing non-compete agreements in certain limited circumstances.'' [Citation.] ''Non-compete agreements are typically enforceable so long as they are reasonable. In practical terms, a non-compete agreement is reasonable if it is no more restrictive than is necessary to protect the legitimate interests of the employer.'' [Citation.] Furthermore, ''[n]on-compete agreements are enforceable to the extent they can be narrowly tailored geographically and temporally.'' [Citation.] Lastly, it is not ''necessary for the employer to show that actual damage has occurred, in order to obtain an injunction. The actual damage might be very hard to determine, and this is one reason for granting equitable relief.'' [Citation.]
Here, viewing the evidence in a light most favorable to the trial court's holding, [citation], it is clear the trial court took umbrage with the covenant's restrictive provisions and geographical limitations on Respondent's [Yates'] ability to find employment.
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The question of reasonableness of a restraint is to be determined according to the facts of the particular case and hence requires a thorough consideration of all surrounding circumstances, including the subject matter of the contract, the purpose to be served, the situation of the parties, the extent of the restraint, and the specialization of the business.
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Here, the covenant not to compete grandly declares that Respondent cannot ''compete with Appellant [Payroll] as owner, manager, partner, stockholder, or employee in any business that is in competition with [Appellant] and within a 50 mile radius of [Appellant's] business.…'' (Emphasis added.) There was evidence from Appellant's representative at trial that Appellant has seventeen branch offices in Missouri and still other locations in Arkansas. If this Court interprets the plain meaning of the covenant not compete as written, the covenant not to compete would prevent Respondent not only from working at a competing business within 50 miles of the branch office in Kennett, Missouri, but Respondent would also be barred from working in a competing business within 50 miles of any of Appellant's branch offices. Under this interpretation, Respondent would be greatly limited in the geographic area she could work.
Additionally, the covenant not to compete bars Respondent from working at ''any business that is in competition with [Appellant].'' Yet, it fails to set out with precision what is to be considered a competing business and certainly does not specify that it only applies to other payday loan businesses. In that Appellant is in the business of making loans, it could be inferred that in addition to barring Respondent's employment at a different payday loan establishment the covenant not to compete also bars her from being employed anywhere loans are made including banks, credit unions, savings and loan organizations, title-loan companies, pawn shops, and other financial organizations. Such a restraint on the geographic scope of Respondent's employment and upon her type of employment is unduly burdensome and unreasonable. [Citation.]
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Appellant's second point relied on asserts the trial court erred in denying its petition because [t]he trial court erroneously applied the law in failing to modify the covenant not to compete to a geographic scope it found to be reasonable in that the court found the geographic scope to be unreasonable for the payday loan industry but failed to modify the covenant not to compete to reflect a geographic scope that would be reasonable and enforceable.
*** This Court ''recognize[s] 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.'' ***
Having reviewed the record in this matter, it appears the record is devoid of a request by Appellant for modification of the covenant not to compete either in its pleadings, at trial, or in its motion for new trial before the trial court. It is settled law that '''appellate courts are merely courts of review for trial court errors, and there can be no review of matter which has not been presented to or expressly decided by the trial court.''' [Citation.]
INTERPRETATION Noncompete clauses in employment agreements can be enforced only to the extent necessary to protect the employer's legitimate interests and only if reasonably limited in duration and geographic scope.
CRITICAL THINKING QUESTION How should courts balance the protection of employers with the freedom of employees to change jobs? Explain.