The national CPA firm of Mayer Hoffman McCann P.C. (“MHM”), based in Missouri, scored a major victory when the Eighth Circuit Court of Appeals affirmed a trial court’s injunctions and liquidated damages award of $1,369,921 against four former stockholder-employees in Minnesota. The injunctions prohibited them from soliciting MJM’s clients, directed them and their employees to make their office and home computers available to a computer forensic expert, and enjoined them from using (and ordered them to return) MJM’s trade secrets and confidential information. The appellate court’s decision is notable because of its analysis of when non-compete covenants and contractual liquidated damages provisions are enforceable, but also because of the court’s view that non-solicitation agreements are unenforceable.
In 2005, the individuals executed a Stockholders Agreement pursuant to which they covenanted not to solicit MHM’s clients and customers for two years after leaving MHM’s employ. However, in 2008, immediately after their resignation from MHM, the individuals started a competing firm which proceeded to serve at least 124 MHM clients.
The covenants were challenged as lacking in consideration, being contrary to Missouri law, and having unenforceable remedy terms. The court discussed and rejected almost every challenge. Mayer Hoffman McCann, P.C. v. Barton, 614 F.2d 893 (8th Cir. 2010).
With regard to consideration, the defendants relied on a 1996 Missouri appellate court decision that invalidated, for lack of sufficient consideration, a non-compete clause contained in a buy-sell agreement. That court, however, was influenced by the absence of a contemporaneous employment contract and the failure of the buy-sell agreement to state that the clause was intended to protect special interests of the buyer. In the Mayer Hoffman case, the individuals who signed the covenants were employees. Further, the Agreements contained mutual promises, recited that the purpose of the covenants was protection of MHM’s legitimate special interests -- its proprietary trade secrets to which the individuals had access -- and did not include restrictions greater than fairly required. So, consideration was adequate.
Several Missouri appellate court opinions identify the types of agreements in which restrictive covenants are permissible. No reported case involved a covenant ancillary to a shareholder’s agreement relating to a professional corporation. But the Eighth Circuit Appeals Court held that since a few decisions upheld covenants in agreements with various kinds of close corporations, and a professional corporation is a type of close corporation, the covenants at issue are enforceable. The two-year covenant was without geographical restrictions, but it was limited to MHM clients who the defendants solicited, and that was held to conform with Missouri law.
The defendants claimed that the non-compete clause failed because MHM had no protectable interest in clients who the individuals had begun servicing before signing the Stockholder Agreements. The court disagreed. MHM had invested money, time and effort in strengthening the pre-existing relationships. The court did concur with the defendants that, under Missouri law, MHM had no protectable interests in the defendants’ co-workers’ continued employment, and so the non-solicitation clause was unenforceable.
The Agreements provided that a violator of the covenant not to compete would owe liquidated damages equal to the sum of MHM’s total billings, for the two years prior to violation of the covenant, to the clients the violators successfully solicited. Overruling the defendants’ contention that the damages clause created an unenforceable penalty, the court held that the clause was valid because an accurate estimate of damages was difficult to make, and two years’ billings was a reasonable forecast of the harm caused by the individuals’ breach of contract.
The injunctive and monetary award in Mayer Hoffman might be harsher than some courts would have rendered. However, the contract violation here was particularly egregious. In any event, the opinion suggests how to draft enforceable trade secret protection agreements, non-compete covenants, and liquidated damages clauses. The decision shows the horrendous consequences that may be faced by anyone who misappropriates trade secrets and breaches a covenant not to compete