Schmersahl & Treloar v. McHugh

• Decision Date: 01 August 2000
• Citation: Schmersahl & Treloar v. McHugh, 28 S.W.3d 345 (Mo. App. 2000)
• Parties: (Mo.App. E.D. 2000) . Schmersahl, Treloar & Co., P.C., Plaintiff/Appellant, v. Tim McHugh, Defendant/Respondent. Case Number: ED76363 Missouri Court of Appeals Eastern District Handdown Date: 0
• Court: Missouri Court of Appeals

28 S.W.3d 345 (Mo.App. E.D. 2000)

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.

Schmersahl, Treloar & Co., P.C., Plaintiff/Appellant, v. Tim McHugh, Defendant/Respondent.

Case Number: ED76363

Missouri Court of Appeals Eastern District

Handdown Date: 08/01/2000

Appeal From: Circuit Court of the City of St. Louis, Hon. Thad F. Niemira

Counsel for Appellant: Charles S. Kramer and Michael A. Ellenhorn

Counsel for Respondent: Stuart R. Berkowitz

Opinion Summary: The company brought a lawsuit to recover actual and liquidated damages against its former employee for breach of a covenant not to "solicit, persuade, induce or encourage" its employees to terminate their employment for a three year period. The trial court found the covenant to be an unenforceable restrictive covenant and entered judgment for the employee.

AFFIRMED.

Division Two holds: (1) The covenant not to solicit employees restrains trade and is governed by the law applicable to restrictive covenants. (2) The covenant is not enforceable under Missouri law because it is not directed to the protection of trade secrets or customer contacts.

Opinion Author: Kathianne Knaup Crane, Presiding Judge

Opinion Vote: AFFIRMED. Dowd, Jr., J. and Sullivan, J., concur.

Opinion:

This case involves an attempt by an employer to recover liquidated and actual damages against its former employee for breach of a covenant not to "solicit, persuade, induce or encourage" employer's employees to terminate their employment for a period of three years after the former employee's termination. Twenty-one months after leaving employer, the former employee told one of employer's employees about a job opportunity, but that employee remained with employer with no change in compensation. Following a bench trial, the trial court found the covenant and liquidated damages clause were not enforceable and entered judgment in the former employee's favor. On appeal employer argues that the covenant and liquidated damages clause are enforceable contract provisions. We affirm for the reason that the covenant restrains trade and does not fall within the class of restrictive covenants which may be enforced in Missouri because it is not directed to the protection of trade secrets or customer contacts.

Plaintiff, Schmersahl, Treloar & Co., P.C., an accounting firm, required all of its employees, both professional and clerical, to sign a Confidentiality and Non-Solicitation Agreement which contained a non-solicitation covenant that prohibited plaintiff's employees, first, from soliciting business from its clients and, second, from soliciting or encouraging its employees to terminate their employment:

2. Non-Solicitation Covenant. In consideration of Employee's employment and/or continued employment, Employee agrees that during the term of the employment and for a period of three (3) years following termination of employment (regardless of which party terminates the employment), Employee will not, directly or indirectly, as an employee, employer, consultant, agent, sole proprietor, principal, associate, partner, stockholder, corporate officer, director, or in any other individual or representative capacity:

a). Solicit, service, refer, attempt to divert, take away, or accept business from, any clients of S&A for any purpose that is in anyway competitive with S&A, or supply any information to any other person, firm, or corporation for such purpose; or

b). Solicit, persuade, induce, or encourage any other employees or agents of S&A to terminate employment with the Company.

The agreement provided for stipulated damages "for violations of paragraph 2(b) above, 30% of the gross salary of each person that the Employee solicits, persuades, induces or encourages to terminate employment with S&A in violation of paragraph 2(b) at the time of said solicitation." All of plaintiff's employees were employees at will.

Defendant, Tim McHugh, an accountant hired by plaintiff in 1994, signed this agreement on April 18, 1996. Defendant left plaintiff to take a position with a different accounting firm in December, 1996. Approximately one year and nine months later, defendant contacted plaintiff's employee, Mark Graves, with whom defendant had previously worked, and had lunch with him. During the lunch defendant indicated that his current employer, Lopata Flegel, was looking for an accountant with Graves's type of experience and that it would be a good opportunity for him.

Graves approached his supervisor and told him that he had talked to defendant about an opportunity at Lopata Flegel. Graves indicated that he planned to stay with plaintiff, but did not ask for a raise. Plaintiff did not give Graves a raise or promise Graves any additional compensation for staying in plaintiff's employ. Lopata Flegel never made a job offer to Graves.

Plaintiff subsequently filed a lawsuit against defendant seeking liquidated and actual damages for breach of the non-solicitation agreement. At trial James Schmersahl, plaintiff's president, testified that the covenant was to keep former employees, who had developed a bond with co-workers as a result of plaintiff's efforts to create camaraderie among employees, from using that relationship to entice the former co-workers to either leave plaintiff's employ or to question whether plaintiff was compensating them sufficiently. He opined that plaintiff would give Graves bigger raises in the future because of Graves's knowledge of the market for his services as a result of the solicitation, but admitted that, as of the time of trial, plaintiff had not given Graves any additional compensation.

The trial court entered judgment for the defendant on the grounds that the covenant sought to be enforced was a restrictive covenant which was broader than was needed to protect client needs and identities and extended to interests which were not properly the subject of a covenant not to compete. It further held that the liquidated damage clause was not a reasonable forecast of the harm caused by the breach but purported to award damages even in situations in which the employer was not entitled to damages and was in the nature of a penalty.

In its four points on appeal, plaintiff contends that the trial court misapplied and misdeclared the law in entering judgment against it. It first argues that its non-solicitation of employees clause is not a restrictive covenant. It next argues that, even if it is a restrictive covenant, it should be upheld because it protects a legitimate business interest, it was reasonable as to time, and the damages were a reasonable forecast of the harm caused by the breach.

DISCUSSION

I. Enforceability of the Non-Solicitation of Employees Clause

A. Is the Non-Solicitation Clause a Restrictive Covenant?

The threshold question is whether a former employee's covenant not to solicit or encourage other employees to terminate their employment is a restrictive covenant. No Missouri court has determined this issue. In Universal Underwriters Ins. Co. v. Lyon, 896 S.W.2d 762 (Mo. App. 1995), the contract contained a covenant by which an ex-employee agreed not to "employ" any other employee of employer for two years after termination. The court affirmed the judgment in defendant's favor on the grounds that there was no evidence that the ex-employee had "employed" one of employer's employees and did not reach the question of whether the employer had a protectable interest in its workforce. Id. at 764.

Because Missouri courts have not addressed this issue, we must look at the underlying principles governing agreements which restrain trade to determine if this kind of non-solicitation agreement falls thereunder. Contracts in restraint of trade are unlawful in Missouri. Section 416.031 RSMo (1994). "A promise is in restraint of trade if its performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation." Restatement (Second) of Contracts Section 186(2) (1981). "Every promise that relates to a business dealing or to a professional or other gainful occupation operates as a restraint in the sense that it restricts the promisor's future activity." Id., cmt. a. Restrictive covenants limiting individuals in the exercise or pursuit of their occupations are in restraint of trade. Sturgis Equip. Co., Inc. v. Falcon Indus. Sales Co., 930 S.W.2d 14, 16 (Mo. App. 1996). Post-employment restrictions are generally considered restraints of trade. House of Tools & Engineering, Inc. v. Price, 504 S.W.2d 157, 159 (Mo. App. 1973).

Competition in the marketplace encompasses competition in the labor market, including an employer's ability to solicit and hire the at-will employees of another and an at-will employee's ability to seek employment at better terms. The policy in favor of free competition allows an employer to make an offer of employment to a competitor's at-will employee and allows an at-will employee to leave employment and compete with a former employer. Dwyer, Costello and Knox, P.C. v. Diak, 846 S.W.2d 742, 747 (Mo. App. 1993). In Triangle Film Corp. v. Artcraft Pictures Corp., 250 F. 981 (2d Cir. 1918), Judge Learned Hand wrote that it was universally accepted that, absent some monopolistic purpose, everyone has the right to offer better terms to another's employee, as long as the latter is free to leave. Id. at 982. He concluded that a contrary result would be "intolerable" both to other employers who could use the employee more effectively and to the employees who might receive added pay. Id. To hold otherwise would "put an end to any kind of competition." Id. The argument "[t]hat nobody in his own business may offer better terms to an employe[e], himself free to leave, is so extraordinary a doctrine, that we do not feel called upon to consider it at large." Id. at 983.

Having considered these principles, we conclude that this covenant is in restraint of...