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Eighth Circuit Upholds 2-Year Restrictive Covenant

In Eighth Circuit, Restrictive Covenants on August 16, 2010 at 10:18 am

The U.S. Court of Appeals for the Eighth Circuit considered an appeal from a judgment following a bench trial, in Mayer Hoffman McCann, P.C. v. Barton, et al., No. 09-2061,  — F.3d —-, 2010 WL 3155177 (8th Cir. Aug. 11, 2010).  The district court granted judgment to Plaintiff Mayer Hoffman McCann, P.C. (“MHM”) , awarding MHM permanent injunctive relief and $1,369,921 in liquidated damages.  Defendant appellant appealed, contending, among other things, that enforcement of the restrictive covenants is contrary to Missouri law.  The Eighth Circuit rejected these contentions and affirmed the judgment of the district court.

Mayer Hoffman McCann, P.C. is national certified public accounting (CPA) firm. MHM sued its former employees and shareholders-Thomas L. Barton, Anthony W. Krier, James N. Stelzer, and John C. Walter (collectively, “appellants”), all CPAs licensed by the State of Minnesota-to enforce restrictive covenants contained in contractual agreements between the appellants and MHM.  Following a bench trial, the district court granted judgment to MHM, awarding MHM, inter alia, permanent injunctive relief.

As part of a stock repurchase agreement, Appellants agreed that for the “Post-Employment Restrictive Period,” a period of two years following the termination of their employment, they would not: (1) solicit, directly or indirectly, or attempt to solicit MHM’s clients or otherwise interfere with MHM’s relationship with its clients, or (2) solicit MHM’s employees. Appellants further agreed not to copy, disseminate, or use MHM’s confidential information at any time.

Appellants asserted that the restrictive covenants are unreasonable in scope and, therefore, unenforceable.  The court rejected this argument, holding that the two year restrictive covenant “has been found reasonable under the “overwhelming weight of case authority” and was “reasonable under Missouri law”.  Id. *10 (citing Missouri Alltype Fire Prot. Co. v. Mayfield, 88 S.W.3d 120, 123 (Mo. Ct. App. 2002)).

Although the restrictive covenants in this case are not restricted geographically, Missouri law recognizes that a customer restriction may substitute for an explicit geographical restriction. See Schott, 950 S.W.2d at 623-24, 627 (concluding that a two-year restriction on CPAs soliciting their former employer’s customers, or doing any accounting work for them, was enforceable, without a geographical restriction, because “the covenant does not prevent employees from practicing in any particular geographical area, it merely prohibits them from soliciting employer’s clients”); Mills v. Murray, 472 S.W.2d 6, 11-12 (Mo. Ct. App. 1971) (determining that a three-year restrictive covenant was reasonable, even absent a geographical restriction, because the former employee was only restricted from soliciting his former employer’s clients such that he could even “conduct a competing business at [his former employer's] doorstep as soon as [he] left [his former employer's] service”). As the Schott Court observed, where “the specificity of limitation regarding the class of person with whom contact is prohibited increases, the need for limitation expressed in territorial terms decreases.” 950 S.W.2d at 627 (quoting Seach v. Richards, Dieterle & Co., 439 N.E.2d 208, 213 (Ind. Ct. App. 1982)). Under Schott and Mills, the restrictive covenant at issue here is not unenforceable, even though it lacks a geographical restriction, because it only prohibits appellants from soliciting MHM clients-not from performing services for MHM’s clients whom the appellants did not solicit. Furthermore, even if the restrictive covenant completely barred the appellants from doing any accounting work for MHM clients, the appellants would still be free to provide accounting services to all non-MHM clients anywhere. Therefore, the scope of the restrictive covenants at issue here is reasonable under Missouri law.

Judges and Attorneys

Before Judge Raymond Gruender, Judge Bobby E. Shepherd of the Eighth Circuit Court of Appeals and Hon. John A. Jarvey, United States District Judge for the Southern District of Iowa, sitting by designation.

The trial court judge was Hon. Gary A. Fenner, United States District Judge for the Western District of Missouri.

Kay Nord Hunt, argued, Minneapolis, MN (Phillip A. Cole, Robert Kent Sellers, Michael Jat Abrams, Diane M. Odeen, Hudson, WI, on the brief), for Appellant.

John C. Aisenbrey, argued, Kansas City, MO (Patricia Konopka, Robin K. Carlson, on the brief), for Appellee.

By CHARLES H. JUNG

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