Employment-8th Circuit Upholds Restrictive Covenants Against Former Employees/Shareholders

In Mayer Hoffman McCann, P.C. v. Barton, No. 09-2061 (8th Cir. 2010), the plaintiff, the accounting firm of Mayer Hoffman McCann, P.C. (“MHM”), sued the defendants, who were former employees and shareholders of MHM, under restrictive covenants that MHM had with the defendants. The district court had granted judgment to MHM, awarding MHM permanent injunctive relief against the defendants and $1,369,921 in liquidated damages. The defendants appealed. The Eighth Circuit upheld the district court’s decision.

The restrictive covenants in this case, found in the defendants’ shareholder agreements with MHM, provided that, for the “Post-Employment Restrictive Period,” which was a period of two years following the termination of defendants’ employment with MHM, the defendants would not: (1) solicit, directly or indirectly, or attempt to solicit MHM’s clients or otherwise interfere with MHM’s relationship with its clients, (2) solicit MHM’s employees, or (3) copy, disseminate, or use MHM’s confidential information at any time. The shareholder agreements also had a liquidated damages provision.

In 2008, the defendants formed their own accounting firm. Each defendant prepared and sent a letter to various MHM clients, or otherwise attempted to contact MHM clients by fax or email, which in effect solicited business from the client. They also recruited four MHM employees to work at the new firm, and used and disclosed MHM confidential information. MHM subsequently filed suit against the defendants, seeking to enforce the restrictive covenants and asking for liquidated damages.

The issue before the Eighth Circuit was the enforceability of the restrictive covenants and the liquidated damages provision in the shareholder agreements. For this purpose, local state law (Missouri) would govern. The Court determined that the restrictive covenants were enforceable under state law, since in this case:

–the restrictive covenants were supported by consideration-namely because the shareholder agreements clearly provided that the restrictive covenants were necessary to protect the legitimate interests of MHM’s business and identified those interests, and the restrictions were not “greater than fairly required” for MHM’s protection;

–local law does not prevent restrictive covenants from being included in a shareholder’s agreement;

–MHM has a protectable interest; and
–the restrictive covenants-in effect for two years after termination- were reasonable in scope.

The Court also held that the liquidated damages provision in the shareholders’ agreements was enforceable under local law, since the provision sought to collect compensation for damages as opposed to imposing a penalty.