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Kentucky Heightens Consideration Requirement for Non-Compete AgreementsPDF
By Matthew Lockaby
Employers have the right to protect themselves against unfair competition. One increasingly common way for employers to do so is through non-compete agreements, which prohibit employees from competing with the employer within a reasonable geographic scope and for a reasonable length of time after the employment relationship ends.
The Kentucky courts have long held that an employee’s continued employment constitutes sufficient consideration for the imposed post-employment restrictions. On June 19, 2014, however, the Supreme Court of Kentucky, in Charles T. Creech, Inc. v. Donald E. Brown and Standlee Hay Co., Inc., 2012-SC-000651-DG (to be published), held that continued employment alone is no longer sufficient.
Creech provided hay and straw to farms throughout Kentucky. Brown had worked for Creech as a salesman for 18 years when, in 2006, he was asked to sign a non-compete agreement that restricted him from working for a competing company for three years after his employment ended.
In 2008, Brown resigned and accepted a position with Standlee, a company that also provided hay and straw to farms in Kentucky. Although Creech did not immediately object to Brown’s new employment, it did so after learning that Brown contacted Creech’s customers, suppliers, and employees. Creech filed suit, seeking an injunction to prevent Brown from competing with Creech.
The trial court held that Brown’s continued employment constituted sufficient consideration for the agreement, and enjoined Brown from competing with Creech and from using information regarding Creech’s customers. The court of appeals reversed, finding that the trial court failed to analyze a variety of factors to be considered when determining whether a non-compete agreement was enforceable.
The Supreme Court of Kentucky disagreed with both the trial court and court of appeals, holding that Brown’s continued employment was not, in itself, sufficient consideration. Looking to the other cases that reached a contrary finding, the Supreme Court explained that, in those cases, the employment relationship between the employer and employee changed after the non-compete agreement was signed. For instance, in one case, the employee received a protected employment status, specialized training, and pay raises. In another case, the employee was granted certain rights and the employer assumed certain obligations. The non-compete agreement signed by Brown, however, did not in any way alter the terms and conditions of his employment with Creech. As such, there was no consideration and the non-compete agreement was held unenforceable.
So what are employers to do after Creech? Most preferably, employers should condition an employee’s initial employment on signing a non-compete agreement. Where employers want employees to sign non-compete agreements after some period of employment, the employer should specifically state in the agreement that the employee’s continued employment is contingent upon signing the agreement and that consideration for the employee’s agreement has been received. Even in this situation, however, Creech makes clear that some additional benefit must also inure to the employee, such as a bonus, pay raise, promotion, or specialized training. What that benefit is will depend on each employment relationship, each employer’s business, and each industry in which an employer operates. Non-compete agreements, after all, are not one-size-fits-all propositions, and they should be narrowly tailed for each employee.
If you have any questions regarding this decision, or any other employment related issues, please call one of our Employment Practices Liability Lawyers.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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