Ky. Ct. App. Adopts New Test for Validity of Non-Compete Agmt

Kentucky Court of Appeals Adopts New Test

For Validity of Non-Competition Agreements

      In a recent decision, the Kentucky Court of Appeals at minimum clarified, although it may be fairly said they have rewritten, the law to be applied in determining whether a non-competition agreement between an employee and an employer will be enforced.  Charles T. Creech, Inc. v. Brown, No. 2011-CA-000629-MR, __ S.W.3d __, 2012 WL 3538351 (Ky. App. Aug. 17, 2012). 

      Donald Brown was an employee, sometimes as a sales person and ultimately working as a dispatcher, for Charles T. Creech, Inc., which was involved in the business of growing and selling hay and straw.  Standlee Hay Company, Inc. was involved in the same industry.  After many years of employment with Creech, Brown was presented with a “conflicts of interest” document containing a non-compete agreement precluding, for three years after termination of service, the employee from working for any direct or indirect competitor of Creech.  Brown continued to be an employee of Creech for two years thereafter.

      In 2008, Brown left his employment with Creech to take a sales position with Standlee.  Creech, in connection therewith, executed a limited waiver of the non-competition clause, although the scope and extent of that waiver is in dispute, and on that basis the Court of Appeals would ultimately remand it for consideration by the fact finder.

      In response to a claim that the non-competition agreement was not supported by consideration, the Court noted that, notwithstanding certain academic condemnation, it is the law of Kentucky (Higdon Food Servs., Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982)) that continued employment itself serves as sufficient consideration.  On that basis, the challenge based upon failure of consideration failed.

      As an aside, it is not clear whether the Court of Appeals is suggesting that the Higdon Food decision should be reversed.  While stating that the decision has been “strongly criticized,” the Court cites only a single law review article from 1987.  Were the Court of Appeals convinced of the invalidity of Higdon Food, it would seem there would be a more expansive recitation of its condemnation.

      Returning to the topic of the non-compete agreement, while it did impose a three-year term, it contained no geographic scope.  Rather, its scope was descriptive in nature, being those companies that competed directly or indirectly with Creech.  Initially, the Court cautioned that the assessment of non-compete agreements is a particularized fact-based issue for which clear rules do not exist:

Both parties point to certain of their factual circumstances they believe are dispositive of the question of whether the covenant not to compete is valid and enforceable because its terms are reasonable.  The proper inquiry, however, is more complex than either party would have us believe.

It is tempting in disputes concerning non-competition agreements to turn to existing case law in search of a single guiding principle or perhaps a collection of hard-and-fast rules which determine the validity of any given covenant not to compete.  In fact, very few bright-line rules govern the inquiry now before us.  2012 WL 3538351, *3.

      Noting the ability of the Court to apply a blue pencil “to modify unreasonable provisions of covenants not to compete, and doing so will save an agreement which might itself otherwise be enforceable” (citing Kegel v. Tillotson, 297 S.W.3d 908, 913 (Ky. App. 2009) and Hammons v. Big Sandy Claims Serv., Inc., 567 S.W.2d 313, 315 (Ky. App. 1978)), it went on to state that “the reasonableness of a covenant not to compete is guided by the following principles:”

An agreement in restraint of trade is reasonable if, on consideration of the subject, nature of the business, situation of the parties[,] and circumstances of the particular case, the restriction is such only as to afford fair protection to the interests of the [employer] and is not so large as to interfere with the public interest or impose undue hardship on the party restricted [the employee].  2012 WL 5358351, *4 ([bracketed material in original]).

      The Court then discussed each of these factors, explaining the source and import of each.  Ultimately, summary judgment was reversed and the case remanded “to give the parties the opportunity to put forth sufficient proof for proper resolution of the case under this analysis.”  2012 WL 3538351, *7. 

      It bears noting that the Court did not provide any sort of weighting analysis vis-à-vis these various factors.