Kentucky Employers Beware: Your Non-Competition Agreements May No Longer Be Valid
By Nicholas Birkenhauer, DBL Law
Kentucky courts have always strictly construed employee non-competition agreements against employers and in favor of employees. This means that any ambiguities, or other questions, in a non-competition agreement will be resolved in favor of the employee. For this reason, it has always been important for Kentucky employers to pay careful attention when drafting non-competition agreements. This is even more true today, in the wake of a 2014 Kentucky Supreme Court case which significantly altered the requirements of employee non-competition agreements in Kentucky.
In Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345, (Ky. 2014), the court held that “continued employment” is no longer adequate consideration for employees who are required to sign non-competition agreements. The case marks a significant shift from prior Kentucky case law.
Charles T. Creech, Inc., a provider of hay and straw to farms throughout Kentucky, employed Donald Brown as a driver, dispatcher, and salesman. In 2006, after being employed for sixteen years, Brown was asked to sign an agreement containing non-competition and non-disclosure covenants. Brown did not receive any additional monetary consideration for signing the agreement. Shortly thereafter, Brown was transferred from his position as a salesman to the position of dispatcher, which arguably constituted a demotion due to the decrease in responsibilities and customer contact. Two years later, Brown resigned and accepted a sales position with a competitor, Standlee Hay Company. After learning that Brown had contacted some of its existing customers, Creech sued Brown and Standlee in the Fayette Circuit Court, seeking damages and injunctive relief.
On appeal, the Court of Appeals upheld the validity of the non-competition agreement, finding that because Brown had remained employed for two years after signing the non-compete, the agreement was supported by adequate consideration. In so holding, the Court of Appeals was simply reaffirming the long-established rule in Kentucky that continued employment is sufficient consideration for such an agreement. In a surprising move, however, the Kentucky Supreme Court went on to reverse the decision of the Court of Appeals, finding that the agreement lacked consideration and was thus unenforceable. The court rejected the employer’s argument that continued employment, standing alone, is sufficient consideration to support a non-competition agreement.
The court conducted a lengthy analysis of the two cases relied upon by Creech, Higdon Food Service, Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982) and Central Adjustment Bureau, Inc. v. Ingram Associates, Inc., 622 S.W.2d 681 (Ky. App. 1981). The court distinguished those two cases by noting that the “common thread” between Higdon and Central was that after the non-compete agreement was signed, “the employment relationship between the parties changed.” Creech, 433 S.W.3d at 354. In the case before it, however, the court noted that Brown’s employment relationship with Creech remained stagnant after he signed the agreement and throughout his remaining two years with the company. Brown remained an at-will employee, and he did not receive a bonus, a promotion, a wage increase, or specialized training. “In short,” the court concluded, “Brown received no consideration from Creech in exchange for signing the Agreement or after he signed the Agreement. Therefore, the Agreement is not enforceable.” Creech, 433 S.W.3d at 354.
While the court did not adopt a bright-line test for determining whether sufficient consideration exists in such a case, the court did consider several factors which it found relevant in that analysis:
- The length of employment both before and after signing the agreement;
- Whether the non-compete is part of a larger employment contract setting forth other terms and conditions of employment;
- Whether the employee is threatened with termination for failure to sign the agreement;
- Whether the employee’s at-will status changes at some point after signing the agreement; and
- Whether the employee receives monetary consideration or some other benefit after signing the agreement, such as a bonus, raise, promotion, or access to specialized training.
See generally Creech, 433 S.W.3d at 353-54. As these factors indicate, the analysis of this issue is highly fact-intensive, and will vary case by case. There is no bright-line rule.
While Creech probably raised more questions than it answered – questions which will have to be sorted out by the trial courts – one take-away from the case is clear: Kentucky employers can no longer rely on continued employment, standing alone, to support their non-competition agreements.
Nicholas Birkenhauer, Associate
Dressman Benzinger LaVelle psc, Cincinnati, Crestview Hills and Louisville, United States
T: (859) 426-2176; F: (859) 341-1469
Nick Birkenhauer is an attorney in the law firm of Dressman Benzinger LaVelle, with offices in Cincinnati, Ohio, Crestview Hills, Kentucky, and Louisville, Kentucky.
published: January 2015