By Robert Milligan and Grace Chuchla
In a recent opinion, Creech, Inc. v. Brown, the Kentucky Court of Appeals both affirmed the ability of Kentucky courts to modify overly broad non-competition agreements in the employment context and laid out a six-part framework that trial courts may follow when analyzing the reasonableness and enforceability of non-competition agreements.
The court also reaffirmed that continued employment is sufficient consideration for non-competition agreements, notwithstanding the existence of some critical commentary concerning existing Kentucky precedent.
In sum, the case confirms that employers can and should use non-competition agreements with Kentucky employees and that continued employment is sufficient consideration for asking an existing employee to sign a new or updated non-competition agreement. Employers should recognize, however, that each case is fact specific and that the courts may apply a six-part framework in determining the extent to which a non-competition agreement will be enforced, if at all.
This opinion arose out of a dispute between Charles T. Creech, Inc. and Standlee Hay Company, Inc. Both Creech and Standlee provide hay and straw to horse farms in Kentucky and other areas of the United States. Donald Brown was hired by Creech in 1990. In 2006, Brown signed a document entitled “Conflict of Interest,” which, in relevant part, prohibited him from “work[ing] for any other company that directly or indirectly competes with the company for 3 years after leaving Creech, Inc. without the companies [sic] consent.”
In 2008, Brown resigned from Creech and began to work for Standlee Hay. Creech did not oppose this move; in fact, Creech signed a partial waiver of Brown’s non-competition clause that allowed him to work for Standlee as long as he did not partake in business pursuits that competed with those of Creech. Additionally, after Creech signed the waiver, Standlee notified them that Brown would be working in Kentucky and therefore necessarily be contacting Creech’s customers. Creech did not respond to this notification.
Creech proceeded to file suit against Standlee and Brown. The trial court entered a temporary injunction against Brown and Standlee, but this decision was overturned on appeal. On remand, in part because of the statements made by the court of appeals when overturning the injunction, the trial court granted Brown and Standlee’s motion for summary judgment. Creech then appealed the trial court’s summary judgment ruling.
On appeal, Creech argued that the agreement was supported by valid consideration and that its terms were reasonable. Creech also argued that if the agreement was fatally lacking in a reasonable geographic limitation, the trial court was empowered to establish such a limitation. Standlee and Brown countered that the agreement’s restriction on Brown’s future employment was invalid because its terms were unreasonable and because it lacked consideration. They also asserted the trial court did not possess the authority to insert a reasonable geographical limitation into the agreement and that Creech waived any rights it did secure under the contract.
In its analysis of the trial court’s ruling, the court began by stating that “very few bright-line rules govern the inquiry now before us.” However, despite the lack of bright-line rules, it stated that there are two “guiding principles” that govern non-compete cases in Kentucky:
1) trial courts are empowered to modify unreasonable provisions of covenants not to compete, and doing so will save an agreement which might otherwise be unenforceable; and
2) judgment on the reasonableness of non-competition agreements should be based on whether they sufficiently protect the interests of the employer while neither interfering with the public interest nor placing undue hardship on the employee.
The court stressed the need for case-specific flexibility. According to the court, the factual circumstances of a covenant not to compete will necessarily vary from industry to industry, from employer to employer, and from region to region and attempting to erect a set of bright-line rules to govern courts’ treatments of these agreements would be futile and counterproductive.
In addition to these two guidelines, the court acknowledged that the “general rule” in Kentucky that non-competes “are not enforceable where they are…unlimited as to space but limited as to time” has never been explicitly overruled in the context of employment cases. The court then stated, however, the blue pencil rule extends to all provisions of a non-competition agreement. Kegel v. Tillotson, 297 S.W.3d 908, 913 (Ky. App. 2009) (“[O]ur courts have adopted a ‘blue pencil’ rule, whereby we are empowered to reform or amend restrictions in a non-compete clause if the initial restrictions are overly broad or burdensome.”).
The court found that in another Kentucky appellate decision, Hodges v. Todd, 698 S.W.2d 317, 319 (Ky. App. 1985), the court held “that the trial court had the authority to enforce [a noncompetition] covenant [which wholly omitted a geographical limitation] by establishing a reasonable geographical limitation based on the intention of the parties at the time the contract was executed.” According to the court, the case admittedly addressed only those non-competition agreements which were part of a contract for sale of a business. The court reasoned, however, given “the persistent tendency of Kentucky courts to apply rules governing noncompetition agreements in contracts for the sale of business to those included in employment contracts, and vice versa, we believe it likely that the old rule that employment contracts whose covenants not to compete fail to state a geographic limitation are invalid is probably no longer the law.”
Six Factors To Analyze As Part of Guiding Principles
The court then fleshed six factors that it stated that may be considered when deciding the reasonableness and enforceability of a non-competition agreement:
1) The nature of the industry;
2) The relevant characteristics of the employer;
3) The history of the employment relationship;
4) The interests the employer can reasonably expect to protect by execution of the non-competition agreement;
5) The degree of hardship the agreement imposes upon the employee (The court stated that this is also the point in the analysis where the trial court may modify certain provisions of the noncompetition agreement if doing so would not work an injustice upon the parties, if a modification would make the agreement reasonable, and if the court determines in its discretion that it is wise to do so (citing Kegel, 297 S.W.3d at 913); and
6) The effect the agreement has on the public.
In a footnote, the court was careful to state that none of these factors are a new creation; rather, this opinion is simply “the first to express them together in this manner.” The court also stated that not all of the categories or all questions within a category which are identified in the opinion must be addressed in every inquiry as the list of factual circumstances which may bear on each factor is neither mandatory nor exhaustive. Rather, the court reiterated that the trial court’s approach must be flexible depending on the parties and their circumstances.
Working off this framework, the court reversed and remanded the trial court’s entry of summary judgment, finding that “the evidence…was insufficiently developed to resolve all of the factors listed above.” The court stated that the key issue on remand was to answer the question whether, “on consideration of the subject, nature of the business, situation of the parties, and circumstances of the particular case,” the noncompetition clause now at issue “is such only as to afford fair protection to the interests of the [employer] and . . . not so large as to interfere with the public interests or impose undue hardship on the party restricted.” The court concluded it must therefore reverse the summary judgment order as prematurely issued and remand the matter to give the parties the opportunity to put forth sufficient proof for proper resolution of the case under this analysis.
Sufficiency of Consideration
The court also analyzed the sufficiency of consideration of the non-competition agreement. The court held that “[t]o the extent the entry of summary judgment may have been premised upon the court’s conclusion that the noncompetition agreement lacked consideration, we also reverse.” The court found that it was undisputed that Brown continued his employment with Creech for more than two years after he signed the Conflicts of Interest document and that he departed the company voluntarily. However, “the courts of Kentucky and those applying Kentucky law found that employer-employee agreements may be executed in exchange for merely retaining one’s job.” Higdon Food Servs., Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982). The court noted that Higdon decision was strongly criticized but stated that “it remains precedent that this Court lacks authority to change.” In applying the precedent to the undisputed material facts, the court concluded as a matter of law that the agreement was supported by sufficient consideration.
Also adding to the court’s decision to reverse and remand was the aforementioned waiver that Creech had signed. At the time of filing its complaint, Creech raised the claim that the waiver was based off false information, and the court of appeals found that a question of fact still remained as to whether Creech intentionally waived its rights under the non-competition clause. Summary judgment was, therefore, premature.
In the end, Creech, Inc. v. Brown stands as a helpful and instructive case containing “guiding principles “ for Kentucky employers looking to properly structure their non-competition agreements and to evaluate their enforceability.