In a vibrant business culture marked by intense competition, non-compete agreements are generally not looked on too favorably by the courts. Indeed, in California and a couple of other states, state law essentially bans the use of non-competes.
What about Kentucky? In an important ruling in 2014, the Kentucky Supreme Court clarified some aspects of the law on non-competes. For both employers and employees, however, many questions remain about the enforceability of such agreements under Kentucky law.
In this article, we will address some of those questions.
Existing employment relationship with no new consideration
In 2014, the Kentucky Supreme Court made it clear that when an employer seeks to impose a non-compete agreement on an existing employee without granting additional consideration, the agreement is not enforceable. The case was called Charles T. Creech, Inc. v. Brown.
In the Creech case, a business that provided hay and straw to horse farms in Kentucky asked a long-time employee to sign a “conflicts of interest” document that was not actually made part of his employment agreement. When the employee left to work for another firm in a similar business, his former employer contended he had violated an agreement not to work for a competitor within three years after leaving his job.
The Kentucky Supreme Court said that this agreement was not enforceable because the employee received no consideration for signing it. Continued employment with the firm, the court said, did not constitute consideration for an enforceable non-compete.
Change in employment terms
What if an employee received additional benefits of some type in exchange for signing a non-compete? For example, an employee could receive a promotion, enhanced training opportunities or an increase in pay.
In its ruling in Creech, the Kentucky Supreme Court noted that it is a different case when a non-compete is accompanied by a change in the employment relationship such as these. This is true regardless of whether the non-compete agreement is structured as a standalone agreement or as part of an existing contract.
Non-solicitation and non-disclosure agreements
The enforceability of a non-compete agreement can also depend on the nature of the industry. Some industries are much more open than others in terms of information exchange, making them less suited to the restrictions of non-solicitation or non-disclosure agreements.
For example, an industry such as human resources staffing in the information technology industry is generally not based on strong confidentiality protections. Companies in that industry commonly share their vacancies with multiple IT firms and information about job candidates is readily available on LinkedIn.
Getting the legal counsel you need
In short, the law on the enforceability of non-competes is evolving rapidly, both in Kentucky and across the country. It is important to get knowledgeable legal counsel to guide you forward.