August 20, 2014

A Recent Kentucky Supreme Court Decision Threatens the Enforceability of Non-Compete Agreements

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by Joseph Bilby

In June, the Kentucky Supreme Court issued an important and unexpected ruling in Charles T. Creech, Inc. v. Brown.  The workplace law attorneys of Stoll Keenon Ogden PLLC have prepared this SKO Client Update summarizing the Creech decision and explaining its potential effects on your business.

Why should I be concerned about this new decision?

The Creech decision could have an impact on a Kentucky employer’s ability to enforce non-competition, non-solicitation, and similar agreements signed by its current and former employees. Until now, an employee’s agreement not to compete with his or her employer was presumed to be valid, binding and enforceable, so long as its terms were reasonably tailored to protect the employer’s legitimate business interests – rather than imposing broad and potentially excessive restraints on the employee’s freedom to earn a livelihood. Kentucky courts assumed that continued employment, standing alone, was sufficient “consideration” to the employee to support a binding contract.

Now, an employer seeking to enforce a former employee’s non-compete agreement must also be able to show that the employee received something of value above and beyond continued employment in exchange for signing the agreement. If the employer cannot show that the employee received something in exchange for promising not to compete with the employer, the employee may be able to persuade the court that the non-compete agreement lacks “consideration” and is unenforceable.

How does Creech change the law with respect to my company’s non-competes?

Until now, many of Kentucky’s attorneys and judges regarded a person’s continued employment relationship as sufficiently valuable to constitute sufficient “consideration” – the quid pro quo that the law requires of any valid contract. After Creech, that is no longer the case in some circumstances.

Creech involved a hay and straw distributor (Creech, Inc.) that hired an individual experienced in the hay industry. After sixteen years of employment, Creech, Inc. asked the employee to sign a non-competition and non-disclosure agreement. No one told the employee his continued employment was contingent on signing the agreement, and the employee did not receive any monetary consideration for signing the agreement. In the years after signing, the employee was not promoted, given additional training, or provided with a pay increase. On these facts, the Supreme Court held that the employee had received no consideration for the agreement, and thus Creech, Inc. could not enforce that agreement after the employee resigned his employment.

How do I know if my company’s non-compete agreements are vulnerable?

In the wake of the Creech decision, the essential question is whether your company’s employees have received something of value in exchange for signing a non-compete agreement.  Many employers already meet this test because they provide one or more concrete benefits to their employees in exchange for their agreements, either at the time of signing or shortly thereafter: hiring to a new position, additional compensation, a promotion, a commitment to provide additional or specialized training, job protection, and so forth.

What can I do to protect my company’s interests in light of this new decision?

Going forward, employers would be well-advised to review their existing non-compete agreements to ensure that Creech’s holding will not create any problems should they need a court’s assistance in enforcing their rights.

Given the importance non-competition agreements and other restrictive covenants have in protecting a business’s most critical assets – customers, employees, and intellectual property, just to name a few – this is a situation where a periodic “check-up” with a legal advisor may be appropriate. If your company has not reviewed its non-compete agreements with legal counsel lately, or if you are concerned about the Creech decision’s impact on the enforceability of your business’ non-compete agreements, SKO’s workplace law attorneys would be glad to speak with you.