November 1, 2012

New Guidelines for Businesses with Non-compete Agreements

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It’s common for an employer to rely on a non-compete agreement to protect his or her business from unfair competition following the departure of a key employee.  The Kentucky Court of Appeals, through Charles T. Creech Inc. v. Brown, recently provided meaningful guidance concerning whether those agreements are enforceable.

First, the Court clarified that courts are authorized to modify any provision in an agreement if doing so will save an otherwise unenforceable agreement.  In other words, if the agreement fails to contain a geographic limitation, the court is free to establish a reasonable geographical limitation.

More significantly, the Court held that erecting “bright-line rules” to determine whether an agreement is enforceable would be “futile” and that a lower court’s inquiry into the reasonableness of a non-compete agreement requires “case-specific flexibility.”  To guide this inquiry, the Court identified six factors to consider:

  1. The nature of the industry:  If the industry is highly competitive and has a history of employee poaching, the non-compete agreement is more likely to be upheld.
  2. Characteristics of the employer:  If the employer is small and susceptible to being put out of business by a competing employee, the court is more likely to enforce the agreement. 
  3. The history of the employer/employee relationship:  If the non-compete agreement was signed early in the employment relationship, and the employer specially trained the employee, the agreement is more likely to be enforced.
  4. The interests the employer seeks to protect:  The more likely it is that a departing employee would cause the employer’s distinctive approach to be used against it, the more likely the agreement will be enforced.
  5. Hardship on the employee:  If enforcing the agreement would make it difficult for the employee to find work consistent with his or her education and experience, the court is less likely to enforce the agreement.  This is where an assessment of the agreement’s spatial and temporal restrictions comes into play.
  6. Impact on the public:  If the covenant unduly restricts the public’s access to goods/services, the court is less likely to enforce the agreement.  A court is less likely to enforce the agreement, for example, if the agreement prevents a physician from serving in a community with a shortage of physicians.

Consideration of these factors will give employers and their counsel guidance when drafting new non-compete agreements, when modifying existing agreements, and when determining whether to pursue the enforcement of an agreement upon the departure of an employee.