Recent Important Court Decision on Enforceability of Kentucky Employee Non-Competition Agreements.
The Kentucky Court of Appeals recently decided a case that summarizes the current state of Kentucky law on the enforceability of employee non-compete or non-competition agreements. In Creech v. Brown* the court summarized six factors the trial court should consider when deciding whether to enforce a non-competition agreement in Kentucky. The following six factors were compiled from a review of prior Kentucky cases concerning the enforceability of non-compete agreements (click on any of the links below to jump to the specific section):
The nature of the industry
The relevant characteristics of the employer
The history of the employment relationship
The interests the employer can reasonably expect to protect by execution of the non-competition agreement
The degree of hardship the agreement imposes upon the employee, in particular the extent to which it hampers the employee’s ability to earn a living
The effect the agreement has on the public
The court’s comments on each of these factors related to an employment agreement are set forth below. Note that the court emphasized it may not be necessary to examine each of these factors in every employer non-compete agreement case and that some cases may require consideration of additional factors. “The trial court’s approach must be flexible depending on the parties and their circumstances”.
If you have questions regarding the enforceability of a Kentucky employee non-competition agreement, we hope the following information will prove helpful. If you need immediate legal assistance, call 1-888-761-7204 or 502-409-6460 to schedule a free consultation. Find out what an employment agreement attorney at Shelton Law Group can do for you.
The nature of the industry
In examining this factor, the trial court in Kentucky should determine whether the industry in which the employer is engaged, and in which the employee desires to continue working, is highly competitive. Is there a limited opportunity to participate in this industry? How many players are there in the market, and are their respective market shares relatively large or small? Is there a history of competitors trying to gain knowledge of one another’s data or methods in an effort to gain a competitive advantage? Is there a history of “poaching” competitors’ employees so as to eradicate competition? Does each employer develop its own competitive strategy, business model, or technology which determines how successful that particular competitor will be? Or are the competitors succeeding primarily according to their own skills which are not kept confidential or secret, including their reliability, people skills, reputation, competitive prices, and good service?
Characteristics of the employer
The trial court should seek to determine who the employer is in the context of the industry and the geographical region. What is the scope of the employer’s operations, both in terms of geographic reach and number of customers serviced or products distributed? How many employees work for the employer? What roles do those employees play in the company and to what type of information are they exposed? What is the employer’s status in the industry and what share of the market does it serve?
The history of the relationship between the employer and employee
This factor will help determine the fairness of the employer’s insistence that the employee enter the covenant not to compete, or the employer non-compete agreement in Kentucky. When, relative to the onset of the employment relationship and the end of the employment relationship, was the agreement signed? (“There must be read into the contract an implied obligation to retain [the employee] in the employment such period of time as would deserve the right to enforce the obligation he assumed not to enter other employment for a year.”) Did the employee arrive on the job with all the skills he needed to do the work required by the employer, or did the employer have to specially train and develop certain skills which would be of special value to the employer?
The interests the employer seeks to protect
This portion of the inquiry should focus on whether the employee’s subsequent hiring by a competitor of the employer would essentially deprive the employer of its competitive position. Or, rather, would it be no different than if the competitor had hired an employee from another competitor in the market? In other words, would the employee’s departure – and subsequent employment by a competitor – necessarily cause the employer’s own innovation or distinctive approach to its business to be used against it to its detriment? An important part of this inquiry is whether the Kentucky employer non-compete agreement is narrowly tailored to protect its interests.
Hardship on the employee
For this inquiry, the court should look to the specific limitations of the employment agreement – what spatial, temporal, and employment restrictions are there on the employee’s ability to work, and what is their impact on the employee? Obviously, the broader the restriction, the greater the burden will be. A trial court might inquire how long the employee has worked in the industry, both for the employer and for others. How likely is it that the employee will be able to find gainful employment if he complies with the covenant’s restrictions? Will the enforceability of employee non-compete agreement in Kentucky effectively compel the employee to part with his education and experience to find employment in a new sector? In sum, the court should determine whether the restrictions on future employment intended to protect the employer’s interests are not so broad as to unduly burden the employee’s ability to find work. Where the restrictions on future employment are narrowly tailored to meet the employer’s needs, they should typically be enforced. (A covenant not to compete has been held to be reasonable where it did not prevent the subject employee from working in the employer’s industry, but only prohibited him from going into business for himself in that industry for one year.)
This is also the point in the analysis where the trial court may modify certain provisions of the non-competition 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 was wise to do so.
Impact on the public
Finally, the trial court must assess how, if at all, enforcement of the covenant will affect the public. Does the covenant restrict the public’s access to the types of goods or services offered by the employer? Are the consequences and extent of that restriction acceptable given the nature of the service provided by the employer and the needs of the community? (“[T]he health of the public is better served if squabbles among physicians are averted by prior agreements and the public is not pawn in the squabble.”)