Employment Law Report
Kentucky Supreme Court Issues Potential Game-Changing Decision for Employers with Non-Competes
In Creech, Inc. v. Brown, et al, 2012-SC-000651 (Ky. 2014) rendered June 19, 2014, the Kentucky Supreme Court altered the landscape for employers who have covenants not to compete signed by their employees. The employer, Creech, Inc. (“Creech”), provided hay and straw to farms. In 2006, after Donald Brown (“Brown”) had worked for Creech for sixteen years, he was presented with a “conflict of interest” agreement (“Agreement”). The Agreement contained confidentiality provisions with respect to proprietary information as well as a prohibition on employment with any company that directly or indirectly competed with Creech for three years after Brown left his employment. At the time he signed the Agreement, Brown worked as a salesperson. He received no additional compensation for signing the Agreement. Shortly after signing the Agreement, Brown was transferred to the position of dispatcher with no change in salary, but decreased responsibilities and little to no customer contact. In November 2008, Brown resigned to take a job with Standlee, a producer and seller of hay and straw. Ultimately, Creech filed suit against Brown and Standlee alleging breach of contract, intentional interference with contract, aiding and abetting breach of contract, intentional interference with prospective business relations, fraud, and breach of confidentiality.
The trial court issued an injunction allowing Creech to remain employed with Standlee but preventing him from selling or purchasing hay for Standlee in Kentucky and preventing him from disclosing information obtained during his employment with Creech. The trial court modified the Agreement to include a geographical restriction to the Commonwealth of Kentucky. The court found that continued employment was adequate consideration for the non-compete. The Court of Appeals was concerned with the breadth of agreement. The court found that additional discovery was warranted and held, as a matter of law, that continued employment was sufficient consideration to support the Agreement.
On appeal, the Kentucky Supreme Court reversed and held that the Agreement was not enforceable because it was not supported by adequate consideration. Specifically, the Supreme Court held that Brown was offered nothing in exchange for signing the Agreement. Brown remained an at-will employee without an employment contract, with no raise or promotion, no change in the terms of the employment relationship, no specialized training or expertise, and no limitation on Creech’s ability to discharge him after he signed the Agreement.
The Supreme Court distinguished two of the leading cases on non-competes in Kentucky, which had led many employers to believe that continued employment was adequate consideration for a non-compete. In Higdon Food Service, Inc. v. Walker, 641 S.W.2d 750 (Ky. 1982), after the plaintiff worked for four years without an employment contract, he was presented with an employment contract in a new position that contained limitations on the employer’s ability to discharge him in exchange for signing the non-compete. Because the employment contract altered the terms of the employment relationship, it was the same as “new employment.” Similarly, the Supreme Court found Central Adjustment Bureau, Inc. v. Ingram Associates, Inc., 622 S.W.2d 681 (Ky. 1981), to be inapplicable. There, the employees involved signed agreements shortly after they began working and they continued to be employed for a number of years before leaving. While employed they received raises and promotions as well as specialized training and knowledge to which they would not otherwise have had access. And unlike Creech, Central threatened employees with the loss of their jobs if they did not sign the agreements.
Lessons for Employers: Employers should examine any non-compete agreements they have entered into with their employees. After Creech, it appears that continued employment, by itself, may not support enforcement of a non-compete. If employees signed the non-compete after they became employed, employers should make certain that the agreements are supported by adequate consideration, such as access to proprietary information, specialized training or knowledge, raises or promotions, or restrictions on the ability to terminate employment. If employees received none of these things, a non-compete may not be enforceable. In addition, employers should explicitly make signing a non-compete or confidentiality agreement a condition of continued employment. That, by itself, may not be enough to enforce the agreement, but it is a factor that was lacking in Creech. The Court also noted that the Agreement at issue was contained in the employee handbook. Confidentiality and non-compete agreements should not be included in employee handbooks. Employee handbooks should contain disclaimers stating that they are not contracts or guarantees of employment and that they may be revised at any time in the employer’s discretion. If a confidentiality or non-compete agreement is included in an employee handbook that contains such a disclaimer, a court will likely find that it is unenforceable.
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