Restrictive Covenants Make Hay in Kentucky


SANYO DIGITAL CAMERALate in June 2014, the Kentucky Supreme Court overruled a decision by its lower court cousin, and found that continued employment alone was not sufficient consideration (i.e. something of value) to support a covenant not to compete. Creech v. Brown offers valuable and significant lessons in the world of restrictive covenants.

Donald Brown, a hay and straw salesman for Charles T. Creech, Inc., was employed by the company for nearly 18 years; working his way up from delivery truck driver and dispatcher to salesman. One day, for no apparent reason and without any incremental consideration, Creech decide that Brown needed to sign a Conflict of Interest Agreement (“Agreement”) prohibiting Brown from soliciting or selling hay to Creech customers. (Hay, along with horses and bourbon, is big business in Kentucky.) Shortly thereafter, Creech demoted Brown to his previous position as delivery dispatcher. Brown resigned his post at Creech and joined Standlee, a competing producer and seller of hay and straw, as a salesperson. Eventually Creech sued Brown and Standlee for breach of contract, intentional interference with various contracts, aiding and abetting breach of contract, and host of other contract and tort claims.  In deciding in favor of Brown and Standlee, the Kentucky Supreme Court relied on the following points:

 

  • Brown was asked to sign the Agreement after 16 years of employment, and not when he was initially hired.
  • Brown did not receive or acquire any specialized training, knowledge, expertise or access to confidential information in connection with signing the Agreement.
  • Brown did not receive any raise, bonus or other financial consideration in exchange for accepting the Agreement.
  • Brown was not promoted as a result of executing the Agreement. In fact, he was demoted shortly thereafter.
  • Brown’s continued employment was not specifically made contingent on signing the Agreement.
  • The Agreement was not an employment agreement that addressed wages, hours and conditions of employment, but contained only the non-compete covenant.

 

The adequacy of the consideration received in exchange for a non-compete covenant is one of several factors that determines enforceability – but perhaps the most important one.  Following the lesson(s) from Creech will significantly improve the probability that consideration will not be a barrier to enforcement. Namely, employment agreements containing restrictive covenants should be signed either as part of the initial hiring process or when the employee receives a significant promotion, salary increase, bonus or substantial employment opportunity (e.g. extensive training, access to confidential information, etc.).

The decision by the Kentucky Supreme Court is consistent with the Illinois Appeals Court’s June 2013 decision in Eric D. Fifield and Enterprise Financial Group v. Premier Dealer Services, Inc.  The Court relaxed the enforceability of employment related restrictive covenants, concluding they must be supported by significant consideration; and established a clear-cut standard – two years of continued employment.  This Illinois rule applies even if the employee voluntarily resigns instead of being terminated.

Cases like Creech and Fifield evidence a growing judicial trend toward increased scrutiny of restrictive covenants. Courts are looking more carefully at whether post-employment restrictions meet the following criteria.

 

  • Is the restriction necessary to protect a legitimate business interest?
  • Does it unreasonably impair the employee’s professional opportunities?
  • Is the public’s interest in a competitive marketplace materially affected?
  • Is the restriction supported by adequate consideration?