Kentucky law can be perilous territory for employers pondering non-compete agreements.
In a recent decision in Charles T. Creech Inc. v. Brown, the Kentucky Court of Appeals (the court) reaffirmed there are no hard and fast rules for employers when drafting non-compete agreements for their employees, concluding that enforcement requires “case-specific flexibility.” Moreover, the court stated that a “blue pencil” rule, whereby courts will reform or amend restrictions in non-compete agreements if they believe the initial restriction to be unduly burdensome, extends to all provisions of a noncompetition agreement.
For employers drafting non-compete agreements, this leaves great uncertainty as to whether agreements will be upheld as written. However, the court offered some guidance in the form of six factors that should be considered in every case, and questions the employer can think about in considering each of these factors:
1. The nature of the industry
Is the industry in which the employer is engaged highly competitive? Is there a limited opportunity to participate in this industry? Is there a history of competitors trying to gain knowledge of one another’s data or methods 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? Are all competitors succeeding primarily according to their own skills that are not kept confidential, including their reliability, people skills, reputation, competitive prices and good service?
If the industry is highly competitive and has a history of employee “poaching,” the non-compete agreement is more likely to be upheld.
2. The relevant characteristics of the employer
Who is the employer in the context of the industry and the geographical region? What is the scope of the employer’s operations, in terms of customers serviced or products distributed? How many employees work for the employer? What roles do those employees have, and to what type of information are they exposed? What is the employer’s industry status and market share?
The larger the area the employer requires to sustain its business, the larger a court will likely permit the geographical area of limitation to be. The more likely it is that an employee could use his position within the business to undermine the employer’s client relationships, the more likely the covenant will be enforced.
3. The history of the employment relationship
When was the non-compete agreement signed relative to the onset and end of the employment relationship? Did the employee arrive on the job with all the skills needed to do the employer’s work, or did the employer have to specially train and develop certain skills that would be of special value to the employer?
The closer in time the covenant was entered to the time the employee was hired, and the more skills the employee learned from the employer, the more likely a non-compete agreement will be enforced.
4. The interests the employer can reasonably expect to protect by execution of the noncompetition agreement
Would the employee’s subsequent hiring by a competitor essentially deprive the employer of its competitive position? 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? Is the agreement narrowly tailored to afford fair protection to the employer’s interests?
The more likely it is that the former employee could aid another business in using the employer’s distinctive approach against the employer, and the more narrowly tailored the covenant is, the more likely it will be upheld.
5. The degree of hardship the agreement imposes upon the employee
What spatial, temporal and employment restrictions are there on the employee’s ability to work? How long has the employee worked in the industry? How likely is it that the employee will find gainful employment if he complies with the restrictions? Will enforcing the covenant effectively compel the employee to part with his education and experience to find employment in a new sector?
The more restrictive a covenant is, and the more it prevents an employee from finding work that is suited to his skill set developed over time or through training/ education, the less likely the covenant will be enforced.
6. The effect the agreement has on the public
How, if at all, will enforcement of the covenant affect the public? Does the covenant restrict the public’s access to the types of goods or services the employer offers? Are the consequences and extent of that restriction acceptable, given the nature of the employer’s services and the community’s needs?
The more the enforcement of the covenant would serve to restrict the public’s access to goods or services, and the more beneficial/necessary those goods and services are to the public, the less likely the covenant will be enforced.
While there are still no bright line rules on what is and is not permissible in terms of non-compete agreements, these six factors give employers and their lawyers guidance when drafting non-compete agreements. However, while the general rule is that courts will not rewrite contracts, employers should remain mindful that Kentucky courts are willing and able to use a “blue pencil” to rewrite non-compete terms to conform to what they believe to be reasonable and fair.
David Treacy and Kristeena Johnson are attorneys in Dinsmore’s Lexington office (www.dinsmore.com).