Contract Drafting, Enforcement and Breaking

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    Non-Compete Agreements

    Non-compete agreements are common in employment situations. In exchange for something of value, i.e. consideration, sometimes just being hired by a company, the employee agrees that she will not work for a competitor within a certain distance for a certain period. A common non-compete prohibits doing similar work for competitor within the same state for a period of a year or two.
     
    An excellent overview of Kentucky's law is found in a federal court decision in 2006, Gardner Denver Drum LLC v. Peter Goodier and Tuthill Vacuum and Blower Systems, 2006 U.S. Dist. LEXIS 20703 (2006).
     
    "A covenant not to compete with a former employer will be enforceable by way of injunction if it is valid and reasonable. ...the test of reasonableness is whether the restraint, considering the particular situation and circumstances, is such only as to afford fair protection to the legitimate interests of the [employer] and not so extensive as to interfere with the interests of the public."
     
    ... As to the duration, review of relevant case law suggests that a three-year limitation can be reasonable."
     
    Kentucky cases enforcing agreements range in duration from 18 months to five years. A territorial limit is reasonable if it is confined to the territory in which the employer keeps his market or carries on his business. The kind of work prohibited depends on the knowledge of the employee and likely harm to the employer. Kentucky law permits courts to revise the agreement to be enforceable, and courts are willing to trim the reach of an agreement, restricting it to the proper scope and enforcing it only to that extent.
     
    Employers will be happy to know that the threshold for adequate consideration in Kentucky is relatively low. Recent cases in Kentucky balance the employers investment in the employee against the hardship on the employee and the public interest.
     
    Previously, the Kentucky Supreme Court held that continuing employment is sufficient consideration for a covenant not to compete. More recently, a Kentucky state court case, Charles T. Creech, Inc. v. Brown and Standlee Hay Company, Inc., clarified that "mere" continued employment is not new consideration. A long-time employee of Creech, Inc. signed an agreement with a non-compete. Soon thereafter his responsibilities were reduced. He quit and went to work for a competitor. Creech sought to enforce the non-compete arguing that continued employment after signing the non-compete was sufficient consideration.
     
    A non-compete requires new consideration. The court explained that a change in status is the minimum requirement.
    Where an existing employee signs a non-compete agreement the employee employment relationship must improve in some manner, such as new opportunities, increased income, specialized training, promotions and so on."
     
    "After Brown signed the Agreement his employment relationship with Creech did not change. He remained an at-will employee with no promotion, no increase in wages, and no specialized training. In short, Brown received no consideration from Creech in exchange for signing the Agreement or after he signed the Agreement. Therefore, the Agreement is not enforceable."
     
    Kentucky courts will enforce non-compete agreements, but only where there is new consideration, for example, where the employee relationship changed for the better for the employee.