At our firm, we get a lot of questions about non-competition and non-solicitation agreements (also commonly referred to as “restrictive covenants”), so we thought it would be a good idea to provide a general overview of some of the issues involved in enforcing them in Kentucky.
At the most basic level, non-competes are agreements between an employer and an employee that, should the employee leave, he or she cannot work for a competitor. Non-solicitation agreements prohibit employees from soliciting customers and/or employees from their former employer. To be enforceable in Kentucky, restrictive covenants must be “reasonable.” That is, “on consideration of the subject matter, the nature of the business, the situation of the parties and the circumstances of the particular case, the restriction is such only as to afford fair protection to the interests of the covenantee and no so large as to interfere with the public interests or impose undue hardship on the party restricted.” Ceresia v. Mitchell, 242 S.W.2d 359, 364 (Ky. 1951).
At their core, restrictive covenants cut against capitalism by restraining competition, impacting an individual’s means of livelihood, and restricting post-employment freedom. Nonetheless, Kentucky Courts have made it clear that such restrictive covenants are most definitely enforceable under the right circumstances.
“The policy behind enforcing noncompetition clauses is to protect businesses against employees resigning and taking valued clients with them.” Managed Health Care Assoc, v. Kethan, 209 F.3d 923, 929 (6th Cir. 2000), citing Central Adjustment Bureau, Inc. v. Ingram Assoc., 622 S.W.2d 681, 685-86 (Ky. Ct. App. 1981). The rationale behind this policy is that if a company invests substantial resources developing an employee’s skill and trade, then the company should have reasonable protections from the employee taking off and starting or working for a competing business. A similar justification has been used for non-solicitation agreements.
Unfortunately, there are typically no bright-line rules that govern whether a restrictive covenant will be enforced or not. This means employers and employees are often faced with uncertain decisions about whether the scope of an existing covenant will survive under judicial scrutiny. Referring to case law addressing analogous situations is often required. Further complicating matters is the concept of “blue pencil” power that Judges in Kentucky wield. Even if a restrictive covenant is found to be overly broad, a Kentucky judge can use his or her blue pencil authority to re-form the terms of the restrictive covenant at issue to make it enforceable. For instance, if a non-competition clause for an employer that only does business in Louisville seeks to restrict a former employee from working for any similar business in the entire United States, a Kentucky judge can re-draft the terms of the non-compete so that it’s applicability is limited to within, say, 25 miles of Jefferson County. For employees and employers, this obviously creates further uncertainty.
Generally, Kentucky Courts analyze restrictive covenants on a case-by-case basis. In Lantech.com, LLC v. Yarbrough, Judge Moyer in the U.S. District Court for the Western District of Kentucky addressed a situation where an employer was attempting to enforce a non-competition clause that limited a former employee from competing for two years after his employment ended for any reason in any area where the employer did business. 2006 U.S. Dist. LEXIS 82970 (W.D. Ky. 2006). Despite the limitations on both time and geography, the Court held that the restrictive covenants were nonetheless unenforceable. The rationale for its decision was that the employer had “terminated [the former employee] in a manner which was abrupt, peremptory, and without explanation.” Id. at *7. The Court explained that while such a termination was perhaps legal under the at-will Kentucky state law, the balance of equities did not favor enforcing the non-competition clause. The Court found it important that, by terminating the employee, the employer had violated “its significant representations to him and its own corporate human resources policy,” and therefore it was inequitable for the employer to simultaneously enforce the noncompete clause to its maximum effect.
There are many more twists and turns that could be addressed with regard to restrictive covenants, but we will leave that for another day. If you have questions about a specific restrictive covenant, you should speak directly to an employment attorney.