Non-Compete Signed 16 Years After Employment Start Date Is Too Late (To Be Enforced) – Says KY High Court

In prior articles, I’ve discussed how restrictive covenants (i.e., non-disclosure, non-solicitation and non-competition provisions) are staples of modern-day employment contracts and business sale agreements.  In Creech, Inc. v. Brown (http://law.justia.com/cases/kentucky/supreme-court/2014/2012-sc-000651-dg.html) the Supreme Court of Kentucky struck down a non-competition provision in a hay supplier’s written contract the supplier made a long-time employee sign several years after he started working there.

The defendant worked for the plaintiff in various capacities through the years.  Sixteen years into his tenure, plaintiff’s new management asked the defendant to sign a Conflict of Interest Agreement (the “Agreement”) that contained broad non-disclosure provisions and a non-competition clause.  The non-compete spanned three years and had no geographic boundaries.  Fearing job loss, defendant signed the Agreement.  The defendant continued to work for the plaintiff for a couple more years when he took a job with a rival supplier.  Plaintiff then sued to enforce the Agreement’s non-competition provision.  The trial court sided with the defendant and the appeals court reversed.  On remand, the trial court entered summary judgment for the plaintiff employer and found that the defendant violated the Agreement.  This time, the appeals court upheld the non-competition clause.  Both parties appealed to Kentucky’s Supreme Court.

Held: Reversed.  The non-competition provision is unenforceable because it lacks consideration.

Reasons:

The defendant worked for nearly two decades for the plaintiff hay supplier and wasn’t asked to sign a non-compete until more than sixteen years after his start date.  The plaintiff gave defendant nothing in exchange for defendant signing the Agreement.  It didn’t give the defendant a raise, didn’t change the defendant’s job duties and offered no training or other benefits.  There was no consideration flowing to the defendant to bind him to the non-competition provision’s three-year term.

Consideration means a benefit to the party making a promise and a loss to the party to whom the promise is made.  Each side gives and gets something.  Benefit means the promisor has gained something to which he is not otherwise entitled.  Detriment or loss means that the promisee has given up something in exchange for the promise.  (p. 12).

The Court rejected the plaintiff’s claim that the defendant’s continued employment was sufficient consideration.  The plaintiff didn’t give the defendant anything in exchange for him signing the Agreement.  The Agreement was silent on defendant’s job duties or rate of pay and as a result couldn’t be considered a “rehiring.”  Nor did the Agreement alter defendant’s employment terms.  He remained an at-will employee at the same pay rate. (p. 14).  The Agreement imposed a three-year restriction on defendant seeking alternative employment without giving him any corresponding benefit.  Since the Agreement didn’t require plaintiff to give up anything in exchange for the defendant signing the Agreement, the non-competition provision lacked consideration and wasn’t enforceable.  (p. 15).

Besides defendant’s job description and pay remaining static, the plaintiff hay supplier also didn’t offer any specialized training to the defendant after he signed the Agreement.  A contract law axiom posits that a promise devoid of a reciprocal flow of benefits and detriments can’t be enforced.  (pp. 15-17).  By not giving up anything in consideration for defendant executing the Agreement, the plaintiff’s offer of continued employment was illusory.

Afterword: I’ve never practiced in Kentucky but the case is relevant to Illinois restrictive covenant law since it’s congruent with Fifield’s (Fifield v. Premier Dealer Services, Inc., http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf) two-year rule. (Two years of continued employment is required for a non-compete to have adequate consideration.)  

The result in Creech seems fair.  An employer shouldn’t be able to unilaterally foist a non-compete on a long-time employee without providing some additional benefit to him.  For employers, the lesson is clear: if you’re going to have an employee sign a restrictive covenant after he’s started working, you should pay the employee a bonus, give him a raise or provide some other tangible benefit so that there is sufficient consideration – loss or detriment –  flowing to the employee so that you can bind him to a non-competition provision.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.