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Kentucky non-compete agreements are invalid without consideration

A non-compete agreement or non-compete clause in an employment contract restricts an employee from engaging in certain competitive business behavior and can include the prohibition of disclosing information to third parties regardless of their competition status. Non-compete agreements can be valid both during, and after separation from the employer. Non-competes usually prevent the employee from working for a different employer within the same industry for a certain length of time within a defined geographic area. Other restrictive terms are possible such as revealing trade secrets and the solicitation of employer’s clients, patients, or employees.

Are non-compete agreements coming into some disfavor?

Non-competes can protect employers from loss of their internal company secrets, data and processes. Economic upheaval from the pandemic is creating commercial uncertainty. President Biden has signaled his preference through executive order by contending that non-compete agreements should not unduly limit workers ability to change jobs and the Federal Trade Commission should exercise its authority through (FTC) regulation to curtail the unfair use of non-compete agreements. Recently, bills introduced in Congress to address non-compete issues have not passed.

Covenants not to compete in Kentucky

Non-competes remain legal, valid and enforceable in Kentucky if they meet certain requirements. With no Kentucky statute on point, judges have established rules through state common law in court opinions.

One basic requirement is that a covenant not to compete must be based on consideration, a basic, but sometimes difficult, concept in contract law. Basically, requiring consideration means that an agreement must be mutual – both parties must give up something to get a benefit back. A contract may not be imposed on one party who must make all the sacrifice.

So, when an employee signs a non-compete agreement, the employer must give up something of commensurate value in return. When the employer presents the non-compete obligation at the beginning of the employment, the employer’s consideration is normally the willingness to hire the employee for pay, while the employee is agreeing to restrict access to certain jobs should they leave. Issues sometimes arise when non-compete agreements are procured after employment has started.

The leading Supreme Court of Kentucky case on consideration in this context is Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345 (Ky. 2014) from 2014 in which Creech, a business that supplied hay to farms, asked its employee Brown to sign a standalone non-compete after years of employment. The Supreme Court of Kentucky held that the agreement was not supported by proper consideration.

The court explained that the non-compete was not part of an overall employment agreement – the employer did not change or add any other terms or conditions of employment when imposing it after 16 years of association. The employer forced the provision on employee Brown without any requirements or concessions for itself. Since Creech did not have to give up any legal rights or accept any detriment, there was no consideration, and the court would not enforce the agreement because it was invalid.