On April 29, 2015, federal judge John G. Heyburn, II passed away at the untimely age of 66. Other decisions of his have been highlighted in the numerous tributes Judge Heyburn deservedly received. Another decision deserves mention, as well.
Non-competition agreements (“non-competes”) are common in employment agreements. In exchange for some consideration, typically the benefit of being hired by a company, the employee agrees that she will not leave the company to work for a competitor in a certain geographic territory for a defined period of time. For example, a non-compete could prohibit an employee from taking a similar position with a competitor within the same state for a period of 12 months.
Though common, these agreements are enforced at various levels depending on state law, with several states being averse to enforcing these agreements.
Kentucky is not one of these “averse” states.
In his decision Gardner Denver Drum LLC v. Peter Goodier and Tuthill Vacuum and Blower Systems, 2006 U.S. Dist. LEXIS 20703 (2006), Judge Heyburn provided a comprehensive review of Kentucky law on non-competes.
Here are the key statements on Kentucky law from the opinion (see full opinion for case cites for each statement):
- “The Kentucky Supreme Court has stated that ‘[t]he policy of this state is to enforce [covenants not to compete] unless very serious inequities would result.'”
- “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.”
Evaluating the reasonableness of the agreement, Judge Heyburn made the following conclusions:
- “As to the duration, review of relevant case law suggests that a three-year limitation can be reasonable.” (citing numerous cases enforcing agreements with durations of 18 months to five years).
- [Regarding geographic scope,] “[t]he territorial limit is reasonable if it is confined to the territory in which the employer keeps his market or carries on his business.” (the order enforced a nationwide scope, but it was limited to competing in a highly-specialized business, hence permitting the former employee to work anywhere in the United States, just not in that industry).
- Regarding the substantive scope, i.e. what sort of job the former employee is barred from taking, Judge Heyburn found the non-compete “overbroad” for prohibiting the former employee, a skilled, high-level vice-president, from taking a job “in any capacity” with a competitor, finding it unreasonable to enforce the agreement if the VP took a job in a competitor’s mail room.
The Judge’s opinion further notes that where the scope of duration, geographic limit, or type of employment is too broad, Kentucky law permits courts to revise the agreement to be enforceable. This is termed “blue penciling,” i.e. taking a blue pencil and making changes to the agreement. From a footnote of the opinion:
Where the covenant as originally drawn has been found too broad, courts have had no difficulty in restricting it to the proper sphere and enforcing it only to that extent.
Judge Heyburn did just that, blue-penciling the scope of job the former employee was barred from taking, but still enforcing the non-compete against him because he took a similar position with the competitor.
In the case, the former employee contested whether there had been adequate consideration to make the agreement binding, i.e. had Gardner Denver provided a benefit sufficient to justify finding the contract valid. Addressing this argument, Judge Heyburn’s opinion states:
- “The threshold for adequate consideration in Kentucky is relatively low.”
- “the more modern cases, including those in Kentucky, place more emphasis on the employer’s investment in the employee and have evolved an approach balancing the importance of that factor against the hardship to the employee and the public interest.”
- “The Kentucky Supreme Court held … that even continued at-will employment is sufficient consideration for a covenant not to compete.”
On this last point, the Kentucky Supreme Court, in 2014, issued a decision that further informs whether continued employment is sufficient consideration.
In Charles T. Creech, Inc. v. Brown and Standlee Hay Company, Inc., Brown, a long-time employee of Creech, Inc. signed an agreement with a non-compete and afterwards had his responsibilities reduced. He left Creech, Inc. for Standlee, a competitor. Creech sought to enforce the non-compete arguing that continued employment after signing the non-compete was sufficient consideration.
The Kentucky Supreme Court explained why, in the cases relied upon by Judge Heyburn in the Gardner Denver case, continued employment was sufficient consideration:
[A]fter the non-compete provision was signed, whether as part of a larger employment contract or as a stand-alone document, the employment relationship between the parties changed. [The employee] became more than simply an at-will employee. [Or,] the employees received specialized training as well as promotions and increased wages. 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.
(HT: to the KMK firm’s blog for alerting me to this case).
With this further explanation, Kentucky courts will enforce non-competes, but in instances where they are entered into after the employee already has been hired, a showing of how the employee relationship changed for the better for the employee will be needed to find the non-compete enforceable.
“I have to agree with Mr. Leach …”
Judge Heyburn was a remarkable judge who left a legacy in the law with his opinions. The memorials written in the press about him highlighted his decisions on socially controversial issues like desegregation of public schools and gay marriage. As Gardner Denver illustrates, there are many others decisions, on many other areas of the law, where Judge Heyburn left a legacy as well.
I was fortunate enough to be on the brief in the Gardner Denver case, with my colleagues at Stites & Harbison, Shannon Antle Hamilton and Chad McTighe, and I had the opportunity to argue the motion before Judge Heyburn. After the hearing, I joked that I got to hear the words every lawyer wants to hear from a judge.
The other side’s counsel was from Chicago. They filed a response to our motion for an injunction arguing that the non-compete was unenforceable–except the response relied entirely on non-Kentucky cases. After detailing the Kentucky cases upholding non-competes, I pointed out that the other side had a litany of cases, from Iowa, Illinois, and elsewhere, but no cases from Kentucky supporting their arguments. Judge Heyburn then turned to the opposing counsel and (I’m paraphrasing from memory) said,
I have to agree with Mr. Leach: do you have any Kentucky cases to support your argument?
They did not, Judge Heyburn granted the injunction, and he gave me one of the best lines I’ve heard in court.
Judge John G. Heyburn, II, RIP.