State Supreme Court says non-compete only valid if there is some consideration involved

Something of value has to be given or given up

By Frost Brown Todd
Labor and Employment Practice Group

The Kentucky Supreme Court on June 20 issued a decision that continued employment alone is not sufficient consideration for an employee non-competition agreement.

The case involved an employee of a hay and straw broker who had worked for the broker in various capacities for 18 years. After 16 years of employment, the broker asked the employee to sign an agreement which included a provision precluding him from working for a competitor for a period for three years following his employment. The employee did not receive a raise or other monetary compensation for signing the non-compete, did not receive a promotion, and was not told that he would be fired if he did not sign the non-compete. The employee later left the broker to work for a competitor, and the broker sued to enforce the non-compete.

gavelThe court noted that every contract must be supported by consideration to be enforceable. In other words, when two parties enter into an agreement, they must either receive something of value, or give up something of value, or else the agreement is unenforceable. The court then concluded that as the employee did not receive anything in exchange for signing the agreement, and the broker did not give up anything, there was no consideration. As a result, the court ruled the non-compete was unenforceable.

Based on previous rulings in Kentucky, most attorneys and employers have assumed that continued employment alone was sufficient consideration to support a non-compete, i.e., the assumption that an employee would be fired if he or she refused to sign a non-compete, and the continued employment if they did sign, was sufficient to make the non-compete enforceable. The Kentucky Supreme court distinguished the previous rulings, however, noting that the previous rulings involved situations where the terms of employment changed at or after the signing of the non-compete, (e.g., the employee received a raise, a new position, or ceased to be an employee at will), so that continued employment was not the only consideration.

If your business requires employees in Kentucky to sign non-compete agreements, or agreements containing a non-compete provision, you need to make sure that the employee receives something in exchange for the non-compete, either by making clear that signing the agreement is required for employment or continued employment, or by connecting the non-compete to a promotion, raise or other change in employment terms or conditions. If you have existing non-compete agreements in Kentucky, you should review the agreements and the circumstances surrounding the agreements, to make sure the employee received something in exchange for agreeing to the non-compete. If the employee did not clearly receive a benefit for entering into the non-compete, have the employee sign a new agreement, and make the consideration clear.

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