The Kentucky Supreme Court has just reversed the Kentucky Court of Appeals holding in Creech, Inc. v. Brown, and held, in a landmark decision, that continued employment, standing alone, is no longer sufficient consideration to justify or support enforcement of a non-compete agreement. This overrules the precedent that employer-employee agreements may be executed in exchange for merely retaining one’s job. While the case has an intricate and complex set of facts, this post focuses on the consideration requirement only, as the Kentucky Supreme Court chose not to address any other issues.

The case arose out of a dispute between Charles T. Creech, Inc., Standlee Hay Company, Inc., and Donald Brown. Both companies provided hay and straw to horse farms in Kentucky and other states. Donald Brown was hired by Creech as an employee in 1990. Sixteen years later, in 2006, Creech approached Brown and asked that he sign a document entitled “Conflict of Interest” (herein “the Agreement”) which, in relevant part, would prohibit Brown from “work[ing] for any other company that directly or indirectly competes with the company for 3 years after leaving Creech, Inc. without the companies [sic]consent.”

Brown signed the Agreement, but no one from or on behalf of Creech signed it. Shortly after signing, Brown was transferred from his job as a salesperson to a dispatcher position, resulting in the same salary but decreased responsibilities.

In 2008, Brown resigned from Creech to take a job with Standlee. This move was not opposed by Creech; in fact, Creech signed a partial wavier of Brown’s non-compete clause that allowed him to work for Standlee despite the Agreement’s three year prohibition.

After hearing rumors that Brown had contacted Creech’s customers, employees, and suppliers while at his new job, Creech filed suit against Brown and Standlee alleging, among other things, breach of contract. Creech also simultaneously sought injunctive relief. In response, Brown argued, among other things, that he had received no consideration for signing the Agreement.

The trial court entered a temporary injunction against Brown and Standlee, finding that Brown’s continued employment by Creech constituted consideration for the Agreement. Brown immediately appealed the trial court’s decision to enter the injunction. The trial court was subsequently overturned on appeal. On remand, the trial court awarded summary judgment to Brown and Standlee. Creech appealed the order and the case went to the Court of Appeals for the second time.

At the Court of Appeals, the trial court’s summary judgment was reversed. The Court proposed a six factor test to be applied by the trial court in determining whether the non-compete portion of the Agreement was enforceable. The Court also held, as a matter of law, that Brown’s continued employment with Creech constituted sufficient consideration to support the Agreement. All parties sought discretionary review from the Kentucky Supreme Court.

On review, the Court rendered the Agreement non-enforceable and reinstated the trial court’s summary judgment in favor of Brown and Standlee. In their Opinion, the Court distinguished the two cases Creech primarily relied upon in his argument, Higdon Food Service, Inc. v. Walker and Central Adjustment Bureau Inc. v. Ingram Associates, Inc^.[1] According to the Court, the common thread running through Higdon and Central Adjustment Bureau, but not in the case at hand, was the fact that after non-compete provision was signed, whether as a larger employment contract or stand-alone document, the employment relationship between the parties changed. In Higdon, the employee became more than an at-will employee. In Central Adjustment Bureau, the employees received specialized training, promotions, and increased wages. Brown, in contrast, remained an at-will employee with no promotion, increase in wages, or specialized training. In fact, he actually received decreased responsibilities, which could be considered a demotion.

From a best practice standpoint, employers must now be sure that non-compete agreements, if presented after employment, are coupled with adequate consideration. The party making the promise must be given a benefit and the party to whom the promise is made must incur a loss or detriment of some sort in order for a non-compete to be considered enforceable. What constitutes adequate consideration will vary depending upon the factual circumstances applicable to the employee and the industry he/she is employed in. Payment of monetary compensation and/or the promise of additional training may constitute adequate consideration but, once again, analysis of the prevailing factual scenario is critical. We highly recommend consultation with legal counsel before asking your employees to execute a non-competition covenant.

_{[1] 641 S.W.2d 750 (Ky. 1982); 622 SW.2d 681 (Ky. App. 1981).}