The Landscape of Kansas Non-Compete Agreements
The primary purpose of non-compete agreements is to protect a company’s trade secrets. A "trade secret" can mean anything from an invention or recipe to a formula or pattern. In the normal course of a business transaction, a company may inadvertently reveal confidential information to its employees or contractors. Many times, a company’s most important information is being shared with its competitors or potential competitors. So, to preserve their vital business interests, companies commonly use agreements that prevent their workers from taking that knowledge elsewhere and using it to potentially compete against the company.
While Kansas has long recognized the enforceability of these types of agreements, in some circumstances, they will not be enforceable. In Upjohn Co. v. Freeman, the Kansas Supreme Court ruled that certain factors needed to exist to enforce a non-compete agreement. Those factors are as follows:
In the Upjohn case, an employee was asked to sign an employment contract that contained a non-compete clause and agreed not to "divulge or communicate to anyone . . . nor use for the benefit of himself . . . any information of Upjohn Co. . . ." The Supreme Court ruled that this clause would only be enforceable if the information was deemed a trade secret. However , no information had been proven to be a trade secret at the time of the employment agreement.
Unfortunately, companies often forget that the non-compete statute is not self-executing. Until and unless an employee has possession of a trade secret, the non-competition agreement will not be enforceable. Also, even when an employee does have a clear and apparent trade secret, the non-compete agreement will only be enforceable if it is no broader than is reasonably necessary to protect the employer’s business. Even though trade secrets fall squarely within the realm of what can be protected by a non-compete agreement, many non-competition agreements prohibit those subject to the agreement from working with a rival business at all. This means that despite possessing a trade secret, an employee may not work with rival business unless the employer is willing to allow the employee to divulge the trade secret to the rival business.
Like most other states, Kansas allows employers to protect their trade secrets with legitimate non-competition agreements. However, such protection will only occur when the agreement complies with the requirements of the statute. If a non-compete agreement does not fit neatly within the desired parameters, the entire agreement may be rendered invalid and unenforceable.
Essential Legal Factors for Enforceability
Kansas courts evaluate non-compete agreements under the general common law that exists in the absence of agreements. Under Kansas common law, a non-compete can be enforced if its use is reasonable. Reasonableness of a non-compete agreement depends upon three factors; the restraint’s (1) duration, (2) geographic scope, and (3) purpose in light of realistic expectations as to how it will be used at the time it becomes effective.
By example, Kansas courts have found one-year restraints on competitive activity to be reasonable. Kansas courts have not made determinations about the reasonableness of non-compete agreements in other contexts, although whether a restraint is reasonable is determined on a case by cases basis. Kansas courts will evaluate whether the non-compete protection is "reasonable in scope, duration and purpose." A five-year nationwide restriction has been found unreasonable.
Kansas courts have found nationwide non-competes to be unreasonable. A non-compete that restricts one from competing in one city – in one occupation – for two years will likely not pass the reasonableness standard. A non-compete that has multiple categories of geographic areas – multiple occupations – for an indeterminate duration – is likely to not be what the Kansas Supreme Court had in mind when it evaluated the reasonableness of a non-compete in Morrison v. Cook, 162 P.2d 514, 520 (1945).
Kansas courts require parties to a covenant not to compete to "know what they are doing" when signing the agreement. Missouri Courts recognize the principle of "freedom of contract" as well. If parties want to competitively isolate individuals, or an entity, they can do so but with certain caveats. Parties cannot draft unreasonable non-compete agreements that disregards realistic expectations of how the non-compete will be used in the marketplace. Non-compete law gives parties freedom, with some limits.
Recent Legal Precedents and Trends in Rulings
While there has not been an abundance of non-compete cases decided in Kansas state or federal courts, one very significant decision in the past year has provided a considerable amount of guidance. In Plainfield-Overland Park, LP, the Kansas Court of Appeals upheld as reasonably suitable geographically a restriction precluding the subject from competing anywhere in the state of Kansas. That decision reversed a trial court which had struck down the restriction as overly broad. The significance of the opinion is that it provides hope to Kansas employers who seek to enforce reasonable restraints on competition against a departing employee.
In Lichtenstein v. Merrifield the Kansas Supreme Court warned in 1999 that in crafting a remedy for breach of a non-compete restraint courts should use special caution in enforcing those restraints. Since that time, however, Kansas trial courts have often been very quick to strike down non-compete agreements in their entirety, rather than narrow them to a reasonable scope.
The Plainfield opinion significantly judges’ restraint when enforcing non-compete restrictions. Even though the Court of Appeals remanded the matter to the trial court for a full hearing on damage issues, it did not leave adversely impacted defendants hanging in limbo for months as they awaited a hearing on the issue of the reasonableness of the scope of the non-compete restriction.
Kansas courts will continue to look at every situation as unique, yet the Plainfield case is very encouraging for employers and employees who wish to move on and start new ventures. Non-compete restrictions must remain reasonable in terms of time, scope and geography, but Kansas courts appear to be more amenable to keeping the restrictions "on."
Business Protections vs. Employee Entitlements
Kansas law seeks to protect legitimate business interests while balancing an employee’s right to fair employment and opportunity. For example, Kansas courts have invalidated on-call agreements that make an employee available to the employer at any time seven days a week for a term of two years as being unreasonable under the standards discussed above. When the agreement is that broad, with little regard to what business interest it protects, it seems to be too one-sided and will be invalid. But if the business interest is narrowly defined, like the protection of customer relationships one week at a time, then the agreement may be valid. In a recent decision the Kansas Supreme Court examined the enforceability of a covenant not to compete that had been signed as a condition of employment. The agreement prohibited the former employee from competing in the territory where he worked for six months after termination. The employee was a cable technician and worked in a town other than where the employer, a cable television company, was headquartered. The extent of the employee’s contact with such customers or potential customers was that he serviced customers of the company in that one town. He did not have contact with any business customers or prospective business customers. Based on these facts, the Court found that the non-compete, in that it would not protect legitimate business interests, was too overbroad to be enforced. One other issue that seems to weigh against Kansas courts enforcing noncompetes, and that appears to be well settled, is that a termination of employment without cause will not invalidate the employee’s obligation under the contract. YouthLand Discovery Enterprises, Ltd. v. Kay, 75 P.3d 1138 (Kan. App. 2003). But, the employer will be required to show a legitimate business interest in enforcing the covenant and the restrictions must not go beyond that interest. In addition, Kansas courts have commented that where an employee has learned many of the trade secrets of his employer, the employer protects its legitimate business interests when it prevents the ex-employee from spreading those secrets. Syntex Laboratories, Inc. v. Morrison, 636 P.2d 154, 157 (Kan. 1981)(recognizing the employer’s legitimate interests where employee had access to confidential, proprietary information, including sources, formulas, technology and trade secrets).
Exceptions and Unique Circumstances
There are exceptions to the enforceability of non-compete agreements in Kansas that are recognized by the courts. Non-compete agreements may not be enforced against licensed physicians, surgeons or dentists unless there is an exception in statute. There is a statutory exclusion for licensed dentists who leave residency during the first year to join a dental practice with an in-office referral (K.S.A. 65-2868). The dental practice must be at least five years old, other than for group practice. The exceptions in K.S.A. 65-2872 apply to healthcare providers, but may be applicable to other specialties as well. In Kansas the party seeking to enforce a covenant not to compete has the burden to show it is protectable. If the employee proves at trial that the company was not engaged in the activity alleged to violate the agreement, it will not be protected. As noted above, employees in certain professions may be subject to particular statutory exclusions. Both the Kansas Dental Board and the Kansas Board of Healing Arts have the authority to decide these matters. A recent Kansas Medical Board case provides guidance on how to interpret these exclusions . In that case the physician was an entrepreneur who owned at least 50% of his employer. He strongly identified himself as that practices’ physician. In that case the physician left that practice after about a year and started a competing practice down the street. The Board concluded the practice should not be enjoined and imposed a 12 month period of non-solicitation docked 12 months from the start date of the competitor. However, in another case, the Board declined to impose a new exemption that was contained in amendments to the statute: that the physician must have been terminated without cause. The Board determined that an older version of the statute already contained an exemption for physicians who were terminated without cause. Because the agreements are strictly construed, they should contain language that make clear the professional is in a group practice. A physician who is an owner or employed by a group practice should also include appropriate language if the employment agreement encompasses a breakup of the group. Some lawyers advocate using a buy/sell provision in an operating agreement as justification for not enforcing the agreement because the owner is no longer an owner.
Employer Guidance on Drafting
Employers should consider the following practical tips when drafting Kansas non-compete agreements in order to increase the likelihood of enforcement:
- Start with an enforceable and narrow purpose for a Kansas non-compete. As a starting point and standard, covenants not to compete are enforceable in Kansas when "reasonably necessary for the protection of the employer." Kansas courts review the agreement based on its terms, and not the surrounding circumstances or prior agreements between the parties when evaluating the reasonableness of the agreement. Thus, it is important to be careful in the language you use to describe the purpose of your non-compete, as this will be the starting point for the court’s analysis, and if the court determines that the stated purpose is overly broad (in terms of the scope of restrictions imposed), the covenant will almost certainly be invalidated.
- Narrowly tailor the temporal and geographic limitations. Covenants not to compete in Kansas are often enforced for up to two years after termination of employment. However, this reasonableness determination will be impacted by the nature of the employer-employee relationship, and the circumstances surrounding the employee’s termination. Greater latitude will generally be given when the employee has a greater ability to adversely impact the employer’s customers, business or goodwill. While even a trial judge may have difficulty determining what the appropriate geography is for every given situation; one general rule of thumb is that any geographic limitation over 50 miles, even with a Kansas business location, is likely overbroad and will likely invalidate the restriction.
- Avoid using unnecessary and over-arching definitions. In Kansas, the language used in the agreement, such as in the definition of "restricted territory" should be limited to the employer’s territory where its business is conducted, such as a metro area, state, region or the United States, as well as adjoining states.
- Draft the non-compete in the context of the employment offer and treat it as a critical factor related to the very nature of the employment opportunity. A non-compete agreement, among other things, protects a business from unfair competition, so it should be clearly spelled out as an aspect of the employment opportunity. This also provides support for a court’s imposition of a limited geographic and/or temporal scope.
Advice for Employees with Non-Competes
If you are presented with a non-compete in Kansas, here are a few tips to help you understand your options.
Questions to Ask Before Signing
Know about your company’s policies. Some companies do not require non-compete clauses and/or allow their employees to bargain or negotiate alternatives.
Understand the agreement’s effects. Make sure you know how the agreement affects your rights to work for other companies and whether there are restrictions on what opportunities you can pursue. You should also find out whether the agreement limits your rights to start a business.
Determine the value of your specific contributions to your company. If you do not, the agreement may restrict more than is necessary , especially if you later start a competing business.
Challenge the Agreement
If you believe the non-compete clause unreasonably restricts your ability to work in your field, you can attempt to negotiate a change with your employer. If your employer is uncooperative, Kansas allows employees to petition the court to invalidate the clause. You may need a lawyer to help with this type of petition.
Some examples of claims you can make against the enforcement of a non-compete clause are:
In general, Kansas courts will only invalidate a non-compete clause in cases where the restraint is overbroad and unreasonable. You bear the burden of proof to show the judge that the non-compete agreement that your employer offered is overly restrictive and should be voided.