What is a Non-Compete Agreement?
An employer-employee relationship in Kansas often relies on a myriad of agreements and policies that together demonstrate certain expectations between the parties. Very few agreements are more important than the non-compete. The non-compete agreement, also referred to as a "covenant not to compete," is a legal contract between an employer and employee limiting the ability of the employee to compete against the employer after his or her employment ends. In practice, the non-compete agreement protects companies from competition in their [sometimes] very desirable markets by ensuring that when an employee leaves their company they do not use their knowledge, contacts, or goodwill that they have developed while at the company against the company. Generally this means for the employee that while they are employed at the company they can still work elsewhere so long as the job position does not violate the non-compete agreement. However , when the employee leaves the company that is when the non-compete agreement comes into play and shapes the agreements and options for the employee.
The purposes of a non-compete agreement include both protecting your employer’s business as well as protecting business secrets and confidential information, and preventing your employer’s clients from leaving with you. A non-compete agreement in Kansas can be drafted to restrict or prohibit employees from doing a multitude of things including but not limited to: Soliciting customers of their former employer, working in an industry that their former company is involved (whether directly or indirectly), and working for a competitor of their former employer.
Are Non-Compete Agreements Enforceable in Kansas?
While Kansas law recognizes the basic principle of freedom of contract, the enforceability of a non-compete agreement is not without limitations. For an employer to successfully restrain its former employees from competing in any way, it must be able to prove that the non-compete is based on a legitimate business interest that warrants the protection of a court.
An employee’s specialized training can be a legitimate business interest that will support the enforcement of a non-compete against a former employee. A specialized training clause may either be expressed or implied. The employer may expressly provide for specialized training in a written contract, such as in the case of a physician or a medical practitioner. The employer may also implicate such a clause through the hiring and training process. This implied provision may be especially effective where the former employee was not informed of its particular significance, and the former employee did not negotiate or contemplate an immediate departure from that employer.
A legitimate business interest may also be based on the good will or any unique customer relationships that an employer develops with his customers. While a company that has developed a strong customer relationship may have some protection, the level of customer protection is very fact specific. Factors which favor enforcement of a non-compete agreement include: that the employee’s job duties directly involve any communication or interaction with the customers; that the customer relationships are built over a long period of time; that the customers have developed a singular loyalty to the employee; and that the former employee is likely to exploit his relationship with these customers in the future. However, even if such factors exist, a court may still not enforce the non-compete agreement if (1) the customer base is not unique or special to the employer; or (2) the employer has not placed specific limitations in the non-compete agreement which would actually protect the employer’s interest.
To be enforceable, a non-compete agreement must also be reasonable in both time and geographic scope. In Kansas, an inquiry into the reasonableness of a non-compete agreement is based on the specific nature of the employer’s business, its geographical area of operation, and the type of interest sought to be protected by the agreement.
Under K.S.A. 25-6111, a non-compete agreement will be considered reasonable when (1) it pertains to the entity’s protection of a legitimate business interest, such as confidential information or goodwill; and (2) it is limited in time and geography to such a level that it does not cause an undue hardship on the former employee.
In deciding what limitations are reasonable, Kansas courts have used either a two-part test or a three-step analysis. Under the two-part test, the elements of (1) the scope of the restraint; and (2) the available alternatives (personal or otherwise) to mitigate the restraint are identified and weighed against each other.
A three-step analysis defines various aspects of a legitimate interest and then weighs them against various degrees of hardship imposed on the employee. The types of things that may be looked at are: (1) the length of time the employee worked for the company; (2) the specialized knowledge gained that would be unavailable through other means; and (3) the alternatives available and those which may be imposed on the former employee.
Kansas courts will invalidate provisions within a non-compete agreement that are either greater than necessary to protect a legitimate business interest, or those which impose a completely unreasonable hardship upon the former employee.
Kansas Noncompete Agreements. Common Exceptions and Limitations
While non-compete agreements are generally enforceable in Kansas, there are certain exceptions and limitations. For example, occupation specific legislation governs non-compete agreements for medical doctors, and rules of professional conduct apply to accounts and brokers acting as agents for clients.
Kansas Revised Statute 40-3402, pertaining to physicians, states that no physician shall enter into any covenant with a line of practice restraint, willingness to practice medicine with any patient or patients. In other words, a physician cannot enter into a non-compete agreement that would prevent the physician from ever practicing at the same or any hospital for which the physician has privileges.
K.S.A. 84-7-700 sets forth a similar prohibition against non-compete agreements for lawyers and law firms. Pursuant to the Kansas Rules of Professional Conduct 1.7 (Conflict of Interest: General Rule), comment 7, "[A] law firm with multiple offices may obtain the informed consent required but may be required to disclose the implications of common representations in more than one jurisdiction." In other words, a non-compete agreement for a Kansas lawyer or law firm will only be enforceable in those states where non-compete agreements for lawyers or law firms are permissible.
Finally, the Kansas Uniform Securities Act, K.S.A. 17-1663(1)(x), has a prohibition against most non-compete agreements for securities sales agents, stating that twenty-five years after enactment, such agreements shall not be enforceable.
Kansas Employee Rights and Obligations
With regard to non-compete agreements, Kansas employees have a right to be informed of their obligations. Employers in Kansas are required to provide employees with any non-competition or confidentiality agreements executed by the employee within the nine months immediately following the employer’s knowledge of the execution of the agreement. Kyger v. Sentry Insurance, 219 Kan. 402 (1976). Failure to do so prevents the employer from enforcing the agreement. Kyger, 219 Kan. at 406 (collecting cases granting summary judgment in favor of employees where employers failed to provide copies of agreements).
Kansas labor law also requires employers to treat employees fairly. An employee cannot be terminated or discriminated against on account of seeking to enforce rights under employment laws or refusing to commit illegal acts. K.S.A. 44-15 , 101. Kansas employees should be aware that an employer’s failure to abide by the law could grant an employee the legal right to defend against an employer’s attempt to prevent future competition.
Once an employee signs a valid non-competition agreement, he or she has an affirmative duty to keep confidential all proprietary information that was entrusted to him or her during her employment. This obligation can last for the duration of the non-competition agreement, which may vary in length. Because in many cases an employee will negotiate with an employer to have the non-competition agreement be limited in scope and duration, the employee cannot avoid the scope of the agreement they signed until the time that it expires.
In Kansas, How to Challenge a Non-Compete
An employee seeking to challenge the validity of a non-compete agreement in Kansas may do so based on several grounds. The most common emerging ground for attacking a non-compete obligation is the argument that the former employer lacked consideration for imposing the post-employment restrictions. Given this state of the law, courts now accept as true that ongoing employment is sufficient consideration in the absence of an express promise by the employer to provide the employee with new employment terms, such as a promotion. As Kansas law continues to develop, employers and employees alike should expect that courts will apply traditional contract principles in analyzing the issue of consideration. Moreover, an employee also may be successful in challenging a non-compete restriction provided that the former employer failed to meet its burden of demonstrating that its business interests warrant enforcement of the provision and that the provision is reasonable in time, scope and geography.
Kansas Non-Compete Agreements: Tips for Drafting
An important consideration prior to drafting a post-employment restrictive covenant is to determine whether an employee has a prior or competing agreement, as that may impact the ability to enforce non-competition provisions. Of course, previous employment and/or post-employment obligations must be disclosed in an employment agreement as the existence of such agreements may lift any presumptive reasonable notice required to modify or amend the agreement.
Once the employer determines that the employee has no prior post-employment obligations, the general rule is that Kansas courts will allow for modification of an at-will employment at any time upon "reasonable notice," so long as the notice is communicated to the employee before the change is to take effect and the employee has an opportunity to terminate the employment relationship if he or she disagrees with the change. The court interprets "reasonable notice" on a case-by-case basis, although two months to thirty days prior to the proposed change is generally accepted as reasonable .
Under Kansas law, only the portion constituting a non-competition agreement must be supported by consideration independent of employment. As noted above, the Kansas courts do not recognize periodic consideration as an adequate basis for enforcing post-employment restrictions.
Once an existing agreement establishes a non-competition provision and additional consideration (such as a $10,000 bonus) is offered to the employee after the agreement is executed, additional new consideration is not necessary. In contrast, if the non-competition agreement does not exist prior to employment (i.e., a required employment condition), additional new consideration is necessary, although continued employment alone may be sufficient. In some circumstances, alleged additional consideration which is not stated in the agreement may be provided by employer’s conduct sufficient to constitute consideration.