Covenants Not to Compete a Kansas Law Overview
| Date | 01 February 1998 |
| Publication year | 1998 |
| Pages | 26 |
67 J. Kan. Bar Assn. February/March, 26 (1998). COVENANTS NOT TO COMPETE A KANSAS LAW OVERVIEW
February/March, 1998
Copyright (c) 1998 by the Kansas Bar Association; Douglas M. Weems
Despite their limitations, noncompete agreements always have been an intriguing and hotly contested issue among company owners, particularly in high-tech circles. These days more and more companies of all sizes and in all industries are using noncompetes in an attempt to protect trade secrets, employee ranks and customer bases. What's more, in an age of frequent job hopping, company owners are finding that they need to enforce those agreements more often than ever. [FN1] Employers, those who purchase businesses and partners are among those frequently seeking to restrict competition by departing employees, sellers of businesses and departing partners. Such restrictions can take several forms. Perhaps the most common is a prohibition on the disclosure of confidential information or trade secrets. Other common restrictions include prohibitions on soliciting certain customers or clients, or valuable, highly trained employees. The most extreme restriction is a prohibition on competition in any form.
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Court decisions considering such restrictions reflect an ancient and ongoing dilemma. On one hand, there are strong public policies in our country favoring employee mobility and vigorous economic competition. On the other hand, the freedom to contract is among our most cherished values. In addition, partners and employees, particularly high-level employees, owe duties of loyalty and confidentiality to their employers and partners. These competing policies in large part have provided the underpinning for court decisions in this area.
This article will first discuss the three most common types of restrictive covenants--nondisclosure agreements, nonsolicitation agreements and noncompetition agreements. The article will then discuss the six specific requirements Kansas courts have imposed before these covenants will be enforced. Although these covenants are enforceable in Kansas, they are reviewed carefully and are enforced only when a reviewing court is satisfied that these six requirements have been met. Finally, the article will discuss two of the legal issues that generally arise when parties attempt to enforce these covenants.
I. The types of restrictive covenants and their uses
Restrictive covenants generally come in one of three forms: nondisclosure agreements, which are the least restrictive of the three covenants; nonsolicitation agreements prohibiting the solicitation of customers, employees or both; and noncompetition agreements, which are the most restrictive type of covenants. A typical nondisclosure provision in an employment agreement might read as follows:
Covenant Against Disclosure Of Confidential Information. During the term of Employee's employment with the Company and for a period of ________ (____) months from the voluntary or involuntary termination of Employee's employment with the Company for any reason whatsoever, Employee shall not use for any purpose, or disclose to any person or entity, any Confidential Information acquired during the course of employment with the Company. Employee shall not, directly or indirectly, copy, take, or remove from the Company's premises any of the Company's books, records, customer lists, or any other documents, materials, or Confidential Information. The term "Confidential Information" as used in this Agreement includes, but is not limited to: (a) information of a business nature such as, but not limited to, records, lists, and knowledge of the Company's customers, suppliers, methods of operations, information about costs, purchasing, profits, markets, sales, methods of determination of prices, financial condition, net income, and indebtedness, etc.; (b) information of a scientific or technical nature such as, but not limited to, know-how, processes, procedures, designs, research and development results, whether successful or unsuccessful, engineering drawings, computer software, trade secrets, etc.; and (c) new business or product development information, business or marketing strategies, future development plans or ideas, projections, or estimates, etc. In the employment context, such a restriction likely would be accompanied by a confidentiality provision in an employee handbook, confidentiality warnings on sensitive documents or information or in sensitive areas, and various other oral and written reminders of confidentiality. In addition to the employment context, confidentiality agreements frequently are used in sale agreements, partnership agreements or any other business relationship in which the parties share any information that they do not want to disclose to the public at large.
A typical nonsolicitation provision in an employment agreement might read as follows:
Covenant Against Solicitation Of Customers. During the term of Employee's employment with the Company and for a period of ________ (____) months from the voluntary or involuntary termination of Employee's employment with the Company for any reason whatsoever, employee shall not solicit, induce, or attempt to induce any past or current customer of the Company to: (a) cease doing business in whole or in part with or through the Company; or (b) do business with any other person, firm, partnership, corporation, or other entity which performs services materially similar to or competitive with those provided by the Company. A similar type of provision often is used to prohibit the solicitation of highly skilled employees. These types of restrictions are common in employment agreements, sale agreements and partnership agreements.
The most restrictive type of covenant is a covenant not to compete. A typical noncompetition provision in an employment agreement might read as follows:
Covenant Against Competition. During the term of Employee's employment with the Company and for a period of ________ (____) months from the voluntary or involuntary termination of Employee's employment with the Company for any reason whatsoever, Employee: (a) will not, directly or indirectly, own, manage, operate, control, be employed by, perform services for, consult with, solicit business for, or be connected with the ownership, management, operation, or control of any business which performs services materially similar to or competitive with those provided by the Company, in any Market Area where the Company has had an office or has sold product or provided services to customers during the period Employee is or was employed by the Company. If the location where
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the Company has had an office or has sold product or provided services to customers is within a standard metropolitan statistical area as designated by the federal government, the term "Market Area" shall be that standard metropolitan statistical area. In all other cases, the term "Market Area" shall mean any county where the Company has had an office or has sold products or provided services to customers. In addition to use in employment agreements, these types of restrictions are frequently used in sale agreements, but also in partnership agreements, franchise agreements and independent-contractor agreements.
Other types of agreements exist that place limits on competition. Those agreements are often analyzed under the same or similar standards that are applied to restrictive covenants, as outlined in Section II. For example, in Francis v. Schlotfeldt, [FN2] the accounting partnership agreement at issue did not directly restrict competition. The relevant agreement simply provided that, if a withdrawing partner took clients of the firm, the lost business would be valued according to a formula set out in the partnership agreement. [FN3] The withdrawing partner was then required to compensate the partnership according to that formula. [FN4] This restriction, as well as other similar contracts that limit competition in some fashion, commonly are analyzed by applying requirements similar to those outlined in Section II. [FN5]
II. Requirements for enforcement of restrictive covenants
The Supreme Court of Kansas most recently considered the subject of restrictive covenants in Weber v. Tillman. [FN6] In that case, the court specifically examined four factors in determining whether to enforce a covenant not to compete in a dermatologist's employment contract:
(1) Did the covenant protect a legitimate business interest? (2) Did the covenant impose an undue burden? (3) Did the covenant injure the public? (4) Were the time and territory restrictions in the covenant reasonable? [FN7] In addition to these four factors, Kansas courts have imposed two other limitations on the enforcement of restrictive covenants. Like all contracts, restrictive covenants must be supported by valid consideration. [FN8] In addition, restrictive covenants must be ancillary to an otherwise lawful contract. [FN9] This section will examine each of these requirements.
In Weber, the Supreme Court reiterated long-standing Kansas law and emphasized that, assuming these requirements are met, restrictive covenants should be enforced in Kansas:
The instant contract is not violative of any positive statute or well established rule of law. It is the duty of courts to sustain the legality of contracts in whole or in part when fairly entered into, if reasonably possible to do so, rather than to seek loopholes and technical legal grounds for defeating their intended purpose. It also has been said, and we think rightly, the paramount public policy is that freedom to contract is not to be interfered with lightly. [FN10]
A. The covenant must be ancillary to an otherwise lawful contract
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