Kansas Noncompete Agreements — an Updated Overview
| Publication year | 2008 |
| Pages | 22 |
| Citation | Vol. 77 No. 1 Pg. 22 |
The Road Ahead: "Kansas Noncompete Agreements An Updated Overview"
By John Vering and David Jermann
I. Introduction
With employee loyalty on the decline, competition for employees on the increase and employee job-hopping becoming more common, an increasing number of employers are scrambling to protect themselves from unfair competition by departing employees. The mechanisms being used include noncompetition agreements, nonsolicitation of customer agreements, anti-employee raiding agreements, and nondisclosure agreements.
This article will discuss the most common types of restrictive covenant agreements, provide practical suggestions regarding drafting and litigating restrictive covenants, and survey important recent Kansas cases involving noncompete agreements.[1] In addition, this article will touch on other issues that frequently arise in the context of enforcing noncompete agreements, including the Kansas Uniform Trade Secret Act (KUTSA),[2] assignment/successor employer issues, requirements for injunctive relief, liquidated damages, actual damages, defenses against enforcement of noncompete agreements, claims of tortious interference with contract, and federal and Kansas computer fraud statutes that can sometimes come into play in connection with the unauthorized theft of confidential information and trade secrets.[3]
II. Types of Restrictive Agreements
The least restrictive and most commonly enforced restrictive covenant is a restriction on the disclosure of confidential information and trade secrets. The use of this type of agreement is particularly useful as a supplement to the statutory protections afforded by the KUTSA. The KUTSA defines a "trade secret" as follows:
"Trade Secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process that:
(i) derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."[4]
Confidentiality or nondisclosure agreements are a useful supplement to the KUTSA because a contractually imposed duty of confidentiality is independent of the statutory duty imposed by the KUTSA.[5] Thus, a nondisclosure agreement may allow the employer to protect confidential information that does not qualify for protection as a "trade secret" under the KUTSA, such as where the employer failed to use reasonable steps to maintain its secrecy. Moreover, if the employee agrees in writing that a particular document constitutes confidential information, e.g., a "customer list," the employer is in an enhanced position to obtain injunctive relief or damages by being able to argue that the employee has already agreed that the customer list is confidential. However, if the description of the confidential information is too general and would virtually bar the former employee from the practice of his profession and would unduly infringe upon his right to earn a living, the restriction will usually not be enforced.[6]
The second type of commonly used restrictive covenant is the nonsolicitation of customers agreement, whereby the former employee agrees not to solicit his former employer's customers for a particular period of time, at least in a way that would be competitive with the services offered by the former employer.[7]
The third type of restrictive covenant is a variation on the nonsolicitation agreement but runs not to the former employer's customers but rather to the former employer's employees. These are commonly known as anti-raiding or anti-employee raiding covenants. In Ori Inc. v. Lanewals, the U.S. District Court for the District of Kansas recognized that the covenant not to employ, solicit, or seek to employ a person employed by the former employer was valid under Kansas law.[8] However, Judge John W. Lungstrum held that summary judgment was proper against the former employer because there was no evidence of damage in that no admissible evidence was presented that any of the former employer's employees actually left employment at the suggestion of the former employee.[9]
The last and most restrictive type of covenant is what is known as the covenant not to compete, which typically restricts the employee from competing with his prior employer for a particular length of time in a specified geographical region.[10]
III. Requirements for Enforcing Restrictive Covenants
In Idbeis v. Wichita Surgical Specialists PA.,[11] the Kansas Supreme Court affirmed the vitality of the governing principles previously annunciated by the Court in Weber v. Tillman,[12]regarding the general rules on enforcement of noncompete covenants. Those general principles include the following:
1. A noncompetition covenant ancillary to an employment contract is valid and enforceable if the restraint is reasonable under the circumstances and not adverse to the public welfare.[13]
2. The rationale for enforcing a noncompetition covenant is based on the freedom of contract.[14]
3. Only a legitimate business interest may be protected by a noncompetition covenant, and if the sole purpose of the covenant is to avoid ordinary competition, it is unreasonable and unenforceable.[15]
4. Noncompetition covenants included in employment contracts are strictly construed against the employer.[16]
The Kansas Supreme Court in Idbeis also reaffirmed the four factors that are to be considered in analyzing whether a noncompetition clause is reasonable:
1. Does the covenant protect a legitimate business interest of the employer?
2. Does the covenant create an undue burden on the employee?
3. Is the covenant injurious to the public welfare?
4. Are the time and territorial limitations contained in the covenant reasonable based on the particular facts and circumstances of each case?[17]
A. Restrictive covenants must protect a legitimate business interest of the employer
Trade secrets and customer contacts have long been recognized in Kansas as legitimate business interests worthy of protection by noncompete agreements.[18] Similarly, seeing that contracts with clients continue and also protecting against loss of clients are well-recognized legitimate business interests subject to protection by a reasonably crafted noncompete agreement.[19] Other recognized protectable interests of employers include special training of employees, referral sources, good will, and reputation.[20] However, the Kansas Supreme Court has refused to expand the list of protectable interests to include the employer's size or "critical mass" or the special contributions the employer might be able to make to its community because of its size.[21]
Moreover, although the Court in Weber recognized that "referral sources" were among legitimate business interests that could be protected by a reasonably limited covenant,[22] there are limitations to the protection of referral sources. For example, in Graham v. Cirocco,[23] the Court found that a former employer of a colorectal surgeon had a legitimate interest in referral sources that could validly be protected by a two-year, 150-mile, nonsolicitation restriction that prohibited the former employee from soliciting business from the patients or referral sources of the former employer with whom the former employee had come in contact as an employee of the former employer.[24]
However, the restrictive covenants went further by prohibiting the former employee from providing services at any hospital in the Greater Kansas City metropolitan area and prohibiting the former employee from opening an office within the geographical region of the Greater Kansas City area bounded by Lawrence on the west; Blue Springs, Mo., on the east; Leavenworth on the north; and a line 25 miles beyond Olathe on the south.[25] The Court found that colorectal surgeons were engaged in a medically necessary subspecialty and that having only one such specialist in northeast Kansas would result in shortages of colorectal surgeons.[26] Under the circumstances, the Court found that enforcing the noncompete portions of the restrictive covenant would threaten the public welfare by forcing seriously ill patients to face long waits for appointments.[27] Therefore, the 25-mile restriction on placement of the former employee's office and the prohibition on delivery of services in any of the hospitals listed in the Greater Kansas City metropolitan area were stricken as unreasonably overbroad and an attempt to protect the former employer from "ordinary competition of a kind a stranger could give."[28]
It is interesting that the Graham Court distinguished Weber by pointing out that Weber involved a dermatologist, which the Court viewed as engaged in a medical subspecialty that was not as necessary as colorectal surgeons.[29] Thus, although the opinion is not clear on this point, the noncompete provisions of the agreement might well have been enforced had the case not involved a medical subspecialty where physicians were both very necessary and in short supply.
In Weber, the Court recognized that other jurisdictions had recognized "special training of employees" as a legitimate business interest protectable by a reasonably limited covenant.[30] In Allen Gibbs & Houlik L.C. v. Ristow,[31] the Court explored the extent to which special training would justify a restrictive covenant. In Ristow, a former employer sought to enforce a restrictive covenant that would have prevented a certified public accountant working in an employee benefits group from accepting a position with any client or center of influence of the employer or Koch Industries...
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