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Recent Kentucky Court of Appeals Decision Reveals Value of Well-Drafted Non-Compete Agreements

Non-competition agreements can help your business protect customers and confidential information, retain valuable employees, and prevent competitors from engaging in unfair practices.  However, not all non-competition agreements are created equal.  In a recent Kentucky Court of Appeals decision, the court enforced a non-competition agreement and, pursuant to the agreement, awarded a temporary injunction, liquidated damages and attorneys fees to an employer whose employee began working for a competitor.  Read on to learn about how this agreement benefitted the employer. 

 

When Sonitrol of Lexington Hired Todd Reynolds, the Parties Executed a Non-Competition Agreement

 

Sonitrol of Lexington, Inc. (Sonitrol) provides home and business security services to the Lexington-Fayette Urban County area.  On May 14, 2003, Sonitrol hired Todd Reynolds (Reynolds) to install alarm systems.  Because Reynolds possessed unique skills and knowledge, and would soon become privy to sensitive business information, the parties entered into a non-compete agreement (Agreement).  The Agreement prohibited Reynolds from working for any competitor within a 100-mile radius of Sonitrol for three years after he left the company, and required him to compensate Sonitrol $10,000 for any violation.  The Agreement also required Reynolds to compensate Sonitrol for any costs and attorneys fees incurred in litigation brought under the Agreement.  Although Reynolds later claimed that he did not remember signing the Agreement, he did acknowledge that the signature on the Agreement “appear[ed] to be [his].” 

 

In August 2006, Reynolds voluntarily resigned from Sonitrol and took a job with a competitor, ADT Security Services (ADT).  Sonitrol quickly learned that Reynolds was working for its competitor, and sent Reynolds a letter advising him that he was violating the Agreement.  Reynolds responded to the letter by filing suit against Sonitrol, claiming the Agreement was unenforceable and also alleging a tort claim of tortious interference with contractual relations. 

 

Sonitrol counterclaimed against Reynolds, seeking liquidated damages under the Agreement, and also moved for a temporary injunction barring Reynolds from working with ADT.  The trial court granted the temporary injunction and, as a result, ADT discharged Reynolds.  Later, the court granted summary judgment in Sonitrol’s favor, and awarded Sonitrol $10,000 in damages, as well as costs and attorney’s fees.  Reynolds appealed to the Kentucky Court of Appeals. 

 

The Court of Appeals Upheld the Temporary Injunction, Damages, Costs, and Attorney’s Fees for Sonitrol, Due to the Language of the Non-Competition Agreement

 

The Kentucky Court of Appeals affirmed judgment for Sonitrol on each issue.  First, it held that the Agreement was enforceable, despite Reynolds’s claim that he did not remember signing it.  The court reiterated the rule that when a party admits that his or her signature appears on a document, lack of recollection of signing is not a valid defense.  The court also rejected Reynolds’s argument that the Agreement was unconscionable.  According to the court, in this situation a non-competition agreement that prohibited an employee from working for any competitor located within a 100-mile area of a company for a period of three years was not unconscionable.  Therefore, the court enforced the agreement by its terms. 

 

The court also upheld the award of $10,000 in liquidated damages to Sonitrol.  Liquidated damages provisions are enforceable when two requirements are satisfied.  First, the actual damages sustained from a breach of the contract must be very difficult to ascertain.  Second, after the breach occurs, the amount of the liquidated damages must not be grossly disproportionate to the actual amount of damages sustained.  In the case at hand, the court held that these requirements were satisfied because Reynolds possessed unique skills, and actual damages would have been difficult to ascertain.  Therefore, the $10,000 damage award was not so disproportionate as to render the liquidated damages provision unenforceable. 

Finally, the court upheld the award of attorney’s fees and costs to Sonitrol.  Reynolds conceded that the Agreement entitled Sonitrol to attorney’s fees, but argued that Sonitrol should have received only attorney’s fees related to its counterclaim for liquidated damages, and not attorney’s fees related to its defense against Reynolds’s tortious interference with contractual relations claim.  The court disagreed.  It held that where multiple claims arise from the same nucleus of operative fact and are “inextricably interwoven” together, the prevailing party is entitled to attorney’s fees relating to each claim.  For this reason, the court followed the fee-shifting language in the Agreement, and ordered Reynolds to compensate Sonitrol for fees incurred in litigating both Reynolds’s claims and its own counterclaims. 

 

The Non-Competition Agreement Secured Victory for Sonitrol

 

In this case, the non-competition agreement was an invaluable asset to Sonitrol.  Due to the Agreement, the trial court quickly granted Sonitrol a temporary injunction, prompting ADT to discharge Reynolds.  When Reynolds brought a lawsuit against Sonitrol, the court dismissed his claim due to the language of the Agreement.  The court also ordered Reynolds to compensate Sonitrol for the attorney’s fees and costs incurred in litigating the claims, as required by the Agreement.  Finally, pursuant to the liquidated damages provision, the court granted Sonitrol $10,000 in damages, saving Sonitrol the burden of proving its damages with specificity.

           

Non-competition agreements are not always this effective; where non-competes are overbroad, under-inclusive, or fail to satisfy the necessary requirements, they may be ineffective or completely unenforceable.  This case shows that a well-drafted non-competition agreement is a valuable investment and a powerful tool for protecting your business from unfair competition.  

 

This article is reprinted with permission from

Kentucky Employment Law Letter, which is published by M. Lee Smith Publishers LLC

 

 

If you have questions regarding non-compete agreements, please contact any member of Greenebaum’s Labor and Employment Practice Group.

 

To learn more about William J. Kishman and his practice, please visit his profile.

 


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About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 170 professionals in five offices, serving local, national and international clients in virtually every industry. A forward-thinking business law firm, Greenebaum is committed to the practice of Breakthrough Law®. For more information, visit www.greenebaum.com.

 

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