Kansas Decision Highlights The Perils Of Overreach In Restrictive Covenant Agreements
In a recent decision examining Kansas non-compete law, the United States District Court for the District of Kansas partially granted a company’s motion to enjoin its former employee’s violations of the non-compete and customer non-solicitation provisions of his employment agreement. The decision, in the matter of Servi Tech, Inc. v. Olson, highlights a number of key issues that Kansas employers should consider when fashioning restrictive covenant agreements.
Olson’s Obligations to Service-Tech
On August 21, 2014, Servi-Tech, which provides agricultural crop consulting services to commercial and individual clients, hired Dillan Olson as one of its consultants. In addition to assuming responsibility for 10 existing Servi-Tech clients at the inception of his employment, Olson acquired 8 additional clients through his own efforts, 5 of whom were family members, friends, acquaintances and/or long-time business contacts.
As a mandatory condition of his employment, Olson signed an Employment Agreement that, among other things, prohibited him, for two years following his termination of employment, from:
- engaging in a competing business within 50 miles of any Servi-Tech customer that he serviced during the two years preceding his termination; and
- soliciting, servicing, or otherwise diverting the same customers on behalf of a competing business.
The Agreement also included a tolling provision, which stated that the 2-year restrictive period “shall be deemed to begin running on the date of the entry of the court order granting SERVI-TECH injunctive relief[,]” and “shall be tolled during any time [Olson] violates” the applicable restrictive covenant(s) and/or court-issued injunction.
Servi-Tech terminated Olson’s employment on September 30, 2016 (for reasons not specified in the Court’s decision). Less than two months later, Olson established a competing business within the 50-mile restricted territory and diverted the business of the 5 personal contacts he brought to Servi-Tech. Servi-Tech responded by suing Olson for breach of the employment agreement and requested a preliminary injunction to prevent continued breaches during the pendency of the lawsuit.
The Court’s Decision is a Mixed Bag
Like many states, Kansas does not have a statute of general applicability to restrictive covenants, but courts will permit and enforce such restraints to the extent they protect a legitimate business interest. Here, the Court determined that Servi-Tech’s investment in specialized crop consulting and agronomy training for Olson, as well as its development of customer contacts and customer relationships through Olson, constituted legitimate business interests that justified reasonable non-compete and non-solicitation provisions.
The court also endorsed the 2-year duration of both the non-compete and non-solicitation provisions, noting that a 2-year restraint is “common” in Kansas non-compete cases. On the other hand, the Court labeled the tolling provision as “most uncommon” as well as unreasonable, particularly in light of the employer’s failure to file suit for about 7 months after learning of Olson’s competitive activities. Importantly, the Court also found the 50-mile geographic scope of the non-compete provision to be overly broad, writing that it was “unrelated to the protection of Servi-Tech’s business interests” and served only to insulate Servi-Tech from ordinary competition.
In light of the above findings, the Court denied Servi-Tech’s motion for injunction as to the non-compete provision. On the other hand, the Court granted the injunction with respect to the customer non-solicitation provision, even with respect to Olson’s family members and long-time personal contacts. Finally, the Court held that the non-solicitation provision’s 2-year restraint should run from Olson’s date of separation from Servi-Tech rather than from the date of the injunction order, essentially striking down the tolling provision in the agreement.
By refusing to enforce the non-compete provision altogether, despite suggesting that it was valid to a more limited extent, the Court’s decision is seemingly at odds with the general willingness of Kansas courts to limit the scope of restrictive covenants rather than strike them down entirely. While preserving the employee’s right to compete generally, the Court’s extension of the customer non-solicitation provision to the employee’s personal friends and family members is remarkable, and seemingly at odds with established law in other states.
In sum, this decision serves as a reminder that employers in Kansas (and elsewhere) should take care to tailor their agreements to meet the realities of their businesses and the unique circumstances of the employees affected, to ensure that any restraints on competition are no broader than necessary to protect the employer’s legitimate business interests.