KEGEL (RUSS), ET AL. VS. TILLOTSON (ROXANNA)
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RENDERED: OCTOBER 30, 2009; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-001938-MR
RUSS KEGEL AND MONA KEGEL, D/B/A UNIQUE
PROMOTIONAL PRODUCTS
v.
APPELLANT
APPEAL FROM MCCRACKEN CIRCUIT COURT
HONORABLE R. JEFFREY HINES, JUDGE
ACTION NO. 07-CI-01310
ROXANNA TILLOTSON
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: CAPERTON, DIXON AND TAYLOR, JUDGES.
CAPERTON, JUDGE: Russ Kegel and Mona Kegel (d/b/a Unique Promotional
Products)(hereinafter Kegel) appeal the September 29, 2008, order of the
McCracken Circuit Court granting the motion for summary judgment filed by
Appellee, Roxanna Tillotson (Tillotson), and simultaneously denying the motion
for summary judgment filed by Kegel. After a thorough review of the record, the
arguments of the parties, and the applicable law, we reverse and remand.
In December of 2007, the Kegels filed their complaint against
Tillotson. In that complaint, the Kegels alleged that Tillotson violated, and
continues to violate a “non-compete” clause by marketing, selling, and/or taking
orders for promotional products or advertising merchandise. From January of
2000 through January of 2007, Tillotson was an independent contractor with
Michelle Chapman, d/b/a Unique Promotional Products. Apparently, Tillotson and
Chapman were friends, and Tillotson wanted to work with Chapman to generate “a
little income for herself and to help a friend.”1
On or about March 16, 2000, Tillotson and Chapman signed a
contract, which contained among other things, a non-compete clause which is the
central issue of this appeal. That clause read as follows:
Upon termination of this contract the Contractor agrees
that he/she shall not engage in the business of marketing,
selling or taking orders for the purchase of promotional
or advertising merchandise in the territory that the Owner
sells merchandise, which is an area of at least three
hundred fifty (350) mile radius from the Owner’s
business address, for five (5) years.
Tillotson directs this Court’s attention to the fact that in entering into this contract,
she remained, and was identified as, an independent contractor. That contract did
not contain an assignment clause. Tillotson states that her clients were people she
went to church with, or knew from her daily life or through her husband’s
1
See Affidavit of R. Tillotson, ROA pp. 64-65.
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business. For slightly over six years, Tillotson purchased products through
Chapman until Chapman decided to sell her business.
On or about January 16, 2007, the Kegels acquired the business
known as Unique Promotional Products from Chapman via a purchase agreement.
Upon acquiring the business, the Kegels apparently made Tillotson an offer of
employment. On January 23, 2007, Tillotson terminated her relationship with the
Kegels and Unique Promotional Products, as evidenced by a letter of resignation
submitted of record. On the next day, January 24, 2007, Tillotson began
conducting business on her own as a sole proprietor under the name Divine
Advertising Products.
Tillotson’s business, Divine Advertising Products, sells and markets
advertising specialty products, and is in the business of providing and/or selling
various items to customers with custom-made promotional or advertising-type
messages.
The Kegels assert that to date, Tillotson has never claimed that her
business does not fall within the parameters of the non-compete clause, and has
admitted that she conducted business on her own with some of the same clients
who had previously been clients of Unique Promotional Products. Tillotson
concedes that she conducts business with clients who previously used Unique
Promotional Products, but states that these were her clients even prior to her
relationship with Chapman, and that they remained with her when Chapman sold
the business. Further, Tillotson argues that the non-compete clause was not
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assignable to the Kegels, and that in the alternative, even if it was assignable, the
terms of the clause were unconscionable and therefore unenforceable.
In issuing its September 29, 2008, order, the circuit court held that the
non-compete clause at issue was not assignable, and that even if it was assignable,
the terms were so unconscionable as to be unenforceable. In so finding, the court
stated that Tillotson and Chapman were independent contractors who contracted
with each other solely in reliance on the services to be provided by each other, and
that absent an assignment clause, the contract was not assignable. Furthermore, the
court held that the five-year time limit and 350-mile radius set forth in the noncompete clause were terms so unconscionable as to cause the clause to be void on
its face as against public policy and, therefore, unenforceable. It is from that order
that the Kegels now appeal to this Court.
At the outset, we note that the issues at the heart of this appeal do not
involve disputed facts. Indeed, the parties agree on all facts pertinent to the appeal.
Our standard of review of an order granting summary judgment is de novo and is
limited to questions of law. Blevins v. Moran, 12 S.W.3d 698, 700 (Ky.App.
2000). Since the parties agree there are no factual disputes, our de novo review will
concentrate on whether Tillotson was entitled to judgment as a matter of law, and
will center on the issues of assignability and unconscionability of the contract or
lack thereof.
Certainly, the law in this Commonwealth clearly establishes that
covenants not to compete are valid and enforceable. See, e.g., Ceresia v. Mitchell,
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242 S.W.2d 359, 364 (Ky. 1951). Assignability of non-compete clauses, however,
seems to be an issue of first impression in our courts. However, the issue was
addressed by the United States Court of Appeals for the Sixth Circuit in Managed
Health Care Associates, Inc. v. Kethan, 209 F.3d 923 (6th Cir. 2000), wherein it
was determined that non-compete clauses are, as a matter of law, assignable. In so
finding, the court stated as follows:
In addition to opinions from the lower courts of
Kentucky, this court may use the rule adopted by most of
the jurisdictions that have addressed the assignability
issue as persuasive authority in determining how the
Kentucky Supreme Court would likely decide the
question. With respect to the assignability of
noncompetition clauses, “[a] majority of courts permit
the successor to enforce the employee’s restrictive
covenant as an assignee of the original covenantee (the
original employer).
....
Based on the opinions of the lower Kentucky courts in
Choate, the majority rule from the other states that have
addressed the issue, and the additional reasons set forth
above, we believe that the Kentucky Supreme Court
would conclude that noncompetition clauses are
assignable.
Id. at 929-30 (internal citations omitted).
Although the parties appear to concede that the non-compete clause
would be assignable if Tillotson had been an employee of Unique Promotional
Products, Tillotson asserts that because she was an independent contractor and not
an employee, the clause cannot be assigned. The Kegels argue that the policy
behind enforcing and upholding the assignability and enforceability of a non-5-
compete clause is the same regardless of whether the relationship is that of an
employer and employee or owner and independent contractor.
In support thereof, the Kegels cite to Central Adjustment Bureau, Inc.
v. Ingram Associates, Inc., 622 S.W.2d 681, 686 (Ky. App. 1981), wherein this
Court upheld a non-compete clause, and in so doing, found that such clauses were
“about the only protection available” to a business to prevent associates from going
out on their own and taking company clients with them.2
The Kegels assert that in the matter sub judice, their predecessor,
Chapman, had a vested interest in the various entities with whom they had a
business relationship, and that Tillotson, by virtue of having worked with
Chapman, was exposed to dealing with those entities on a first-hand basis.
Accordingly, the Kegels assert that they have the same interest in preventing
Tillotson from leaving and taking these clients with her, as an employer would
have in the case of an employee trying to do the same. Thus, the Kegels assert that
Tillotson’s status as an independent contractor is a distinction without merit.
Tillotson, by contrast, asserts that as an independent contractor, her
customers were hers, and solely hers, and that their business did not arise from or
through Tillotson’s relationship with Chapman. Further, Tillotson asserts that she
wanted to work only with Chapman and with no one else. Tillotson also makes a
distinction as to the nature of the business sold by Chapman to the Kegels, noting
2
In reviewing this case, we note that this case dealt with an employer and its employees, as
opposed to an owner and an independent contractor. We nevertheless believe, for the reasons set
forth herein, that the public policy interests remain the same, regardless of the status of the
business relationship.
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that it was not a corporation or any other legal entity, but was instead operated by
Chapman as a sole proprietorship. Tillotson states that such a distinction is
relevant because all cases relied upon by the Kegels involve corporate employers
and employment contacts.
Tillotson also cites to Pulaski Stave Co. v. Miller’s Creek Lumber Co.,
128 S.W. 96, 101 (Ky. 1910), in support of her assertion that a contract is not
assignable when its provisions are such as to show that one of the parties reposes a
personal confidence in the other, which he would have been unwilling to repose in
any other person. Tillotson asserts that the clause was simply not assignable, that
the clients before and after the sale of the business to the Kegels were her clients,
and that the non-compete clause itself was not assignable, was unenforceable, and
was terminated with the termination of the contract.
First, we address Tillotson’s repeated assertions that the contract
between herself and Chapman was one of “personal confidence” so as to make the
contract unassignable.3 With this contention, we cannot agree. Our review of the
contract reveals nothing of the sort that would indicate it was of a personal nature,
or that Tillotson intended the contract to be unassignable and personal to Chapman
only. Indeed, a review of the record reveals that Tillotson must have, at the very
least, assumed some assignable relationship existed by virtue of her submission of
3
With respect to the issue of whether the contract between Tillotson and Chapman was a
personal services contract, our review of the record indicates that this was not an issue raised
before the trial court and, indeed, we note that Tillotson does not in her brief allege that the
contract was for personal services. Accordingly, we need not address that issue further herein.
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a letter of “resignation” from Unique Promotional Products, dated January 23,
2007, seven days after the Kegels had purchased the business. Indeed, that letter
read, in pertinent part, as follows:
Dear Mr. Kegel: Please accept this letter as formal
notification that I am resigning my association with
Unique Promotional Products effective immediately.
Certainly, the need for resignation presupposes a relationship of some
sort between the resignee and resignor. We find it of interest to note that in her
letter of resignation, Tillotson describes her relationship as one with the company,
Unique Promotional Products, and not with Chapman herself, or the Kegels
themselves. In so stating, we believe that Tillotson evidenced an understanding
that her relationship was one with the business entity, and not one solely of a
personal nature between herself and Chapman. In making such an
acknowledgment, we believe Tillotson also evidenced an implicit acknowledgment
that the Kegels stood in Chapman’s shoes insofar as their contractual rights were
concerned.
With respect to the issue of Tillotson’s status as an independent
contractor, we agree with the Appellants that this is a distinction without merit in
this instance. Certainly, we believe that sufficient precedent exists for this Court to
conclude that in an employer-employee situation, the successor employer may
enforce the employee’s restrictive covenant as an assignee of the original
covenantee.
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In the matter sub judice, we find that Tillotson’s status as an
independent contractor does not alter the applicability of this general principle.
While Tillotson may have been an independent contractor, her relationship was
with the business, Unique Promotional Products, and not with Chapman, the
individual. Accordingly, her commitment was one not to compete with the
business, not with Chapman herself. Therefore, we find that the non-compete
clause in the matter sub judice, having been freely entered into by Tillotson, was
assignable to the Kegels.
While we have not in the courts of this Commonwealth had the
opportunity heretofore to address this issue directly, we note that it was addressed
by one of our sister courts in Tennessee. In the unpublished decision of Packers
Supply Co. v. Weber, 2008 WL 1726103 (Tenn. Ct. App. 2008), the Court
addressed the Kethan decision previously cited herein. In addressing the issue of
assignability of non-compete clauses, the Weber court stated:
[f]or purposes of the enforcement of the non-compete
clause, it should not matter if they are considered
independent contractors or employees, because the
potential for unfair competition remains the same in
either case. Allowing the defendants to avoid
compliance with the non-compete agreement simply
because of a restructuring of the business and of their
employment status would exalt form over substance.
Id. at 7 (internal quotations omitted).
In agreeing with this reasoning, we are compelled to agree with the
Appellants that the trial court, in the matter sub judice, erred in finding that the
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non-compete clause was not assignable. Accordingly, we reverse, and turn to the
second issue raised on appeal, concerning whether or not the court below correctly
found that the non-compete clause in the matter sub judice was unconscionable.
As noted, the court below found, without further elaboration, that “the
non-compete clause with its term of 5 years and distance of 350 miles was so
unconscionable as to be void on its face as against public policy . . . .” Having
reviewed the record and the arguments of the parties, this Court is of the opinion
that the court below prematurely entered judgment on the issue of
unconscionability. At the time that the court entered summary judgment, no
depositions had been taken, substantial evidence had not been gathered, and only
one set of interrogatories had been exchanged.
As this Court previously held in Hammons v. Big Sandy Claims
Service, Inc., 567 S.W.2d 313 (Ky. App. 1978), agreements on restraint of trade
are reasonable if, “on consideration of the subject, nature of the business, situation
of the parties and circumstances of the particular case, the restriction is such only
as to afford fair protection to the interests of the covenantee and is not so large as
to interfere with the public interests or impose undue hardship on the party
restricted.” Id. at 315. Clearly, whether or not a particular non-compete clause is
conscionable is an issue that is highly fact specific and, we believe, will more
appropriately be addressed in the course of additional discovery.
In addition, our courts have adopted a “blue pencil” rule, whereby we
are empowered to reform or amend restrictions in a non-compete clause if the
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initial restrictions are overly broad or burdensome. As stated by this Court in
Hammons, supra, at 315, “[w]here the covenant as originally drawn has been
found too broad, courts have had no difficulty in restricting it to its proper sphere
and enforcing it only to that extent.” See also Ceresia v. Mitchell, 242 S.W.2d 359
(Ky. 1951).
Accordingly, we believe it appropriate to remand this matter to the
court below for additional findings on the issue of unconscionability, as well as a
determination as to what, if any, action is appropriate by the court under the “blue
pencil” rule.
Wherefore, for the foregoing reasons, we hereby reverse and remand
to the McCracken Circuit Court for additional proceedings not inconsistent with
this opinion.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Jason F. Darnall
Benton, Kentucky
Charles S. Foster
Mayfield, Kentucky
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