By Ali Marchant
Kansas courts have consistently interpreted the Kansas Restraint of Trade Act (KRTA), K.S.A. 50-101 et seq., in a manner consistent with federal antitrust law, which applies a “rule of reason” to determine whether a restraint against trade is reasonable, and as a result, legal. In relation to non-compete agreements, courts have typically looked at the reasonableness of the specific terms of non-compete agreements, such as distance or time, to determine whether they are proper under the KRTA.
Despite years of Kansas precedent applying the rule of reason to KRTA cases, the Kansas Supreme Court, in O’Brien v. Leegin Creative Leather Products, Inc., 294 Kan. 318 (2012), rejected the application of the rule of reason to lawsuits brought under the KTRA, because of differences in the plain language of the KRTA and the federal Sherman Antitrust Act. Although O’Brien dealt with a price-fixing claim, the decision called into question the validity of all types of restraints on trade, including non-compete agreements and franchise agreements. In response to the potential widespread impact of the O’Brien decision on KTRA claims, an attempt was made late in the 2012 legislative session to restore the rule of reason to the KTRA; however, it was unsuccessful, leaving practitioners to face continuing uncertainty as to the scope and impact of O’Brien.
In 2013, Senate Bill 124 proposed amendments to the KRTA intended to clarify the KRTA and reduce any ambiguity or uncertainty regarding its application and applicable evidentiary standards and to restore the rule of reason in Kansas. Specifically, Section 1 of SB 124 states:
An arrangement, contract, agreement, trust, understanding or combination shall not be deemed a trust pursuant to the Kansas restraint of trade act and shall not be deemed unlawful, void, prohibited or wrongful under any provision of the Kansas restraint of trade act if that arrangement, contract, agreement, trust, understanding or combination is a reasonable restraint of trade or commerce.
(emphasis added). The bill further states, with certain exceptions, that the KRTA shall be construed in harmony with United Stated Supreme Court’s interpretations of federal antitrust law. Significantly, SB 124 explicitly provides that the KRTA does not apply to “any franchise agreements or covenants not to compete.”
The legislature approved SB 124 effective April 18, 2013, but the new law provides that the changes to the KRTA apply retroactively to any claims or defenses premised on any amended or repealed provision of the KRTA, including any claims or defenses that accrued before the effective date of the new amendments. However, any claims pending in court prior to the effective date of the changes are governed by the prior version of the Act.
The Kansas Supreme Court, in O’Brien, commented that if the legislature wanted to include the rule of reason within the KRTA, it was capable of doing so. The legislature responded by amending the KRTA to specifically include the reasonableness standard as well as requiring it to be construed in harmony with the United States Supreme Court’s interpretation of federal antitrust law. These changes to the KRTA put to rest concerns about the validity of common restraints on trade, such as non-compete agreements and franchise agreements.
Fleeson Gooing member Steve Robison co-chaired the Kansas Judicial Counsel committee that drafted the new legislation.