Kansas: Distinction Between Forfeiture and Penalty for Noncompetes

Applies to: All Employers with Employees in KS

Effective: As Indicated 

Quick Look

• A federal appeals court has affirmed that employers in Kansas may enforce forfeiture of future compensation as a consequence of competition, without meeting the stricter legal standard typically applied to noncompete enforcement.

DISCUSSION

In Lawson v. Spirit AeroSystems, Inc., the Tenth Circuit upheld a forfeiture-for-competition clause under Kansas law, affirming that such a provision—when it applies only to future compensation—does not require the same level of judicial scrutiny as a traditional noncompete agreement.

The dispute arose from an agreement between Spirit AeroSystems and its former CEO. Under the terms of a retirement agreement, the executive could continue to receive cash payments and vest in stock awards if he worked as a consultant and honored a noncompete clause. When the executive contracted with a hedge fund engaged in a proxy contest against a Spirit supplier, Spirit deemed the activity competitive and ceased future payments and vesting. Importantly, Spirit did not attempt to claw back previously paid compensation or vested shares—only unvested awards were forfeited.

The Tenth Circuit found that this forfeiture did not constitute a penalty. Instead, it offered a financial incentive to comply with the noncompete. The court drew a clear distinction between enforcing a covenant not to compete through legal penalties (e.g., damages or injunctions) and using a compensation-based incentive model. Because the former CEO knowingly accepted the risk of forfeiture in exchange for potential compensation, and because he was a sophisticated party advised by counsel, the court found no policy basis to impose a reasonableness test.

This ruling, though only binding on federal courts applying Kansas law, adds weight to a growing body of case law distinguishing between noncompete penalties and forfeiture incentives. As a result, employers operating in jurisdictions that recognize this distinction may retain some leverage in negotiating noncompetition agreements.

ACTION ITEMS

1. Review noncompete agreements with legal counsel for compliance.

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