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Non-Competition Agreement Enforceability in Ohio and BeyondPDF
By Sarah M. Mancuso and Andrew J. Dorman
Non-competition agreements or “non-competes” are an essential tool used in an employment contract to protect trade secrets and other confidential information for a wide array of businesses. To be enforceable under Ohio law, a non-compete provision must be drafted in a reasonable manner based on the circumstances involved in the kind of business the employer is engaged in. The burden that may be placed on a former employee in complying with such a provision in the event of termination and the effect the non-compete will have on the public are also important factors. This article gives an overview of Ohio law on non-competes and provides insight on how courts may uphold the enforceability of such provisions.
A. Ohio Law
Since the 1940s, Ohio “has recognized the validity of agreements that restrict competition by an ex-employee if they contain reasonable geographical and temporal restrictions.” Lake Land Empl. Group of Akron, 101 Ohio St.3d 242, 245, 2004-Ohio-786, 804 N.E.2d 27 ¶9, citing Briggs v. Butler, 140 Ohio St. 499, 507, 45 N.E.2d 757 (1942). “Such an agreement does not violate public policy, ‘being reasonably necessary for the protection of the employer's business, and not unreasonably restrictive upon the rights of the employee.’” Id.,quoting Briggs, 140 Ohio St. at 508.
In Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E.2d 544 (1975), the Ohio Supreme Court held that Ohio uses a test of “reasonableness” when determining whether to enforce a non-compete provision in an employment contract. Raimonde v. Van Vlerah,, Ohio St.2d 21, 25-26, 325 N.E.2d 544 (1975). The reasonableness test “permits courts to determine, on the basis of all available evidence, what restrictions would be reasonable between the parties.” Id.at 25. Courts will consider the following factors in determining whether a non-compete is reasonable:
[t]he absence or presence of limitations as to time and space[;] * * *; whether the employee represents the sole contact with the customer; whether the employee is possessed with confidential information or trade secrets; whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; whether the covenant seeks to stifle the inherent skill and experience of the employee; whether the benefit to the employer is disproportional to the detriment to the employee; whether the covenant operates as a bar to the employee's sole means of support; whether the employee’s talent which the employer seeks to suppress was actually developed during the period of employment; and whether the forbidden employment is merely incidental to the main employment.
Id. at 25. At least one Ohio court has stated that these factors are only employed when a judge has first determined that the non-competition provision is unreasonable and must be reformed. SeeTry Hours, Inc. v. Douville, 2013-Ohio-53, 985 N.E.2d 955, ¶ 47. A case from the Southern District of Ohio, however, has determined that the factor-based analysis is necessary from the outset of determining “reasonableness.” See Convergys Corp. v. Wellman, S.D.Ohio No. 1:07-CV-509, 2007 U.S. Dist. LEXIS 90729, *16-26 (Nov. 30, 2007) (evaluating each factor outlined in Raimondeexhaustively and weighing the results).
Each case must be decided on its own facts. Raimonde, 42 Ohio St.2d at 25. Courts are empowered to modify or amend employment agreements so that a covenant restraining an employee from competing with his former employer is (1) no greater than is required for the protection of the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public. Id. at 25-26.
Notably, in Raimonde, the court abandoned the “blue pencil” test in favor of the reasonableness test. The reasonableness test differs from the “blue pencil” test in the manner of modification that the court is permitted to use in reconstructing a non-compete agreement. Id. at 25. Specifically, the reasonableness test “permits courts to fashion a contract reasonable between the parties, in accord with their intention at the time of contracting, and enables them to evaluate all the factors comprising ‘reasonableness’ in the context of employee covenants.” Id.
In contrast, under the "blue pencil" test, an unreasonable provision in a non-compete agreement “may be stricken, if divisible, but not amended or modified.” Id. at 23. The blue pencil test “also provides that if restrictions are unreasonable and indivisible, the entire contract fails.”Id. “Because divisible provisions sometimes contain integral parts of the agreement, ‘blue penciling’ those provisions may render the contract useless.” Id. at 24. Thus, the Raimondecourt pointed out that the blue pencil test has produced both arbitrary and inconsistent results. Id.
i. Duration of Restrictions
Most non-competition agreements prohibit a former employee of an organization from working with a direct competitor or with clients from the former employer for a specific period of time. Ohio courts utilize the reasonableness test to determine whether the restricted period of time is appropriate and reasonable based on the specific facts of each matter.
For example, in AK Steel Corp. v. ArcelorMittal USA, LLC, 2016-Ohio-3285, 55 N.E.3d 1152 (12th Dist.), the court held that the trial court erred when it reduced the duration of a non-compete agreement from one year to six months. Id. at ¶ 8. As a former executive of AK Steel Corp., Keith Howell resigned from AK Steel Corp. to work for its direct competitor ArcelorMittal USA, LLC. Id. at ¶ 1. “Howell had access to confidential information and corporate strategic initiatives that AK Steel had a legitimate business interest in keeping confidential.” Id. at ¶ 17. The employment contract included a one-year non-compete provision because a former employee would no longer have confidential information related to that year’s margin, pricing, and negotiation information. Id. After a one-year period, AK Steel could be sure that a competitor would not be unfairly advantaged by hiring a former executive of AK Steel. Id. The court reasoned that the one-year period did not impose an undue hardship on Howell. Id. at ¶ 19. The court noted, “any person who is prevented from practicing his profession or trade for a period of time in an area in which it has been practiced, suffers some hardship. However, the Raimonde test requires more than just some hardship * * *.” Id. at ¶ 19, citing Wall v. Firelands Radiology, Inc., 106 Ohio App. 3d 313, 333, 666 N.E.2d 235 (6th Dist. 1995). The court considered the fact that Howell had a large vested retirement plan from AK Steel and his new employment with ArcelorMittal included a $900,000 signing bonus. Id. at ¶ 20. As such, in balancing the hardship imposed on Howell with the legitimate business interests of AK Steel, the court held that the trial court erred by reducing the non-compete provision from one-year to six months.Id. at ¶ 21.
Courts have also reduced the temporal restriction in non-competes. For example, inAnimal Hosp. of Polaris v. Cole, C.P. No. 15 CVH 4890, 2015 Ohio Misc. LEXIS 14999 (Sep. 11, 2015), the court reduced the duration of a non-compete agreement that restricted a veterinarian from providing services within 10 miles of his former employer from one year to ninety days. Id. at *10. The court reasoned that one year was excessive to restrict former employees from finding employment in a similar field where trade secrets were not involved and the person could be denied income for one year. Id. at *9. The court concluded that in order for there to be no undue hardship on the employee, a period of ninety days was sufficient for the plaintiff-employer to protect its clientele.Id. at *9-10.
In Willis Ohio Inc. v. Turney, C.P. No. 11 cv 15804, 2014 Ohio Misc. LEXIS 3935, (May 9, 2014) the court held that a non-compete covenant restricting an insurance agent-employee from working with his former clients for a period of two years was reasonable. Id. at *12. The court reasoned that the covenant did not impose an undue hardship on the insurance agent-employee because he was not restricted from earning a livelihood or using his skills in his chosen profession since he was able to work for a competitor during the two-year period. Id. at *11.The court reasoned further that the agreement was not injurious to the public because restricting the employee’s former clients from not working with the insurance agent-employee for the two-year period was not enough to find the covenant unreasonable. Id. at *12.
ii. Geographic Scope of Restrictions
Generally, non-compete agreements restrict the former employee from engaging in business activities within a certain distance from the office of the former employer. Again, the reasonableness test is used to determine whether the distance restriction imposed on the employee is reasonable under the circumstances. Unless the agreement states otherwise, the distance is measured by the “straight-line approach,” as opposed to the driving distance between two locations. Ginn v. Stonecreek Dental Care, 12th Dist. Fayette Nos. CA2015-01-001, CA2015-01-002, 2015-Ohio-4452, ¶ 29; M6 Motors, Inc. v. Nissan of N. Olmsted, LLC, 2014-Ohio-2537, 14 N.E.3d 1054, ¶ 58 (8th Dist.)(“[c]ase law has been historically uniform in rejecting [the driving distance] theory and in holding that the correct way to measure the distance between locations is as the crow flies, or the straight-line approach used by a surveyor.”).
In Lindsey Constr. & Design, Inc. v. Luttrell, 5th Dist. Stark No. 2014CA00006, 2014-Ohio-1720, a general contractor sued a former employee for violating a non-competition agreement where the employee agreed not to compete with the company within one hundred miles of the company’s principal place of business for a two-year period. 2014-Ohio-1720, ¶ 1. The one-hundred-mile area covered Akron and the northeastern region of Ohio which was home to approximately four million people and the fourteenth largest metropolitan area in the United States at the time. Id. at ¶ 27. The court held that the language of the non-compete excessive and overbroad, and pointed out that the new employer did less than one percent of its business in the plaintiff-employer’s major service area.Id. at ¶ 29. In addition, no proof was presented to the court of any direct solicitation of the former employer’s customers or business which could lead to a possibility of irreparable harm. Id. Thus, the court held that the trial court correctly denied the preliminary injunction as the noncompetition agreement was geographically overbroad. Id. at ¶ 30.
It is also important to note that a non-competition agreement that extends in geographic scope to all states in which the employer does business has been deemed reasonable. See, e.g., Try Hours, Inc. v. Douville, 2013-Ohio-53, 985 N.E.2d 955, ¶ 49 (6th Dist.)(enforcing provision with “nationwide” geographic scope because trucking company employer was engaged in a “fiercely competitive, niche industry”); Convergys Corp. v. Wellman, S.D.Ohio No. 1:07-CV-509, 2007 U.S. Dist. LEXIS 90729, *7 (Nov. 30, 2007)(enforcing agreement between an employer and its employee that included “the geographical area where the Company is doing business at the time of termination of Employee’s employment”); Conforming Matrix Corp. v. Faber, 104 Ohio App. 8, 13, 146 N.E.2d 447 (6th Dist.1957) (enforcing provision covering a distance of “Toledo, Ohio, and any city, town, borough, township or any other place in the United States and Canada in which the employer was engaged in business” for employer’s spray paint equipment business).
As with the duration of a non-competition agreement, Ohio courts will focus on the specific facts of each matter when ruling on the reasonableness of purview geographical restriction. Be sure to do the same in deciding what geographic scope is appropriate for your agreement and consult with a qualified attorney to draft your non-compete.
iii. Other Important Considerations
There are other factors you should be aware of with respect to non-competes. For instance, the presentation of a non-competition agreement by an employer to an existing at-will employee is essentially a proposal to renegotiate the terms of the parties’ at-will employment. B.J. Alan Co. v. Andrews, 7th Dist. Mahoning No. 13 MA 55, 2014-Ohio-2938, ¶ 30, citing Lake Land Emp. Group of Akron, LLC v. Columber, 101 Ohio St.3d 242, 2004-Ohio-0786, ¶ 19, 804 N.E.2d 27. Thus, the employer should be aware that the promise of continued employment is sufficient consideration to support the enforcement of a non-compete agreement that is proposed to a current at-will employee. B.J. Alan Co., 2014-Ohio-2938, ¶ 30. Therefore, to avoid an issue regarding the agreement’s enforceability, simply allowing the current employee to continue employment after executing the non-compete agreement will be enough to establish adequate consideration. See Id.
Moreover, non-compete agreements transfer by operation of law to a surviving company after a merger and may be enforced by the surviving company as if it stepped into the shoes of the original company. Willis Ohio Inc. v. Turney, C.P. No. 11 cv 15804, 2014 Ohio Misc. LEXIS 3935, at *7 (May 9, 2014), citing Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St.3d 356, 2012-Ohio-4648, 978 N.E.2d 823, ¶ 12. Further, a non-compete in a franchise agreement is enforceable if it is not injurious to the public, i.e., the clause does not limit the public’s access to businesses similar to the franchise. ITS Fin., LLC v. Gebre, 2d Dist. Montgomery Nos. 25416, 25492, 2014-Ohio-2205, ¶ 27.
There are many nuances in the law that may affect a particular non-compete agreement. Be sure you consider the manner in which you are implementing your agreement in order to consult with counsel and any potential issues or litigation that may arise.
B. Non-Compete Enforceability Outside of Ohio
It is wise to be familiar with the treatment of non-competition agreements in states outside of Ohio because it may pose an issue in certain circumstances — particularly, where a choice of law provision is included on the employment contract.
Well-established Ohio law provides the following with respect to choice of law provisions:
The law of the state chosen by the parties to govern their contractual rights and duties will be applied unlesseitherthe chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or application of the law of the chosen state would be contrary to the fundamental policy of a state having a greater material interest in the issue than the chosen state and such state would be the state of the applicable law in the absence of a choice by the parties.
Schulke Radio Prods., Ltd. v. Midwestern Broadcasting Co., 6 Ohio St.3d 436, 453 N.E.2d 683, at syllabus (1983)) (emphasis added). Moreover, Sixth Circuit law states that “[a] federal court exercising diversity jurisdiction applies the choice of law rules of the state in which it sits.” Lifestyle Improvement Centers, LLC v. East Bay Health, LLC, No. 2:13-cv-735, 2013 U.S. Dist. LEXIS 144685, at *10 (S.D.Ohio 2013), quoting Standard Fire Ins. Co. v. Ford Motor Co., 723 F.3d 690, 692 (6th Cir. 2013)).
Certain states outside of Ohio do not permit non-competes in an employment contract and will bar them as unenforceable. These states are California (except as to trade secrets), North Dakota, and Oklahoma. The reasonableness test, also known as the reformation method, is used in a majority of states in determining the enforceability of non-competes as follows: Alabama, Alaska, Arkansas, Colorado, Delaware, Washington, D.C., Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New Jersey, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, West Virginia, and Wyoming. The “blue pencil” method, discussed above, is still used by Arizona, Connecticut, Georgia, Indiana, Louisiana, Maryland, Montana, North Carolina, Rhode Island and South Carolina.In contrast, the “red pencil” method is used by Nebraska, Virginia, and Wisconsin.While the “blue pencil” method allows a court to strike the unreasonable terms of the non-compete clause, the “red pencil” method strikes the entire covenant.Schetter v. Newcomer Funeral Serv. Group, 191 F. Supp. 3d 959, 962 (E.D.Wis.2016). Moreover, New Mexico and Utah have not specified a single method used to analyze the enforceability of non-competes.In addition, many of these states have codified their own particular laws pertaining to non-compete agreements.
Although two states may utilize the same method in determining the enforceability of a non-compete agreement, that does not mean that the laws governing specific issues of enforceability are also the same. For example, Ohio law recognizes that “continued employment” of an at-will employee is sufficient consideration for entering into a non- competition agreement with that employee, even after that employee has begun working for the company. B.J. Alan Co., supra, 2014-Ohio-2938, ¶ 30.Pennsylvania law, however, is different as Pennsylvania has recognized that “the mere continuation of the employment relationship at the time of entering into the restrictive covenant is insufficient to serve as consideration for the new covenant, despite it being an at-will relationship terminable by either party.” Socko v. Mid-Atlantic Sys. of CPA, Inc., 633 Pa. 555, 570-71 (Pa. 2015)(emphasis added). Based on the foregoing example, it is important to consider whether the law of multiple states may impact by your non-competition agreement.
Many factors must be analyzed in drafting a non-competition agreement that will best suit your needs. Non-competes are immensely beneficial if drafted correctly. Taking time to exercise the due diligence needed to ensure that such an agreement is enforceable in Ohio—or elsewhere—is essential.
Employee Noncompetes A State by State Survey, https://www.faircompetitionlaw.com/wp-content/uploads/2017/07/Noncompetes-50-State-Survey-Chart-20170711.pdf.
See, e.g.,Ala. Code §§ 8-1-190-197; Ark. Code 4-70-207; Colo. Rev. Stat. § 8-2-113; Fla. Stat. § 542.335; OCGA § 13-8-53 (Georgia); Haw. Rev. Stat. § 480-4 (Hawaii); Idaho Code §§ 44-2701- 2704; La. Rev. Stat. Ann. § 23:921; Mich. Comp. Laws § 445.774a; 28 Mo. Stat. Ann. § 431.202; Nev. Rev. Stat. § 613 (enacted June 3, 2017, not yet codified); RSA 275:70 (New Hampshire); N.C. Gen. Stat. § 75-4; N.D. Cent. Code § 9-08-06; OK Stat. § 15-219A; OR. Rev. Stat. § 653.295; S.D. Codified Laws §§ 53-9-8, et seq.; Tex. Bus. & Com. Code §§ 15.50-.52; Utah Code Ann. §§ 34-51-101- 301 (effective for agreements entered on or after May 10, 2016); Wis. Stat. Ann. § 103.465.