Ohio non-compete history, law, tips and links

By Neil Klingshirn

Contents


Unlock Non-Compete Agreements: Keys to Escape

Overview and History of Ohio Non-competition Case Law


In 2004 the Ohio Supreme Court reviewed the background and history of non-competition agreements in Lake Land Empl. Group of Akron, LLC v. Columber, 101 Ohio St. 3d 242, 245-246 (Ohio 2004). The Columber Court observed:

Generally, courts look upon noncompetition agreements with some skepticism and have cautiously considered and carefully scrutinized them. Ingram, Covenants Not to Compete (2002), 36 Akron L.Rev. 49, 50. Under English common law, agreements in restraint of trade, including noncompetition agreements, were disfavored as being against public policy, although partial restraints supported by fair consideration were upheld. Lange v. Werk (1853), 2 Ohio St. 519, 527-528, 1853 WL 117, citing Mitchel v. Reynolds (1711), 1 P. Wms. 181, 24 Eng.Rep. 347. In a society in which working men entered skilled trades only by serving apprenticeships, and mobility was minimal, restrictive covenants precluding an ex-employee from competing with his ex-employer "either destroyed a man's means of livelihood, or bound him to his master for life." Raimonde v. Van Vlerah (1975), 42 Ohio St.2d 21, 71 Ohio Op. 2d 12, 325 N.E.2d 544.

Modern economic realities, however, do not justify a strict prohibition of noncompetition agreements between employer and employee in an at-will relationship. "The law upholds these agreements because they allow the parties to work together to expand output and competition. If one party can trust the other with confidential information and secrets, then both parties are better positioned to compete with the rest of the world. * * * By protecting ancillary covenants not to compete, even after an employee has launched his own firm, the law 'makes it easier for people to cooperate productively in the first place.' " KW Plastics v. United States Can Co. (Feb. 2, 2001), M.D. Ala. Nos. Civ. A. 99-D-286-N and 99-D-878-N, 131 F. Supp. 2d 1289, 2001 U.S. Dist. LEXIS 1630, 2001 WL 135722, quoting Polk Bros., Inc. v. Forest City Ent., Inc. (C.A.7, 1985), 776 F.2d 185, 189.

Accordingly, courts in Ohio recognized the validity of agreements that restrict competition by an ex-employee if they contain reasonable geographical and temporal restrictions. Briggs v. Butler (1942), 140 Ohio St. 499, 507, 24 O.O. 523, 45 N.E.2d 757. Such an agreement does not violate public policy if it is "reasonably necessary for the protection of the employer's business, and not unreasonably restrictive upon the rights of the employee." Id. at 508, 24 O.O. 523, 45 N.E.2d 757.

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Consideration as a barrier to Enforcement

Non-competition agreements are creatures of contract and therefore must satisfy the requirements necessary for the formation of an enforceable contract. One of the most important requirements for an enforceable contract is "consideration," which is something of value given by one party to another in exchange for the promised thing of value.

At one time employees in Ohio argued that a non-competition agreement was unenforcable for lack of consideration unless it was required as a condition to, and at the time of, new employment. This view was supported by the facts of Rogers v. Runfola & Assoc., Inc. (1991), 57 Ohio St.3d 5, 565 N.E.2d 540, in which the Ohio Supreme Court found valid a noncompetition clause in a written contract in which the employer agreed to discharge the employee only for specified reasons. In Runfola the Ohio Supreme Court rejected the argument of the ex-employee that her promise not to compete lacked consideration in light of the "the exchange of mutually beneficial promises." From this, employees argued that a non-competition agreement required valid cause for termination or some other consideration.

In Lake Land Empl. Group of Akron, LLC v. Columber, 101 Ohio St. 3d 242, 245-246 (Ohio 2004), however, the Ohio Supreme Court held that continued at-will employment was sufficient consideration to support a non-competition agreement. That is, since the employer has the right to terminate an employee at any time:

It follows that either an employer or an employee in an at-will relationship may propose to change the terms of their employment relationship at any time. If, for instance, an employer notifies an employee that the employee's compensation will be reduced, the employee's remedy, if dissatisfied, is to quit. Similarly, if the employee proposes to the employer that he deserves a raise and will no longer work at his current rate, the employer may either negotiate an increase or accept the loss of his employee. In either event the employee is entitled to be paid only for services already rendered pursuant to terms to which they both have agreed. Thus, mutual promises to employ and to be employed on an ongoing at-will basis, according to agreed terms, are supported by consideration: the promise of one serves as consideration for the promise of the other.

The presentation of a noncompetition agreement by an employer to an at-will employee is, in effect, a proposal to renegotiate the terms of the parties' at-will employment. Where an employer makes such a proposal by presenting his employee with a noncompetition agreement and the employee assents to it, thereby accepting continued employment on new terms, consideration supporting the noncompetition agreement exists. The employee's assent to the agreement is given in exchange for forbearance on the part of the employer from terminating the employee.

As a result, an employer can require non-competition agreements from all of its employees and can terminate, without legal liability, those employees who refuse to sign.

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Assignment of the Non-Competition Agreement in a Sale

Since non-competition agreements are contracts, the ability of one employer to enforce a non-competition agreement entered into with another employer depends on the law of contract assignment. As a general rule, a party to a contract can assign the contract to another party, unless the contract does not permit assignment or the contract is for a personal, or highly individual, service. For example, P. Picasso, a famous painter, could not contract with Q. Victoria, a rich sponsor, to provide a painting for $1,000,000 and then assign the right to S. Artist, a painting student. The law assumes that the service, providing the painting, is unique and personal to Picasso and cannot be assigned.

Most non-competition agreements are not for personal services. Thus, unless the non-competition agreement itself prohibits an assignment, the agreement can usually be assigned to another employer, who would then have the right to enforce it.

Moreover, assignment of non-competition agreements most commonly arise in the context of a sale of a business. If the sale is accomplished by selling all of the stock of the business, the buyer buys the business that entered into the non-competition agreement and no assignment is necessary. If the buyer merely bought the assets of the business, including the right to enforce the non-competition agreement, then the purchase agreement would control whether the parties assigned the non-competition agreement or not. Therefore, parties to an agreement to purchase the assets of a business should make sure that the agreement assigns to the buyer all contract rights, including employment agreements and non-competition agreements.

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Enforcement of Otherwise Valid Non-compete Agreements

If the parties enter into a valid non-competition agreement, then Ohio courts will enforce it in light of the guidelines pronounced in Raimonde v. Van Vlerah (1975), 42 Ohio St. 2d 21, 71 O.O. 2d 12, 325 N.E. 2d 544. In Raimonde, the Ohio Supreme Court held:

  1. A covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer's legitimate interests.
  2. A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.
  3. If the restraint from a covenant not to compete is greater than that required for the protection of the employer, Ohio courts are empowered to fashion a reasonable covenant between the parties and, in so doing, they should consider the following factors:
  1. The absence or presence of limitations as to time and space,
  2. Whether the employee represents the sole contact with the customer;
  3. Whether the employee is possessed with confidential information or trade secrets;
  4. Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition;
  5. Whether the covenant seeks to stifle the inherent skill and experience of the employee;
  6. Whether the benefit to the employer is disproportional to the detriment to the employee;
  7. Whether the covenant operates as a bar to the employee's sole means of support;
  8. Whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment; and
  9. Whether the forbidden employment is merely incidental to the main employment.

Raimonde v. Van Vlerah, 42 Ohio St. 2d 21 (Ohio 1975).

The process by which Courts will rewrite overly broad non-competition agreements is known as "blue penciling." It describes the court's ability to redraw geographic, time or other restrictions on an employee's non-competition agreement.

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Practical Tips

Employers should write narrowly drawn non-competition agreements to avoid second guessing by courts. In almost all cases, courts will enforce agreements that prevent employees from taking unfair advantage of relationships that they developed, or information obtained, during their employment. Therefore, an employer interested in protecting current customers and accounts should write the agreement to place those customers or accounts off limits for a reasonable period of time. In that case, the employer is at a low risk to a successful challenge of the non-competition agreement.

Employees have far less bargaining power during the formation of a non-competition agreement but should nonetheless insist on restrictions that are no greater than necessary to protect the employer. The employee's most effective argument in this context is that a court will rewrite an overly broad agreement and could discard the restrictions altogether. The employee can also argue that both she and the employer benefit by entering into an enforceable agreement, since they will both avoid litigation costs if one side or the other needs to enforce it.

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How to break your non-competition agreement

Employees want to believe that they can sign a non-competition agreement today, which a court will not enforce it tomorrow. In most cases, that belief is a myth.

If an employer limits a non-competition agreement to the minimum restrictions necessary to protect its information or relationships, a court will almost certainly enforce it. If the employer overreaches on restrictions, however, a court may not enforce them.  Even then, however, the court is not free to invalidate the entire agreement. Rather, it must redraw the restrictions in a manner it considers reasonable. Therefore, employees who sign a non-competition agreement should plan on its enforcement, at least to the extent necessary to protect the employer's legitimate business interests.

If a non-competition agreement contains obligations on the employer's part that the employer does not keep, such as a promise of compensation or ownership in the business, then an employee could sue to rescind the agreement. In that case, the employer's failure to keep its promise, or breach, gives rise to a claim for money damages or rescission. If the employee proves a breach and elects rescission, the court will treat the contract as though the parties never entered into it. 

Finally, an employer may waive its right to enforce a non-competition agreement or agree to amend it in a way that permits the employee to pursue a competitive line of work. In both cases, however, the employer must consent. Consequently, the most effective ways to avoid the restrictions of a non-competition agreement are to not sign one in the first place or, having done so, to reach an agreement with an honorable employer that protects it without unreasonably limiting the employee.

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I want to consult an employment attorney to discuss my non-competition agreement. Do you have any suggestions?

You can schedule a consultation with Neil Klingshirn if you are in Northeast, Central or Southeast Ohio (that is, near Akron, Canton, Cambridge, Cleveland, Columbus, Lorain, Marietta, Youngstown or Wooster Ohio).

If you live live elsewhere, we suggest that you:

  • search for a lawyer on My Employment Lawyer;
  • search the National Employment Lawyer's Association's (NELA) attorney directory;and
  • search the attorney directory of a state affiliate NELA, such as the California Employment Lawyer's Association. To find an affiliate in your state, search for "[State] Employment Lawyer's Association; or
  • consult the general "Bar Association" in your area, which is a trade association of local attorneys.  It will probably have an attorney referral service. Ask for attorneys who practice employment law.

Most attorney directories and referral services provide only the attorney's name and contact information. Therefore, you may need to do some more research. As a general rule, the best employment attorneys:

  • Write and speak on employment law topics;
  • Are recognized by their peers (for example, are listed in Super Lawyers or have "AV" ratings); and
  • Are Board Certified in employment law in those states that offer specialty certification.
My Employment Lawyer's attorney profiles allow mel's attorney's to list their peer ratings, board certifications and writing and speaking accomplishments. You can also see who has contributed articles and answers to mel, and the quality of that work, from their attorney profile.

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