Non-competition Agreements in Ohio
An overview with case citations, history and helpful links.
See also:
FAQs about Non-competition Agreements and
Answers to Questions about Non-Competition Agreements
Overview and History
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.
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.
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 of the contract is for personal, or highly individual, services. 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 Starving Artist, a painting student. The law assumes that the service, providing the painting, is unique and personal to Picasso and therefore 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 probably be assigned to another employer, who would then have the right to enforce it.
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 has bought 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 must make sure that the agreement assigns to the buyer all contract rights, including employment agreements and non-competition agreements.
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:
- 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.
- 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.
- 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:
- The 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.
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.
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.
Is my non-compete valid?
Every case is different and each depends on its facts. In many cases, the outcome of non-competition litigation also depends on the judge, since the judge has the power to blue pencil or reject an overly broad agreement.
To find out if a non-competition agreement that you signed is enforceable, we recommend that you consult with an attorney experienced at litigating non-competition agreements in your state.
Links and Resources
My Employment Lawyer FAQs about Non-competition Agreements
Answers to Questions about Non-Competition Agreements.
Do you want to consult your own employment attorney?
Schedule a consultation with Fortney & Klingshirn if you live in Northeast Ohio. If you live live elsewhere, search for a lawyer from your state.
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