Non-competition Agreements in Ohio - History and Law

posted by Neil Klingshirn  |  Jul 30, 2008 09:54 AM [EST]  |  applies to Ohio

History of non-competition agreements in Ohio

As in other states, Ohio courts at one time viewed noncompetition agreements with some skepticism. Agreements in restraint of trade, including noncompetition agreements, were disfavored as being against public policy. Further, the law initially developed in a society in which workers entered skilled trades only by serving apprenticeships, and mobility was minimal. Hence, 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.

Much has changed in Ohio since then. In 2004 the Ohio Supreme Court noted that modern economic realities do not justify a strict prohibition of noncompetition agreements between employer and employee in an at-will relationship. Instead, Ohio courts now balance an employer's ability to protect its trade secrets, customer relationships and other legitimate business interests against the employee's ability to earn a living.

Accordingly, courts in Ohio now recognize the validity of agreements that restrict competition by an ex-employee if they contain reasonable geographical and temporal restrictions. 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.

Consideration as a Barrier to Enforcement

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. The Court viewed presentation of a noncompetition agreement by an employer to an at-will employee as, in effect, a proposal to renegotiate the terms of the parties' at-will employment. 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 the assignment. However, Ohio non-competition agreements are an exception to this rule.

In the case of non-competition agreements in Ohio, if a non-compete agreement does not expressly state whether or not it is assignable, Ohio courts look to the intent of the parties. If the parties used language suggesting that they did not intend assignment, such as describing a specific employer and defining the geographic restrictions in relationship to that specific employer, a court may find that the parties did not intend assignability. Fitness Experience, Inc. v. TFC Fitness Equip., Inc., 355 F. Supp. 2d 877, 888-890 (N.D. Ohio 2004). In addition, the court may require the employer to show that assignability is necessary to protect the goodwill of the business being sold. Thus, if the employees are not in a position to harm the new owner, permitting assignment may not be necessary to protect the goodwill of the business.

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.

Ohio Courts will rewrite overly broad non-competition agreements by redrawing geographic, time or other restrictions on an employee's non-competition agreement.

Revision History

posted by Neil Klingshirn  |  Jul 30, 2008 09:54 AM [EST]  |  applies to Ohio

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Neil Klingshirn
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