Navigating Non-Competes in Ohio By Guest Blogger Erin Rhinehart, Esq.
Protection of a company’s competitive advantage is vital. Therefore, it is necessary that employers understand the options available when evaluating how best to protect their company. One common practice is the noncompete agreement. Generally, a noncompete agreement is a contract between an employer and employee where the employee agrees not to compete with the employer after termination of the employment relationship. Be careful, though, not all states permit noncompete agreements, and those that do recognize varying levels of protection to employers. Ohio, however, remains a state that recognizes that noncompete agreements with employees or independent contractors is a valid and enforceable means for employers to protect their economic interests – but, the agreement must be reasonable.
What constitutes a “reasonable” non-compete agreement?
In Ohio, a noncompete agreement is reasonable if the agreement: (1) is no greater than is required for the employer’s protection of a legitimate interest; (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. Courts consider several factors when evaluating the reasonableness of a noncompete agreement, including the length of time and geographic scope of the restrictive covenant, whether the employee is the sole contact with the customer, whether the skills seeking to be restrained by the agreement were developed during employment, whether an employee came into possession of confidential information or trade secrets during the employment, and whether the covenant seeks to protect against unfair competition as opposed to ordinary competition. No one factor is dispositive; and, determining whether a non-compete is reasonable is a highly fact intensive endeavor.
The employer bears the burden of establishing the reasonableness of the agreement. Therefore, employers should be practical when evaluating the scope of restraint to impose on an employee. Consider the legitimate business interests to protect – confidential information, trade secrets, costumer lists, and skills and training acquired during employment. Also, be cognizant of any undue hardship on the employee. Finally, consider the sophistication and position of the employee or independent contractor involved. Courts will consider all of these factors. Thus, even if the employee agrees to an overly broad and aggressive noncompete agreement, she may challenge the validity of the agreement later, and a court may find the agreement unenforceable in its entirety.
Trial courts in Ohio also have the option to modify an overbroad or unreasonable covenant not to compete, but it is within the court’s discretion whether to do so. Rather than risk the court striking down the agreement altogether, or re-writing it so that its worth is severely diminished – particularly in light of the current landscape on noncompetition reform throughout the country – put the time in on the front end to consider what exactly needs protection and what is the least restrictive means of affording such protection.
What other terms should be included in a non-compete agreement?
A noncompete agreement can be as simple or involved as necessary to protect the legitimate interests of a business, and how you word the agreement is important. Ohio courts interpret noncompete agreements following ordinary contract interpretation principles, including that any ambiguities will be construed against the drafter. Therefore, be careful to use plain and ordinary language when setting forth the specific terms of the noncompete agreement. Typically, even the most straightforward noncompete agreements contain some of the following clauses.
Choice of Law and Forum Selection. A choice of law provision determines which state’s law will govern an action seeking to enforce the agreement. A forum selection provision determines the court in which such an action must be brought. In Ohio, these provisions have long been found to be enforceable so long as there is a reasonable basis for the chosen law and forum, they have a substantial relationship to the transaction, and enforcement of the term(s) would not be contrary to a fundamental policy of a state having a greater interest in the case.
Confidentiality. Depending on the nature of the business or employment relationship, the parties may seek to keep the terms of the non-compete agreement confidential. While these types of provisions are fairly straightforward, be careful to allow exceptions necessary to effectuate any term or provision of the agreement, to disclose the agreement to a party’s accountant or lawyer for use in connection with providing professional services, and as required by law.
Non-Disparagement. A non-disparagement provision prohibits the parties from bad-mouthing one another. Non-disparagement provisions seem to go hand-in-hand with a non-compete agreement. After all, the overall purpose of the agreement is to protect a company’s competitive advantage. What good is it if the employee refrains from working for a competitor if she is bad-mouthing the company all over town? Of course, other laws are available to protect a company’s reputation and business interests (e.g., defamation, tortious interference, etc.); however, a non-disparagement clause is a simple way to remind the employee (and employer) to maintain professionalism despite the end of the employment relationship and ensure protection of the company’s reputation and competitive advantage.
Opportunity to Review and Consider the Agreement. Even where there is a question whether the employee understood the contents of a non-compete agreement, Ohio law charges the employee with knowledge of the contents of the agreement so long as she read and signed the agreement. Still, given the recent trends in other states that make it a requirement that the employer provide the employee with notice of the non-compete and be given an opportunity to review, it is prudent to include a provision where the parties expressly acknowledge that they have read and understood the agreement, that they have had sufficient time and opportunity to review the agreement, confer with legal counsel if they so desire, and that they fully understand and appreciate the meaning of each of the agreement’s terms.
Liquidated Damages. Liquidated damages clauses are not necessarily common practice, but such provisions are worth mentioning, as they have not been stricken outright in Ohio in the context of a breach of covenant not to compete. A liquidated damages clause provides that, in the event of a material breach of the agreement, the breaching party is liable for a sum certain, in addition to actual damages and injunctive relief, if so requested. Be careful of these types of provisions – you may be on the receiving end if the provision is mutually applicable to the parties. Careful consideration should be given to whether inclusion of a liquidated damages clause is appropriate.
Severability. A severability clause protects the agreement from complete avoidance should one of the provisions be found invalid. In other words, if any of the provisions of the agreement are rendered invalid by a court, then the parties agree that such a finding will not preclude enforcement of the remainder of the agreement. For example, if a liquidated damages provision was included in the agreement, but the court found it punitive in nature and, therefore, unenforceable, then the remainder of the agreement is still enforceable.
Applicability to Successor and Assigns. While Ohio law generally provides that employee noncompete agreements transfer to the surviving company after a merger, even without the employee’s consent, it is still prudent to include specific language in a non-compete agreement regarding its applicability to successors-in-interest. If the noncompete agreement is silent as to assignability, some courts may look to whether the agreement employs words that indicate that assignment was contemplated and whether it is necessary to protect the goodwill of the business being sold. Additionally, successor businesses should evaluate their noncompete agreements to ensure that they are fully protected. Just because the non-compete may transfer does not mean that the agreement is enforceable. If your business is the successor-in-interest, one option is to require the employees to sign a new noncompete agreement as a condition of their continued at-will employment.
Noncompete agreements are a useful tool for employers to protect their competitive interests. It is important, though, that these types of agreements are used sensibly. Covenants not to compete are more likely to be enforced if they are narrowly tailored to protect only a company’s legitimate, identifiable business interests – not to control a particular industry or prevent former employees from making a living. As this area of the law continues to evolve, in Ohio and elsewhere, it is always smart to consult with a lawyer before entering into any restrictive covenant.
About Erin Rhinehart, Esq.
Erin is an Equity Partner with Faruki PLL, a complex commercial litigation boutique with offices in Dayton and Cincinnati. Her practice focuses on class action defense, media and communications law (First Amendment, defamation, privacy, public records, advertising, social media, trademark, and copyright litigation), breach of contract, non-compete, tortious interference, and environmental litigation matters. She has significant trial experience in federal and state courts across the country; and, she has been repeatedly recognized by Benchmark Litigation and Ohio Super Lawyers.For more information, please visit https://www.ficlaw.com/team/erin-rhinehart/.