Clermont County Enforces Non-Compete Even After Employee Placed on Paid Administrative Leave for One Year

Earlier this month, a unanimous Clermont County Court of Appeals reversed a trial court decision denying judgment to an employer who sued a former employee and her new employer for violating her non-competition and non-solicitation agreement even after the new employer put her on a paid leave of absence during the non-compete period.  Total Quality Logistics, L.L.C. v. Leonard, 2023-Ohio-2271.  The Court found that the agreement was not merely to protect the unfair poaching of its customers, but also to prevent the poaching of its employees after a significant investment in training them.  By putting the employee on a paid leave of absence, the new employer created an incentive for the employee to leave the plaintiff employer and deprive the plaintiff employer of its investment. “Allowing a competitor to circumvent a noncompete agreement by simply hiring an employee and placing the employee on paid administrative leave for the duration of the noncompete agreement would defeat the purpose of noncompete agreements, reward former employees and the competitors hiring them, and ignore the employer's legitimate business interests.”

According to the Court’s opinion, the plaintiff employer hired an inexperienced employee and spent 22 weeks training her about the industry, its business and how to win and retain loyal customers. She was required to sign a one-year non-compete and non-solicitation agreement which provided that the one-year period would be tolled while she was in violation.    After two years, she transferred to Massachusetts and became personal friends (i.e., after working hours) with employees of a few customers.  She was then recruited away by another company for its new division, which directly competed with her former employer.  She was incorrectly told that her non-compete was not enforceable in Massachusetts (which should have been suspicious when she was required to also sign a non-compete with her new employer).  The former employer learned about this on LinkedIn and brought suit the following month.  She was then placed on paid administrative leave for a year, at which time the new employer requested to dissolve the agreed preliminary injunction.  The trial court agreed, and after a bench trial limited the plaintiff employer’s damages to the $24K profit lost during the six weeks that she actively worked for the competitor and denied it attorneys’ fees as the prevailing party under the agreement.   The Court of Appeals reversed.

Non-compete agreements are only enforced to the extent necessary to protect the employer’s legitimate interest.  The trial court found that the employer’s only interest was to protect its customers from being unfairly poached and that this was sufficiently protected by placing the employee on paid administrative leave.  However, the plaintiff employer argued that it also had a protectible interest in retaining its investment of “substantial time, money, and other resources” in the employee.  It argued that the trial court had turned it into a “farm system” for the identification and training of logistics staff for its competitors.

One legitimate purpose of a noncompete agreement is to prevent the disclosure of a former employer's trade secrets or the use of the former employer's proprietary customer information to solicit the former employer's customers. . . . . We have recognized that another legitimate purpose of a noncompete agreement is the retention of employees in which an employer has invested time and other resources. (bolding added for emphasis).

                . . .

            In addition to its legitimate business interest in keeping its proprietary customer information and marketing and business strategy confidential, TQL had a legitimate business interest in retaining its employees. [She] obtained her experience and skills as a freight broker in the logistics industry while being trained extensively by and working for TQL. [She] had a proven track record of success, was demonstrably skilled at developing customer relationships, and was a promising broker as evidenced by her promotions through TQL's ranks, and once she began working for Ally, by her being contacted by former TQL customers and the profits she generated for Ally in less than six weeks . . .

The upshot of [defendants’] argument is that the NCA restricts them only from competing with TQL for customers. However, the NCA is not so limited as it also restricts "employment" with a TQL competitor.  Moreover, the purpose of the NCA is to prevent not only unfair competition for customers but also for the human resources necessary to conduct business. The NCA promotes this purpose by, among other things, disincentivizing TQL employees from leaving the employ of TQL to work for a competitor. Adopting [defendants’] narrow construction of the NCA would permit competitors to acquire TQL's key and high-performing employees and placing them on paid administrative leave for a year, thus depriving TQL of the benefit of its investment in the employee and the employee's services while avoiding liability for tortious interference and breach of contract. (bolding added for emphasis).

In light of this construction, the Court also found it was an error to conclude that the employee ceased being employed by a competitor after she was placed on paid administrative leave simply because she conveyed no tangible benefit to her new employer during that time because this conclusion did not give weight to the plaintiff employer’s interest to disincentive its employees to resign for greener pastures.

Trial testimony established that Leonard signed a two-year noncompete agreement on her first day as an Ally employee, and that while on administrative leave, she continued to be on Ally's payroll, was paid her regular salary, paid taxes on her income, and continued to receive benefits. Leonard and Zambo both identified Leonard as a current employee of Ally. It is axiomatic that only an employee can be placed on paid administrative leave. The trial court focused on the fact that although she was paid during her administrative leave, Leonard did not conduct business of any kind on behalf of Ally and that her pay and benefits were "entirely gratuitous on Ally's part." That Leonard was paid for doing nothing during her administrative leave because Zambo purportedly felt responsible for Leonard's situation does not make Leonard a non-employee of Ally for purposes of the NCA.  The fact that Ally paid Leonard her full salary and benefits during her administrative leave shows that it received a reciprocal benefit. It is no different than an employee going on a paid FMLA, jury duty, or military leave and performing no services for the employer during such leave. From the time Leonard was hired to date, nothing in Leonard's status as an Ally employee changed. By being hired by Ally and by continuing to be employed by Ally, Leonard violated the noncompete provision of the NCA prohibiting its employees from being "employed" by a competitor of TQL.

The Court further focused on the fact that the employee continued to socialize with the three employees of her former employer’s customers while she was on paid administrative leave.  It found these contacts – even though purely social – were contrary to her former employer’s economic interests.

The trial court had found that the plaintiff employer had no legitimate interest in rendering the employee unemployed if she was not competing against it in business.   However, the Court found this focused more on the benefit – or lack thereof -- to the new employer and not on the interest of the plaintiff employer to retain its employee.

Ally's retention of [her] was a benefit to Ally from the outset, and a benefit Ally was able to hold onto by maintaining [her] as an employee after November 25, 2020. However, the test established in Raimonde plainly focuses upon the former employer and its legitimate interests and need for protection, not on the competitor's benefit, and thus requires that noncompete agreements be viewed through the interests of the former employer, not the offending competitor.

As discussed in the first assignment of error, TQL has a legitimate business interest in retaining its employees after it has invested time, money, and other resources in them, and preventing its competitors from recruiting those employees away. Before being employed at TQL, Leonard had no prior experience, clients, or contacts in the logistics industry. At TQL, Leonard received extensive training learning how to become a successful freight broker and was promoted due to her recognized leadership qualities. Trial testimony established that Leonard had a proven track record of success, was extremely skilled at developing customer relationships, and was a promising asset in the logistics industry. Ally's hiring of Leonard undermined TQL's legitimate business interest in retaining Leonard as its employee. The trial court erred by ignoring TQL's legitimate business interest in the retention of its experienced and skilled employees after investing time and other resources in them.

The trial court found that "[h]ad [she] been terminated [by Ally] or had she resigned after November 25, 2020, and then been rehired by Ally after a year had elapsed, the effect upon TQL would have been exactly the same as it is in the current circumstances." Not so. While the result of [her] not working for the logistics industry for a year in compliance with the NCA or her sitting out for a year while on paid leave might have been the same in that [she] performed no services in the logistics industry, [she] would have been less inclined to leave employment with TQL if there were no other employment prospects in the industry. Allowing a competitor to circumvent a noncompete agreement by simply hiring an employee and placing the employee on paid administrative leave for the duration of the noncompete agreement would defeat the purpose of noncompete agreements, reward former employees and the competitors hiring them, and ignore the employer's legitimate business interests.  (emphasis  added). 

Ultimately, the Court found that the plaintiff employer was entitled to a permanent injunction to keep the employee from working for another year and was entitled to attorneys’ fees as the prevailing party.

This is exactly the kind of non-compete case to which the NLRB objects -- disincentivizing employees from seeking higher wages and better working conditions.  

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

What's New with Unions, Non-Competes and FMLA?

 I’m running a bit behind in my blogging, so I will cover more ground and be a bit more abbreviated than usual. The Supreme Court held that unions can be held liable for intentionally damaging employer’s property during a strike under state law because such claims are not pre-empted by the NLRA.  The NLRB’s General Counsel has officially declared war on most non-compete agreements, although employees can be prohibited from accepting an ownership or management interest in a competitor.   The DOL also explained how to calculate FMLA leave during a holiday week and when the employee’s doctor says that they cannot work more than 8 hours/day. 

The Supreme Court ruled that an employer’s intentional tort claims against a union were not preempted by the National Labor Relations Act when the union started a strike after the employer had filled its cement trucks, which caused the employer to lose all of the cement and risk losing many of the trucks if they were not immediately unloaded in a safe location before the cement hardened in them.  Glacier Northwest, Inc. v. Int’l Bhd of Teamsters, Local 174, No. 21-1449 (U.S. 6/1/23).  The state supreme court had held that the damage was incidental to the lawful strike and, therefore that the tort claim was preempted.  However, the Court’s 8-1 majority found that the NRLB had long required employees to take “reasonable precautions” to protect an employer’s property from foreseeable, aggravated and imminent danger.  Because the union had failed to take “reasonable precautions,” and actually sought the obtained result, its strike activity was not even arguably protected and could not pre-empt state tort laws.  By reporting for duty and prompting the employer create a perishable product, they created an imminent risk of harm to the trucks and destroyed the concrete by then walking off the job after it was poured.

 . . . the Union’s decision to initiate the strike during the workday and failure to give [the employer] specific notice do not themselves render its conduct unprotected. Still, they are relevant considerations in evaluating whether strikers took reasonable precautions, whether harm to property was imminent, and whether that danger was foreseeable. In this instance, the Union’s choice to call a strike after its drivers had loaded a large amount of wet concrete into [the employer’s] delivery trucks strongly suggests that it failed to take reasonable precautions to avoid foreseeable, aggravated, and imminent harm to [the employer’s] property.

                . . .

[The employer] alleges that the drivers’ conduct created an emergency in which it had to devise a way to offload concrete “in a timely manner to avoid costly damage to [its] mixer trucks.” App. 72. The Union’s actions not only resulted in the destruction of all the concrete [the employer] had prepared that day; they also posed a risk of foreseeable, aggravated, and imminent harm to [its] trucks. Because the Union took affirmative steps to endanger [the employer’s] property rather than reasonable precautions to mitigate that risk, the NLRA does not arguably protect its conduct.

A day earlier, the DOL issued a rare opinion letter FMLA2023-2-A about the FMLA.  In it, it explained that when holidays fall during a week in which the employee takes FMLA leave, whether the holiday counts towards the FMLA 12 week entitlement depends on whether the employee took off the full week (meaning the holiday counts) or whether the employee took off less than a full week (meaning the holiday would not count towards the 12 weeks).  The reason being that if the employee typically works 5 days a week and only took one day off for FMLA during a holiday week, the employer may only count 20% of the week against the 12-week entitlement and not 25% (as though it were a four-day work week). 

When a holiday falls during a week that an employee is taking a full workweek of FMLA leave, the entire week is counted as FMLA leave. 29 C.F.R. § 825.200(h). Thus, for example, an employee who works Monday through Friday and takes leave for a week that includes the Fourth of July on Thursday would use one week of leave and not 4/5 of a week. However, when a holiday falls during a week when an employee is taking less than a full workweek of FMLA leave, the holiday is not counted as FMLA leave unless the employee was scheduled and expected to work on the holiday and used FMLA leave for that day. Id. The Department has taken a consistent approach to the treatment of holidays since the first publication of its FMLA regulations in 1995. See 60 Fed. Reg. at 2200; see also Final Rule: The Family and Medical Leave Act of 1993, 73 Fed. Reg. 67934, 67972-73 (Nov. 17, 2008).

Also on May 30, the NLRB’s General Counsel issued an enforcement Memorandum indicating that she intends to litigate the enforceability  of most non-management non-compete agreements on the grounds that they prevent employees from quitting their jobs and finding new ones and on the belief that most are overly broad.  In other words, she finds most non-compete agreements issued to non-management employees to violated the National Labor Relations Act whether issued during, before or after (in a severance agreement) employment and regardless of the motivation (i.e., confidential information or training investments).  She had conceded that it would not violate the NLRA to prevent employees from engaging in an ownership, management or independent contractor relationship with a competitor following employment. 

Earlier this year, the DOL also issued an FMLA opinion letter No. FMLA2023-1-A reminding employers that employees can essentially take unlimited FMLA leave.  In the employer’s request, the employee’s physician instructed him to not work more than 8 hours/day, even though the employer frequently needs employees to work more than 8 hours/day and operates a 24-hour-day business.  The DOL indicated that the employee remains entitled to 12-weeks of FMLA leave, not just an ADA reasonable accommodation.  If the employee typically works 50 hours/week, then employee would be entitled to 600 hours of leave, not just 480 like a typical 40-hour/week employee. 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Court Rejects Non-Compete Which Applied Following Employee "Termination" When the Employee Voluntarily Resigned

Earlier this month, the Franklin County Court of Appeals affirmed a judgment for physicians and a medical officer manager who were alleged to have violated post-employment restrictive covenants and misappropriated trade secrets.  Buckeye Wellness Consultants, L.L.C. v. Hall, 2022-Ohio-1602.   The Court agreed that the one-year terms of the employment agreements did not automatically renew when the contracts lacked language indicating automatic renewal and both physicians indicated that they wanted to renegotiate their contracts before they ultimately resigned between six and 16 months following the expiration of their agreements.   The non-solicitation clauses only applied during the term of the agreement and one for one year after termination of the agreements.   The clause had expired before one of the physicians had resigned.   While the court indicated that the clause could not be enforced against the other physician who had resigned only six months after his agreement expired, the Court also pointed out that the employer had failed to identify a single patient who had been inappropriately solicited and refused to find notification of a change of practice to constitute a solicitation.   The Court also agreed that one non-compete was unenforceable because the employee never worked in the restricted territory.  The Court also found that the other non-compete did not apply because the employee voluntarily resigned, his agreement implied a distinction between termination and (voluntary) separation, and the clause only applied “for one year “following termination of the Employee.”   Finally, the Court rejected the trade secret claim because the employer failed to produce any evidence that the defendants had inappropriately accessed the password protected trade secret lists or used them. 

According to the Court’s opinion, the defendants all worked at the same medical office before being hired by the plaintiff employer.  Each physician also practiced elsewhere.   The two defendant physicians entered into one-year employment agreements which contained restrictive covenants prohibiting competition and solicitation of patients.   One non-compete applied “so long as the Employee is employed by the Employer, and for a period of one (1) year following termination of the Employee.”  The other non-compete applied for one year “following termination by the Medical Doctor/Physician.”   Both non-solicitation clause applied only for one year following “after termination of this agreement.”  Interestingly, the agreements did not provide for automatic renewal.   Both physicians attempted to negotiate better terms after the first year and, when unsuccessful, submitted their resignations.  One resigned six months after his agreement expired and one 16 months after his agreement expired.   The office manager never signed an agreement or non-compete.   They ultimately formed a new practice and all patients were informed by the defendants and plaintiff of their move.  The employer then filed suit for breach of contract, tortious interference, theft of trade secrets, conversion, conspiracy, unjust enrichment, etc.  The trial court entered judgment for the defendant employees.

The most significant issue was when the one-year restrictive covenant periods commenced and expired.  As an initial matter, both clauses applied “during the term of the Agreement” and for “so long as the Employee is employed” by the employer.   Both non-solicitation clauses expired one year after termination of the agreements.   The employer argued that the term of the agreements and non-competes continued until termination of employment, but the Court disagreed.  Each clause indicated that “[t]he term of this Agreement shall commence on the Effective Date of this Agreement and shall continue for one (1) year(s) thereafter” and that the parties could revisit the physician’s compensation at the end of each contract year.  The agreements were silent as to the manner or duration of any renewal.  The employer asserted that renewal was implied, but the Court disagreed.   The language indicating that the agreement had a term of one -year was clear and unambiguous, particularly when renewal was never mentioned.   Generic references in other clauses of the agreement to potentially renewable terms was not a substitute for an explicit term discussing how long and when the contract would be renewed.  The reference to “year(s)” did not make the agreement ambiguous because it simply meant that the term “one” could have been made “five” while being negotiated.

The Court then addressed whether the restrictive covenants continued to apply after the agreements expired on their terms. 

The general rule of contracts under such a situation was " '[w]here a contract of employment for a definite time is made and the employee's services are continued after the expiration of the time, without objection, the inference is that the parties have assented to another contract for a term of the same length with the same salary and conditions of service, following the analogy of a similar rule in regard to leases.' . . . . The employee who continues working under the same terms and conditions after the employment agreement has expired becomes a hold-over employee.

However, the presumption that arises from an employee's continued employment is "rebuttable by proof that a new contract for the continued period has been entered into, or by facts and circumstances showing that the parties did not intend to continue upon the terms and conditions of the original contract."

In this case, at the expiration of the employment agreements, both physicians indicated their displeasure with their terms and conditions of employment and attempted to negotiate new agreements.    Among other things, one wanted to become a part-owner and the other wanted to work more days each week and spend more time with each patient and see more investment in EMR, etc.  “The evidence shows that the doctors did not intend to continue working under the terms and conditions of the original employment agreements, so a new one-year contract does not arise by implication of law.”  Accordingly, the terms of their prior written agreements no longer bound them and they became employed at will, entitling each of them to resign prior to completing another year of employment. 

The non-compete language was slightly different for each physician and their employment agreements expired at different times.   With respect to Dr. Santiago, the Court agreed that the non-solicitation covenant – which applied for 12 months after expiration of the employment agreement --  had expired by the time he had resigned 16 months after his employment agreement had expired.   The duration of the non-compete was ultimately irrelevant because he always worked outside the 5-mile restricted radius.   Both covenants applied so long as they were employed and were triggered by their terminations.   Although the Court thought that the language “termination by” the physician was ambiguous when Dr. Santiago had voluntarily resigned and the agreement did not define “termination,” the ambiguity was ultimately irrelevant.    In other words, the non-solicitation clause did not apply because it had expired before he resigned.  The non-compete duration was irrelevant because he had never worked inside the restricted territory.   

Dr. Hall’s situation was more complicated because he resigned only six months after his agreement had expired (before the non-solicitation clause expired) and the duration and territory of his non-compete were different:

During the term of this Agreement, including the renewals hereof, so long as the Employee is employed by the Employer, and for a period of one (1) year following termination of the Employee, Employee shall not . . . . Employee shall further not solicit any patient or employee of Employer for a period of one (1) year after the termination of this agreement.

Unlike Dr. Santiago’s agreement, Dr. Hall’s agreement contained a separate provision governing terminations which apparently did not explicitly apply to this dispute.  Also, unlike Dr. Santiago’s agreement, Dr. Hall’s agreement defined “employment separation” as "’the separation or termination of Employee's employment with the Company, regardless of the time, manner or cause of such separation or termination.’  . . . . ‘13(D) also refers to actions based on an employee's ‘termination or separation.’"  While “separation” was never mentioned in the non-compete clause, the definition of employment separation indicated that termination and separation were different terms with different meanings.  “The employment agreement clearly provided different meanings for the two terms, and they are not interchangeable.”  Because the non-compete only applied after employment if Dr. Hall were terminated, the Court concluded that it did not apply after employment if he voluntarily resigned.  

There was no discussion of the use of the terms in IRC 409A(a)(2)(A)(i) or 26 CFR § 1.409A-1 ("An employee separates from service with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer.")

Oddly, the Court then converged the language of the non-compete clause with the language of the non-solicitation clause in rejecting the employer’s argument that the “termination” mentioned in the non-compete clause meant termination of their relationship, not the employee:  “the plain meaning limits termination to firing of the employee, which did not happen here. Hall was not subject to the covenant not to compete and solicit.”

The Court also rejected the claims that the defendants had misappropriated trade secrets (i.e., a password protected list of patient names and attorney referral sources).   The Court of Appeals found that the employer failed to produce any evidence that the lists were misappropriated, how or when the lists were obtained or how or when they were used.  Indeed, the employer could not identify a single patient who was supposedly misappropriated or solicited.  The Court concluded that it was mere speculation that the employer lost patients and the defendants gained patients based only on a misappropriation of password protected patient and referral source lists.

The Court rejected any argument that patients were improperly solicited when they were informed that the defendant physicians had changed medical practices:

Hall and Santiago, pursuant to their professional obligations, informed their patients that they were moving to a new location. Doctors have an obligation to their patients to ensure continuity of care and prevent a patient from being abandoned. These letters do not rise to the level of solicitation.

It is notable that there are a limited number medical providers who accept new workers' compensation patients, and so it is logical that patients will seek continuing care with a familiar provider, even when the provider moves. In addition, when you consider that Spanish speaking patients only have one or two medical providers who speak fluent Spanish, Santiago is in great demand by both patients and attorneys,  . .

Indeed, it appears that patients followed Dr. Santiago from his prior practice to the employer when he was hired and he was always busy with Spanish-speaking patients.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Ohio Court Narrows Non-Compete to One Year for Holding Management Position and Eliminates Restriction on Practicing Medical Specialty

Earlier this month, a unanimous Cuyahoga County Court of Appeals affirmed a trial court’s limited enforcement of a non-compete clause imposed on a burn surgeon.  MetroHealth Sys. v. Khandelwal, 2022-Ohio-77. The trial court had refused to enforce any restriction on the surgeon practicing medicine, but shortened the two-year restrictions to one year on the physician acting in a leadership capacity for a competitor within the restricted territory and from soliciting patients, employees or referral sources. “The prevention of ordinary competition is not a legitimate business interest that can be protected by a restrictive covenant.” The evidence established that most patients chose the closest burn center, making competition for patients relatively rare.  The trial court had indefinitely enjoined the physician from using proprietary information and left pending tortious interference claims. 

According to the Court’s opinion, the physician was an experienced burn surgeon who was hired in 2015 with a one-year and 10 miles non-competition agreement.  The non-competition restriction was expanded the following year to a two-year and 35 miles and a few years later he was promoted.  In March 2020, he gave three months’ advance notice that he was going to the only other competing facility within 35 miles of the employer.  The employer brought suit to enjoin him from working in any capacity for the competitor for two years.  After a three-day hearing, the trial court agreed only to prevent the physician from holding a management position and from soliciting the employer’s patients, employees or referral sources for one year, but refused to enjoin him from practicing medicine for the competitor.  The court also enjoined the physician from using or disclosing any of the employer’s proprietary or privileged information indefinitely. The trial court did not resolve claims for misappropriation of trade secrets or tortious interference with contract, which remain pending.  The employer appealed, but the appellate court affirmed the trial court’s order and limited restrictions.

The Court noted that under Ohio law,

A covenant restraining a physician-employee from competing with his employer upon termination of employment is unreasonable where it imposes undue hardship on the physician and is injurious to the public, the physician’s services are vital to the health, care and treatment of the public, and the demand for his medical expertise is critical to the people in the community.

The employer had argued that the physician had specialized knowledge from his management position of the strengths and weaknesses of the employer, as well as knowledge of confidential information and relationships with its referral sources in a five-county area.  The physician testified that the relationships were between entities and not with individual physicians, like himself.   There was also testimony that burn patients generally seek the closest burn hospital, rather than a particular physician.  Accordingly, in light of the limited competition, the Court found that the trial court had not been arbitrary or capricious in refusing to enjoin the physician from practice medicine in his specialty despite the non-compete clause.

Further, the Court found that the physician would be harmed by a restriction.  He could lose his certification and his skills would atrophy if he were prevented from practicing his specialty for two years.   He might even have trouble getting credentialed if he had to wait two years.   The Court rejected the argument that he could work as a locum tenens positions because no such specific positions had been identified and it would be hardship to travel so much during the pandemic.   Further, his family had established roots in community since moving there from Arkansas in 2015 and did not want to relocate far from the area or his daughters’ schools.  His wife has medical specialty that requires her to work within 15 miles of her assigned hospital.

The Court also found that the public would be harmed due to a shortage of qualified burned physicians because it was a relatedly rare specialty.

The Court also affirmed the trial court’s shortening of the two-year restriction on the physician holding a leadership position with the competitor.   Because, as mentioned, the evidence established that patients typically chose the closest burn center (meaning little competition between the two entities), there was little likelihood of harm from the physician having a leadership position after the passage of a year and little reason to extend the restriction to two years.  The Court also noted that two years was “not standard practice.”

 NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Ohio Appellate Court Remands Physician Non-Compete Case To Evaluate Whether Continuing Education Investment Was Sufficient Protectible Interest

In October, the Hamilton County Court of Appeals reversed a hospital employer’s summary judgment in a declaratory judgment action brought by a former employee-physician on the grounds that the trial court had incorrectly increased the employee’s burden of proof.   Wigton v. University of Cincinnati Physicians, Inc., No. 2021-Ohio-3576.  There was no issue of stealing patients or confidential information.  The employer justified the non-compete clause on the basis of the investment which it had made in the physician’s continuing education.  Neither party moved for injunctive relief and both moved for summary judgment.  Nonetheless, the trial court ruled that the physician failed to carry his burden of clear and convincing evidence (as required for injunctive relief).   The court of appeals ruled that the burden of proof should have been the simple no dispute of material fact and judgment as a matter of law standard and remanded the case to decide whether the employer’s investment in continuing education was significant enough to restrict otherwise fair competition.  In particular, the trial court was instructed to evaluate “whether the doctor’s “expertise was increased * * * more than would have been through experience as [a physician] in solo practice,” . . . and/or whether the training provided by the hospital facilitates some type of unfair competition.”

According to the Court, the plaintiff physician signed a non-compete clause which prohibited him from practicing medicine for 18 months within 10 miles of any location where he had previously worked in the prior 12 months.  After four years of employment , he accepted another position and sought a declaratory judgment on the enforceability of the non-compete clause, but did not move for injunctive relief (which requires clear and convincing evidence).  Instead, he sought a summary judgment (which only requires no disputes of material fact and judgment as a matter of law).  In opposing the summary judgment motion and moving for its own summary judgment, the employer’s attorneys argued the injunctive relief standard of proof (i.e., clear and convincing evidence).  There was no dispute about the physician attempting to steal patients or possessing any trade secrets or confidential information.  The employer was relying simply on the amount of training it claimed to have provided the physician to justify the restriction.

The appellate court observed that while reasonable restrictions are enforceable, physician non-complete clauses are disfavored:

Noncompete restraints on physicians are, therefore, “strictly construed in favor of professional mobility and access to medical care and facilities.” Id. Nevertheless, “covenants not to compete in the medical profession are not per se unenforceable, and will be upheld if they are reasonable.” Id. That said, we only enforce noncompete restraints on physicians “to the extent necessary to protect an employer’s legitimate interests; if there is no legitimate interest to be protected, the noncompete is unreasonable.”

             . . . Generally, noncompete restraints are only enforceable when the employee possesses protected business information (such as trade secrets or customer lists) that she can use against her former employer. . . . . Indeed, this is why noncompete caselaw focuses on preventing unfair competition, not simply ordinary competition.

Without ruling on whether the employer’s investment in the physician’s training was a sufficiently strong interest to justify a restriction on competition, the Court observed:

It concluded that UCP’s position as a nonprofit academic hospital provided a legitimate business interest in deterring defections like Dr. Wigton’s and that UCP invested in Dr. Wigton’s training. We take no position on the merits of these conclusions because they were assessed under an incorrect standard, but we do point out that in considering a physician’s training, a court should not simply evaluate whether a doctor received training (as all doctors do) but whether the doctor’s “expertise was increased * * * more than would have been through experience as [a physician] in solo practice,” id. at ¶ 28, and/or whether the training provided by the hospital facilitates some type of unfair competition.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Another Ohio Appellate Court Rejects Non-Compete Clause that Restricts Ordinary Competition

Last week, the Montgomery County Court of Appeals affirmed a declaratory judgment in favor of an employee that the non-compete agreement which he had signed just six months earlier was unenforceable because it sought to prevent regular competition instead of unfair competition.  Geloff v. R.C. Hemm's Glass Shops, Inc., 2021-Ohio-394.  The Court found that the employer failed to show that the employee had memorized or was familiar with its entire customer list or that this list was in fact confidential.  The employee was familiar with the identities of the customers he had serviced, but the employer had also publicized the names of some customers on its website.  Moreover, the fact that the employee learned the skills of a common trade during his employment did not make those skills a protectable interest or trade secret.  Because the non-compete clause was unenforceable, the trial court did not need to narrow it in order to make it enforceable.

According to the Court’s opinion, the plaintiff employee had been hired in 2015 as a glazier and was promoted to foreman in January 2019.   He signed a non-compete upon being hired and upon his promotion.  He resigned his employment six months later, joined the union and was assigned to a new employer, which hired him as a glazier.   His employer then threatened to file suit for breach of his non-compete (and presumably for tortious interference against his new employer), prompting the plaintiff to seek a declaratory judgment.  His new employer terminated his employment.  A year later, the trial court entered summary judgment in the employee’s favor.  The Court of Appeals affirmed.

The trial court concluded that the employer failed to show that the employee possessed confidential information because the identities of its customers were public knowledge.  The plaintiff only had knowledge of the customers which he served.  While he may have been aware of a customer list, there was no allegation that he memorized it or possessed a copy.  The employee’s “awareness of the identities of some customers, moreover, is not the equivalent of possession of a complete customer list.“  The plaintiff disputed that he had information about marketing, pricing, or customer acquisition techniques, etc.     Because the employer “itself voluntarily discloses the identities of certain customers on its website, presumably for promotional purposes, it cannot establish that the identities of individual customers are entitled to protection as trade secrets or otherwise confidential information.”

The court also rejected the employer’s argument that the employee’s training and experience as a field glazier constituted a trade secret..  “[S]uch experience and skills “cannot qualify as trade secrets if they are of common knowledge * * * in the trade.”

The Court also refused to enforce a six-state restrictive territory. The plaintiff had only been assigned outside Ohio twice during his four-year employment and the employer itself had only ever performed 30 projects outside Ohio.

The trial court found that [the employer] did not produce evidence suggesting that the Agreement’s restrictions were necessary to restrain [the employee], “a field installer of the products [that the employer distributes,” from engaging in unfair competition.  . . . [The employer] did not explain how [the employee’s] subsequent employment as an installer “in Ohio or within the other five * * * states” listed in the Agreement “[would] subjectively harm” [its] business, inasmuch as [it] did not establish that its out-of-state work was a significant component of its business overall, or more importantly, that the nature of [his] subsequent employment as an installer, as opposed to employment involving sales and marketing, constituted anything other than ordinary competition.

The employer did not understand why the trial court was influenced by the fact that the employee was not involved in sales. The employer

fails to distinguish between unfair competition and ordinary competition. The distinction depends on whether the “form of competition [a] covenant [not to compete] restricts is in its nature and character unfair” to the employer; if the form of competition is not unfair, then the restriction is unenforceable.  . . .The trial court reasoned that in the absence of any evidence that [the employee] worked subsequently in sales and marketing for a competitor of [the employer], and in the absence of any evidence that [he] “established his own business in direct competition” with [it], the enforcement of the Agreement would serve only to prevent [him] from working as an installer.

We concur with the trial court. [The employer] has not demonstrated that [the employee] engaged in unfair competition merely by installing glass products for a competing business, nor did [it] produce evidence showing that [he] possessed trade secrets or other confidential information that he could have used to give his subsequent employer or employers an unfair advantage over [it].

Further, “The trial court found, in effect, that the Agreement would not provide any benefit to [the employer], because the evidence on record did not show that [the employee] possessed any confidential information or trade secrets, or that [he] had engaged in unfair competition.
 Agreeing, the Court stated that “Absent evidence that [the employee] misappropriated confidential information or trade secrets, or otherwise engaged in unfair competition, enforcement of the Agreement would not discernibly benefit [the employer], whereas it would needlessly prevent [him] from working as an installer.”

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Affirms Fee Award to Employer in Non-Compete Case Without Prevailing on Final Judgment

Yesterday, the Sixth Circuit Court of Appeals affirmed an award of $72, 183 in attorney’s fees to an employer which successfully obtained a preliminary injunction against former employees who had begun working for a competitor in violation of their non-competition agreements.  Kelly Services, Inc. v. De Steno, No. 18-1118 (6^th Cir. 1-10-19).   The Court rejected the employees' arguments that they should not be liable for the fees without a judgment on whether their agreements were enforceable and without a jury trial on the amount of fees.   Their agreements awarded the employer fees incurred in enforcing the agreement and did NOT require the employer to actually prevail before obtaining a fee award.    In other words, the employer was entitled to attorney’s fees regardless of whether the non-compete clauses were actually enforceable and regardless of whether it ultimately prevailed on the merits.  The Court affirmed, but noted that the reasonableness of the fees might depend on the reasonableness of the enforcement efforts.  In any event, it would be “highly impractical” to ask a jury to rule on attorney’s fees earned in a pending action, so a jury trial was not required under the Seventh Amendment.

According to the Court’s opinion, the defendant employees each signed a non-competition agreement which precluded them from working for a competitor for one year after leaving employment with the plaintiff employer. Their contracts also contained a provision which provided in relevant part that:

I further agree to pay any and all legal fees, including without limitation, all attorneys’ fees, court costs, and any other related fees and/or costs incurred by the Company in enforcing this Agreement.

When the employer learned that they were working for a competitor in violation of their non-competition agreements, it filed suit for breach of contract and breach of the duty of loyalty and sought damages, including attorney’s fees.  A preliminary injunction hearing was held and the employees preliminarily enjoined from working for competitor in violation of their non-compete agreements.   The Court did not lift the preliminary injunction until approximately four months after the one-year period in the non-compete had passed.  The parties subsequently both moved for summary judgment.  The employees argued, among other things, that the non-compete agreements were not enforceable and they were entitled to a jury trial under the Seventh Amendment to determine their financial liability for, and the reasonability of, the attorney’s fees.  The employer argued that it had already obtained all of the relief that it sought (i.e., to keep the employees from working for the first year after their employment for a competitor)  and were, thus, automatically entitled to an award of attorneys’ fees for obtaining enforcement of the agreement.  Indeed, the employer asserted that the contracts did not require the employer to prevail on the merits in order to be entitled to attorneys’ fees when seeking to enforce the agreement.  The trial court ruled in favor of the employer and rejected the request for a jury trial on the amount of fees.

The contracts by their terms do not require a final determination of liability in favor of [the employer] as a condition for the award of fees.  Unlike numerous similar agreements, these contracts do not employ the words “prevailing party,” nor by their literal language do they require a final determination of liability.  In fact, as the district court correctly noted, defendants argued below that these provisions were not prevailing party provisions.  . . .

In reasoning that a final determination of contract breach was not required, the district court may have stated too freely that the contract required former employees to pay attorneys’ fees “if [the employer] merely sought to enforce the contracts.”  De Steno, 2017 WL 4786105, at *2.  One can imagine cases where efforts to “seek enforcement” could for instance be unreasonable, made with little or no basis, or made for purposes of oppression or harassment, or could be simply unsuccessful.  A court might read the words “reasonable . . . fees . . . involved in enforcing” and “fees . . . incurred . . . in enforcing this Agreement” not to extend to such situations.  We do not address the possibility of such a limited interpretation, however, because the record is clear that none of these situations is present in this case.  The district court entered a preliminary injunction that resulted in substantial relief, based on a determination that [the employer] had shown a strong likelihood of success on the merits.  Indeed, defendants withdrew their appeal from the grant of that relief. . . .

The Court rejected the Seventh Amendment argument on the grounds that calculating attorney’s fees for the pending case is an equitable power better left to a judge, as previously explained by the Second Circuit:

Accordingly, although plaintiff had the right to a jury decision on whether defendants should recover attorneys’ fees, plaintiff did not have the right to a jury decision on a reasonable amount of attorneys’ fees. Unlike the client in Simler v. Conner, [372 U.S. 221 (1963),] no party here claimed that the contract directed the amount of attorneys’ fees to be awarded by specifying a percentage of an ascertainable sum. Therefore, the district court, in its equitable role, should have determined a reasonable fee.

The Court found it would be “highly impractical” to require a jury to determine a reasonable amount of attorney’s fees.  The trial would become a trial about the cost of the trial itself.  It would also be impractical to require a jury to “look behind the curtain” and determine the proper cost of pretrial motions, etc. before the trial was even complete.  Therfore, it distinguished prior cases where juries ruled on the amount of attorneys’ fees to be awarded concerning disputes which had already been concluded (as in indemnification cases).  In this case, the Court also found that summary judgment was properly granted to the employer on the liability question, so it did not need to be submitted to a jury.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Flurry of Restrictive Covenant and Trade Secret Activity This Spring

There has been a number of developments affecting employment agreements, non-compete agreements and trade secrets this Spring.  First, a new federal statute was enacted last month, the Defend Trade Secrets Act of 2016 which, as discussed below, creates federal court jurisdiction over civil trade secret theft lawsuits, authorizes courts to issue ex parte seizure orders in “extraordinary circumstances” and authorizes treble damages and attorneys’ fees  only when the employer amended its confidentiality agreements and/or policies to permit confidential disclosure to government agencies, under seal in litigation, and to attorneys in whistleblower situations, but does not permit court to enjoin individuals from obtaining employment with a competitor.   In one lawsuit, the Ohio Court of Appeals affirmed judgment for an employer who revoked a former employee’s severance pay when he began working for a company and the severance agreement permitted the employer in its “sole discretion” to deem it a “competitor.”  In the second, the employer lost in its attempt to keep temporary employees from continuing to work for a client through a competitor supplier because the court interpreted the contract to only apply if the defendant employees had voluntarily resigned, which they had not.  Finally, in the last decision from earlier this month, the court reversed a shortening of the restrictive period from one year to six months because the hardship on the employee was not undue in light of his considerable financial resources.

 Congressed passed the DTSA in April and it was signed by the President in May.  Federal court may be invoked when a trade secret involving a product or service used in interstate or federal commerce has misappropriated within the prior three years.   In extraordinary circumstances, a court may – without prior notice to the defendant – issue an order for the seizure of property necessary to prevent the dissemination or propagation of the misappropriated trade secret.    The Court may also grant other civil remedies, but may not enjoin an employment relationship or enjoin information that the person simply knows (as opposed to misappropriated trade secrets).  In other words, Congress did not adopt the inevitable disclosure doctrine and only provides a remedy when the misappropriation was through “improper means” or was acquired by someone who knew that the information was “derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret.”  “Improper means” was defined to “include[] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” but “does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not preempt state law or change the burden of providing that particular information is, in fact, a trade secret.

In order to obtain an ex parte seizure order, the plaintiff needs to show that a TRO (i.e., temporary restraining order) would be inadequate because the defendant ‘would evade, avoid, or otherwise not comply with such an order and the plaintiff would suffer immediate and irreparable injury if the property were not seized.  The plaintiff need also show that the harm to the defendant and third parties is outweighed by the plaintiff’s harm, that the defendant has possession of the trade secret and property to be seized, and that it is likely that information is in fact a trade secret which was misappropriated through improper means (or through such a conspiracy).  Finally, the plaintiff needs to show that the application for a seizure order has not been publicized and, if it were, that the defendant (and/or his/her co-conspirators) would move or destroy or make inaccessible the property to be seized.  The property seized is then placed in the custody of the court.  The defendant could have an action for wrongful seizure against the plaintiff.

In order to obtain treble damages or attorney’s fees following the successful prosecution of a trade secret theft action, the employer must have first provided notice of the DTSA’s statutory immunity to defendant through “any contract or agreement with an employee that governs the use of a trade secret or other confidential information”  which is signed or modified after May 11, 2016 or through “a cross-reference to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law.”   “Employees” includes contractors and consultants.  This statutory immunity protects individuals from being held criminally or civilly liable under any federal or state trade secret law if the individual’s otherwise unlawful disclosure was made in confidence to a federal, state or local government official or any attorney solely for the purpose of reporting or investigating a suspected legal violation, or was disclosed in a complaint or other document filed under seal in a lawsuit or, if the individual  files a whistleblower retaliation lawsuit for retaliation against his or her employer, was disclosed to the individual’s own attorney  or used in the court proceeding if the information is filed under seal and only disclosed pursuant to a court order.

As for non-competition agreement cases, the first case involves a non-competition provision inserted in a severance agreement.  Saunier v. Stark Truss Co., Inc., 2016-Ohio-3162.  The non-competition clause was not very strict.  The employee agreed to not work for any competitor for a year, but even if he did, he would only lose his severance pay.  In addition, the Agreement permitted him to work for a competitor in certain non-sensitive positions (i.e., maintenance), but again, if he did so, his severance pay would cease.  The determination of what entity was a “competitor” was left to the “sole discretion” of the employer without any reasonableness standard.   The employee obtained a job shortly thereafter and, wouldn’t you know it, the employer deemed that entity to be a competitor and cut off his severance pay.  The employee sued and lost because the Court found that the Agreement gave the employer the “sole discretion” to deem the entity a competitor.

In the second case, the employer lost in attempting to keep its temporary employees from continuing to work for its client through a competitor.  Drone Consultants, L.L.C. v. Armstrong, 2016-Ohio-3222.  The plaintiff employer provided temporary employees to a client.  Those employees were required by contract to provide two weeks advance notice of resignation so that their replacements could be recruited and trained and then precluded from returning to their temporary assignment with that client through a competitor.   After the client terminated its contract with the plaintiff employer, the employer notified the six defendant employees that their employment was being terminated and they could collect unemployment.  Instead, they were hired by a competitor who placed them right back in their previous assignments with that client and the plaintiff employer sued.  The Court interpreted the contract to only require the employees to provide notice if they voluntarily resigned, which they had not.  Similarly, the restriction against returning to their previous assignments through a competitor also only applied in the event of their voluntarily resignation and, therefore, did not apply in the event of their involuntary termination.    Although the court ultimately did not discuss or apply it, the plaintiff employer’s contract to provide contingent workers to that client provided that it was required to waive any restrictive covenants that would preclude those workers from continuing to work for the client in the event the plaintiff employer’s contract was terminated by the other party without cause (which it had been).

The final case from earlier this month reversed the trial court’s shortening of the non-compete period from one year to six months.   AK Steel Corp. v. Arcelormittal USA, L.L.C., 2016-Ohio-3285.  In that case, a senior executive with knowledge of the plaintiff employer’s strategic plans for the future was subject to a one-year world-wide non-competition agreement and was recruited to the be the COO of a larger competitor.   The trial court reduced the restrictive period to six months on the grounds that it constituted an undue hardship to the defendant employee without a corresponding benefit to the plaintiff employer.  The appeals court found the restrictive period to be reasonable in light of his confidential knowledge of strategy, business plans, manufacturing processes for current and next generation products, future plant locations, pricing and awarding of contracts, etc.

To be sure, there is no allegation that Howell has in any way attempted to steal confidential or trademarked information for the benefit of ArcelorMittal. Furthermore, it is acknowledged among the parties that certain information available to Howell, such as highly complex and detailed manufacturing processes and patented technology, are simply not capable of reproduction from memory. Rather, the pertinent concerns related to confidential information involving company strategy and information that is relied upon at such a fundamental level that makes non-disclosure nearly impossible. Although there is no evidence to suggest any malicious intent on the part of ArcelorMittal, as competing multibillion dollar companies operating worldwide, there is a certain amount of information, in particular strategic decisions, that the companies have a legitimate interest in remaining confidential. The record establishes that AK Steel has a legitimate interest in restricting Howell, the fourth-highest executive within the company, from accepting employment from a competitor for a one-year period.

Finally, the Court rejected the trial court’s concern with hardship on the defendant employee because every employee suffers some hardship from these covenants, but they can only be modified or eliminated when the hardship is undue:

 . . the trial court failed to consider that "sole means of support," as noted by the Raimonde decision is not limited to employment income. The record here supported a finding that Howell was a highly sought after senior executive of a major steel company, and was recruited by an even larger competitor. Although there was testimony that Howell had a family that depended on his income, there was also testimony that Howell had a large, vested retirement plan from AK Steel, and his new employment with ArcelorMittal would include a $900,000 signing bonus. In resolving the issue of "undue hardship," we find the trial court erred by failing to consider the additional resources in determining whether the noncompete provision deprived Howell of his sole means of support.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Fayette County Appeals Court Affirms Non-Competition Damages and Prevailing Party Attorney Fee Award

On Monday, a unanimous Fayette County Court of Appeals addressed the other half of the non-compete/tortious interference case between dental practices blogged about here last May.  In it, the Court affirmed the $125,000 jury verdict against the defendant dentist for breaching the non-competition clause in his sales agreement with the plaintiff dentist and the reduction of the successful dentist’s attorney fees award (pursuant to the loser pay provision in the contract) to $95,988 based on prevailing attorney fee rates in Fayette County of $250/hour.  Ginn v. Stonecreek Dental Care, 2015-Ohio-4452.  The Court found that the 30-mile non-compete restriction was clear on its face in a contract containing an integration clause and could not be clarified with extrinsic evidence to mean anything other than 30 straight-line miles.  Finally, the jury was entitled to base its damage award on the plaintiff’s testimony of lost revenue.

According to the Court’s opinion, the defendant dentist sold his Washington Court House practice to the plaintiff dentist in 2010 and, as part of that sale, agreed to work one day per week for the plaintiff dentist and not otherwise practice dentistry for 5 years within 30 miles of the plaintiff’s practice.  The contract also provided that the prevailing party would be entitled to attorneys’ fees in the event of litigation over a breach of the agreement. The defendant dentist resigned six months later and began working for StoneCreek Dental in Chillicothe.  StoneCreek’s office was less than 30 straight line miles from the plaintiff dentist’s office, but was more than 30 driving miles.  The plaintiff dentist brought suit and the jury awarded him $125K plus interest.  The trial court dismissed the claims against StoneCreek, but that dismissal was reversed in part on appeal in May.

First, the Court held that it was not an abuse of discretion to reduce the attorneys’ fees to $250/hour based on the prevailing rates in Fayette County instead of the actual rates of the Franklin County attorneys. The plaintiff’s attorneys had requested $143,595 plus expenses.  The trial court based its analysis on the factors listed in Professional Rule of Conduct 1.5.  In addition, the trial court properly excluded litigation expenses because the contract only required the payment of fees and not expenses.  Without a controlling contract or statute, the American Rule requires each party to pay their own fees and expenses. 

Second, the Court held that it was proper for the jury to base its award on the plaintiff’s testimony about the revenue he lost when the plaintiff resigned to work for a competitor.  Damages for breach of a non-competition clause is generally based on lost profits.   As the Court held last May, mathematical certainty is not required.  The plaintiff dentist testified about his past revenue and the increase in revenue he realized while the defendant worked for him for six months.  He doubled that amount to show how the revenue would have increased in a year.  Because his overhead did not change, the increased revenue constituted profit that he lost when the defendant began competing against him during the five-year non-competition period. “Whether the revenues actually represented lost profits as testified to by Dr. Ginn relates to Dr. Ginn's credibility and was for the jury to decide.”    

Finally, the Court rejected that defendant’s argument that the 30-mile territorial restriction was ambiguous where the parties each had different interpretations of the restriction.  It also refused to consider extrinsic evidence – i.e., evidence outside the four corners of the contract – to interpret the 30 mile restriction because it was plain on its face and unambiguous.   The contract contained an integration clause which precludes the parties from attempting to contradict its terms with other evidence about other side-agreements.  Further, Ohio courts have routinely interpreted similar restrictions to refer to straight-line miles instead of driving miles.

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Fayette County Appeals Court Reverses Directed Verdict on Tortious Interference with Non-Compete and Sale of Good Will

Last week, the Fayette County Court of Appeals reversed in part a directed verdict entered in favor of a large dental practice on claims that it had tortiously interfered with the non-compete and sale of good will contract of a dentist it hired who had signed the contract with the plaintiff dentist when selling his practice.   Ginn v. StoneCreek Dental Care, 2015-Ohio 1600. The defendant practice hired the defendant dentist with full knowledge of the terms of his non-competition provision and sales agreement, which included the sale of good will, including his trade name and trade marks.  It then targeted advertising using his name and voice in the area of the non-compete territory during the non-compete period and employed him within the non-compete territory.  While the Court affirmed the dismissed of the claims for tortious interference with prospective contractual relations (i.e., patients), it held there was sufficient evidence that the defendant practice had tortiously interfered with both the five-year, 30 mile non-compete provision and sale of good will from the defendant dentist.  It also found that the plaintiff had sufficient evidence of damages even though he could not identify a single patient that left his practice for the defendant practice.

According to the Court’s opinion, the plaintiff dentist purchased the practice of the defendant dentist and agreed to employ him one day each week.  The purchase agreement included a sales price, a five-year non-compete with a 30-mile territory and a provision about transferring goodwill, including his trade name and trade mark (which was the name of the defendant dentist).  The defendant dentist resigned after approximately six months and, shortly thereafter, went to work for the defendant dental practice, which was located within the non-compete area. He had provided the defendant practice with a copy of his sales agreement, including the provisions governing non-competition and good will.   About six months later, the defendant practice began radio advertisements with the defendant dentist’s name and voice to recruit patients to its practice.  About a year later, the plaintiff dentist filed a lawsuit against the defendant dentist for breach of contract and against the defendant practice for tortious interference with contract and prospective contractual relations.  The defendant dentist left the defendant practice about ten months later.  The case proceeded to trial and at the conclusion of the plaintiff’s evidence, the court entered a directed verdict for the defendant practice on the grounds that it lacked sufficient intent to interfere with the contract.  The plaintiff appealed.

The Court affirmed dismissal of the tortious interference with business relations claim because the plaintiff remarkably could not identify a single patient that left him for the defendant practice. He testified that his “staff would have handled any transfer of patients and that he does not keep a record of where patients transfer.”  (Maybe he did not want to offend them by identifying them as witnesses).

The defendant practice claimed that it only negligently violated the non-compete and goodwill provisions and that its “mere knowledge” of the defendant dentist’s contract was not enough to show intent.  While the court agreed that a party’s mere knowledge of the fact of a contract is not sufficient to show intent, knowledge of the terms of that contract is a horse of a different color.   Because the defendant practice had a copy of the contract and knowledge of its terms, it could not claim to have “mere knowledge” of the existence of a contractual relationship.

As for negligence, the defendant practice claimed that it believed that it was outside the 30-mile non-compete territory because it calculated the distance using driving miles.  However, the legal standard is straight line miles.  Therefore, the jury was entitled to weigh the evidence to determine if it believed the defendant practice acted improperly, especially considering its other actions in this case (such as advertising within the non-compete territory).

As for interference with the good will provision of the sales contract, the Court agreed that broadcasting commercials in the non-compete territory with the defendant dentist’s name and voice while it had knowledge that the defendant dentist had assigned his commercial rights in his name to the plaintiff dentist was sufficient evidence to prove an intention by the defendant practice to interfere with the good will provisions of the sale contract.

The Court partially rejected the defendant’s claim of competitor’s privilege because it only applies when the contracts at issue are terminable at will.  In this case, the non-compete had a five-year duration.  While the good will provision did not have a specific duration, a “reasonable time” restriction is imposed by law.  However, what constitutes a “reasonable time” is a question of fact: 

In the sale of a business, even when the sale carries with it goodwill and the name of a business, the seller may reengage in business only after reasonable time has passed that allows the buyer to establish the customers of the purchased business as his own. . . Whether sufficient time has passed in order for the buyer to establish the customers of the purchased business as his own is a question of fact. Id. Three years has been held a sufficient time.

                               . . .

In regard to the goodwill provision, there is a question of fact as to whether Stonecreek Dental employed wrongful means in competing with [plaintiff dentist] by broadcasting advertisements within the geographic proximity of [plaintiff dentist’s] office using [defendant dentist’s] name and voice approximately one year after the sale of the practice. Because no timeframe applied specifically to the sale of the goodwill of the business, including all right, title, and interest in the name R. Douglas Martin, DDS, it is a question for a jury to determine whether one year was a reasonable time to have passed to allow [the plaintiff] to establish [defendant dentist’s] patients as his own before Stonecreek Dental broadcast such radio advertisements. 

The Court also found that the plaintiff had produced sufficient evidence to show the proximate cause of and amount of his lost profit, even though he could not specifically identify a single patient who left him for the defendant practice.   A jury is permitted to infer that patients left because of the advertising targeted within a non-compete territory.  Further, the damages are calculated based on the number of patients lost by the plaintiff, not by the number of patients gained by the defendant. Mathematical certainty is not required.   In this case, the plaintiff produced evidence about the historical growth of his practice and anticipated growth from purchasing the practice of the defendant dentist, compared to the size of his practice after the tortious activity began. 

When considering Dr. Ginn's substantial decline in revenue soon after Dr. Martin left, in conjunction with the timing of the radio-broadcast advertisements utilizing Dr. Martin's name and voice, it can reasonably be inferred that Stonecreek Dental's interference with the contract was the proximate cause of Dr. Ginn's loss of profits. As such, there is some evidence as to whether Stonecreek Dental's actions proximately caused the decline in Dr. Ginn's revenue, and whether Dr. Martin leaving the practice and working and advertising for Stonecreek Dental proximately caused damages to Dr. Ginn is a question for a jury.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.