In October, the Cuyahoga Court of Appeals ruled on a dispute between coffee barons which arose out of the division of a coffee business in a divorce (in which the wife’s attorney ended up with the business) after the husband began a new coffee venture (at the urgings of his disinherited children) following the expiration of his non-compete agreement. Berardi's Fresh Roast, Inc. v. PMD Enterprises, Inc., 2008-Ohio-5470 (8th Dist. 10/23/08). The courts agreed with the husband that his preparations to begin his new coffee business did not violate the non-competition agreement and he was entitled to engage in fair competition with his former business by promoting his “better” and “less expensive” coffee. The court also ruled that the inevitable disclosure doctrine did not justify relief for the plaintiff company because the confidentiality obligation did not survive the expiration of the non-compete.
Like most businesses, the Company started in happier days when the Executive and his wife began with a small retail store in Cleveland and the Executive’s talent with coffee blends grew the business to a nationwide scope. Fourteen years later, the Executive sold his share in the Company to his wife in a divorce, agreed to a three-year non-competition agreement (containing a perpetual confidentiality clause) and accepted a deferred compensation arrangement. However, after the wife sold the business to her attorney (thus disinheriting their children), the Executive’s sons asked him to re-enter the coffee business, which the Executive agreed to do following the expiration of his non-compete agreement. In the meantime, he lined up the financing and suppliers for his new business, investigated prices and blends, purchased the necessary equipment and signed an office lease. The day after the non-compete agreement expired, the Executive opened his new coffee business and he hired three former employees (who then worked for the Company). One of the Company’s major grocer clients then began buying its coffee from the Executive based on his reputation, his lower price and the taste of his coffee. The Company then filed suit against the Executive, his new company and its former employees.
“In its complaint, [the Company] alleged tortious interference with business, breach of the noncompetition agreement, theft of trade secrets, deceptive trade practices, civil conspiracy, and destruction or conversion of [the Company’s] personal property. The Executive counterclaimed for failure to pay the remainder of his deferred compensation. The trial court granted summary judgment to the Executive on all claims and the Court of Appeals affirmed that judgment, except that it reversed summary judgment on the conspiracy and on one of the trade secret claims.
Trade Secrets Claim. The Company’s trade secrets consisted of the coffee blend formulas the Executive developed when he owned the Company. “The formulas consist of both the origin of the beans (i.e. Africa, Columbia, Brazil) and percentage used of each type of bean.” Although the Executive’s new company created a sales cheat sheet to indicate which of its blends most closely approximated the Company’s coffee blends, a comparison of the formulas showed that the Executive’s coffee blends used different beans and percentages than the Company’s blends – with one exception. In that case, the Executive admitted that the formulas were identical, although he used a different roasting method which changed the taste. In addition, the Executive claimed that the formula for that blend actually belonged – in whole or in part – to the client who helped develop the blend and was its exclusive buyer. The client supported this contention. However, because the Company pointed out that the client was not even aware of the blend’s formula and had asked for a copy of the formula only a few months before the Executive opened his new coffee business, there was a disputed issue of material fact as to whether the Executive misappropriated this particular trade secret formula.
The courts rejected the remaining trade secret claims involving the confidential client list because the Executive showed that he created his new client list (of names and telephone numbers) from researching the yellow pages, the internet and client referrals and making cold calls, etc. There was no evidence that the Executive’s new client list overlapped identically with the Company’s client list or contained other information unique to the Company’s clients (such as buying habits, prices, etc.).
Conspiracy. Because the court of appeals resurrected this trade secret claim, it felt compelled to resurrect the civil conspiracy claim based on the alleged misappropriation of trade secret. “The elements of civil conspiracy are: (1) a malicious combination of two or more persons, (2) resulting in injury to person or property, and (3) existence of an unlawful act independent of the conspiracy.” In that the Executive is alleged to have conspired with his new employees to misappropriate the single coffee blend, that claim would be sent to a jury to decide its merits.
Inevitable Disclosure. The Company argued that the doctrine of inevitable disclosure should bar the Executive from hiring its former employees since those employees possessed trade secret information and could use it to compete against the Company. The courts indicated that this doctrine is limited to when “a threat of harm warranting injunctive relief exists when an employee with specialized knowledge commences employment with a competitor.” Because those employees were apparently not subject to a non-compete agreement and the Executive’s non-compete agreement had expired, the courts held that the doctrine was inapplicable to this situation.
Unfair Competition. The court rejected the Company’s arguments that the Executive’s preparations in forming his new business constituted a violation of the non-compete and unfair competition because there was no evidence that he was competing, was soliciting customers, was hiring or recruiting employees or advertising before the expiration of the non-compete agreement. The fact that the Executive’s son mentioned his father’s future venture to a Company employee a few months before the business opened was irrelevant.
Similarly, the court rejected the Company’s arguments that the Executive and its former employees tortiously interfered with its contracts with its customers by persuading them to switch suppliers (i.e., to buy from the Executive instead of the Company). Under Ohio law, competitors are permitted to engage in fair competition without actual malice. There was no evidence that any of the customers breached any contracts with the Company when they switched coffee suppliers. Rather, their contracts were terminable at will. Moreover, “informing potential clients that its coffee tastes better and was less expensive, does not constitute ‘actual malice.’"
The courts also rejected for lack of evidence claims that the Executive was providing customers with “cheat sheets” indicating that his coffee was the same as the Company’s or was placing his coffee in grocery bins identified for the Company’s coffee.
Deferred Compensation. The Company argued that it was not required to make the remaining payments of deferred compensation to the Executive because he allegedly breached the non-compete agreement. However, as discussed above, the court rejected all arguments that he breached the non-compete agreement. In any event, the courts found this to be irrelevant because, pursuant to the contractual terms, the deferred compensation obligation was independent of the non-compete obligation. The compensation was due because of past services rendered, not because of the non-compete provision.
Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-5470.pdf.
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.
