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.
