Yesterday, the unanimous Sixth Circuit Court of Appeals affirmed a divided decision concerning the enforcement of a non-compete, trade secret and non-solicitation agreement which the employee was required to sign as a condition of being hired. Total Quality Logistics LLC v. EDA Logistics, LLC, No. 23-3713 (6th Cir. 10-2-24). First, it refused to prevent the employee from working in the logistics industry because it agreed that the employer had failed to produce specific evidence of the “special” training it had allegedly provided to support such a broad restriction even though the employee had absolutely no prior logistics experience. Second, while it agreed that the employee could not solicit the employer’s customers, it refused to impose any damages because the employer failed to show what efforts it made to keep those customers after the employee’s resignation or what specific profit it lost. Merely relying on the revenue generated for the employee’s new business was insufficient to justify monetary damages. Third, it refused to find that the employee misappropriated trade secrets based on contacting specific customer contacts based on his personal knowledge from his prior employment or already in his cell phone. “[I]nformation retained in the [employee’s] cell phone could not support a trade-secret claim.” There was no evidence that he had taken or used any confidential master customer list or could not have re-created his customer list from cold calling, etc. Finally, the court refused to enforce the one-sided prevailing party attorney fees provision because it found the provision to be unenforceable in a contract of adhesion.
Readers
may recall that this same employer was able last year to enforce the same types of restrictions
against a former employee even though that employee had been placed on paid leave
by her new employer for one year while waiting out the non-compete. The Clermont County Court of Appeals found
that to undermine the purpose of the contract.
In this case, the employee removed the case to federal court in
Cincinnati. The federal courts observed that while the
employer was frequently successful in litigating its agreement, it was
dissatisfied with the lack of evidence it presented in this particular case.
According to the Court, the employee had been hired with no
prior logistics experience. Prior to starting work, he signed a restrictive
covenant protecting trade secrets and preventing him for one year from working
in the industry or soliciting customers. There was testimony that the employer had
never once modified the agreement at an employee’s request. After
working for over 4 years, he resigned because of the employer’s COVID return-to-work
policies due to his son’s respiratory issues.
He quickly found a job with a
small logistics company, working only with that company’s customers, with the
plan to take over when the owner died.
However, the owner died earlier than expected just 60 days later. He then formed his own logistics company and obtained
business from customers – particularly one customer -- he formerly served while
employed by the employer. Although the
employer had reassigned his accounts to other employees, it noticed that it had
lost some business and investigated whether he was responsible. It
then filed suit against him in state court, which the employee removed to
federal court.
The trial court refused to award monetary damages because
the employer failed to introduce evidence of what business it would have
continued to receive from particular customers and what profit it would have
made from those customers. Although some courts would find it sufficient to
rely on its diminished revenue and the employee’s admission of what profit he
made from those customers, the Court indicated that it was not enough in this
case where in other cases the employers had utilized experts on the issue of
retainage and turnover, etc. :
[The employer] failed to produce
evidence that [his] unlawful competition (rather than, say, his mere departure
and [its] failure to meaningfully pursue its customers) caused [it] lost
profits. [It] continues to ask for the entire profit that [he] made by
servicing the at-issue customers, $148,821.80. Yet a factfinder could
reasonably conclude that [it] did not demonstrate that, had [he] not serviced
those loads, the work would have flowed to [it]. . . .
. . .
[Its] request for the entirety of [his] total profit, by contrast, does
not even account for the commission that [it] would owe [him] in the
counterfactual in which [he] secured those loads while still employed for [it].
The Court also affirmed the decision to not enforce an
industry-wide non-compete because non-competes can only be enforced to the
extent necessary to protect an employer’s legitimate interests, such as confidential
information, customer good will and the expense of providing valuable training. Employers are required to prove with clear
and convincing evidence the legitimate interests which require protection by
the non-compete’s scope. In this case,
the courts found that the non-solicitation clause was sufficient to protect the
customer’s good will. Because the
employer failed to produce evidence regarding (1) the content or extent of the
training to the employee, (2) how the training was proprietary or trade secret
or (3) how the employee used that training to hurt it or even the cost of the
training, it could not rely on that training to support a nationwide and industry-wide
non-compete clause.
The courts also rejected the employer’s trade secrets claim
based on its pricing and customer information.
There was no evidence that the employee took a confidential master compilation
of customer names and information.
Rather, he relied on his own memory of the customers he served. Although “it is true that Ohio law treats
customer lists as presumptively entitled to trade-secret protection,” it is
also true that “Ohio limits that protection when the identity of the customers
is “readily ascertainable through ordinary business channels.’” “Though [he]
retained contact information for some customers that he directly serviced, the
district court noted that “telephone numbers for a small number of companies
are ‘readily ascertainable by proper means,’” and “easily discovered as part of
the cold-calling process.’” Moreover, “to
be a protectable trade secret under Ohio law, a customer list “must contain
information not generally known to or readily ascertainable by the public.” Id.
(emphasis added). Ohio courts have applied this principle in declining to
recognize a protectable trade secret in customer-contact information that a
departing employee retained in a cell phone.”
While the court agreed that knowledge of its pricing margins
and ”pricing policies can rise to the level of a protectable trade secret under
Ohio law” and enable a departing
employee to better compete against it, the employer “failed to articulate
precisely what concrete “pricing information” it thinks [he] misappropriated. The
record is unclear whether [it] had any standard route pricing or margin
expectation that [he] could have misused.”
In addition, its employees had wide latitude in setting prices, even
authority to price at a loss to maintain a client relationship.
The Court also affirmed that “the fee-recovery provision was
unilateral, allowing only [the employer] to recover fees” and thus, was “unenforceable
under Ohio law because it resulted from a “contract of adhesion,” in which [the
employee] had little or no bargaining power and no realistic choice as to
terms.” The Court also agreed that “unenforceability
under Ohio law is not limited to instances of duress.”
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.
