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.

Promise of Commissions Was Too Vague and Indefinite to Be Enforced

In November, the Franklin County Court of Appeals affirmed an employer’s summary judgment on an employee’s claim for unpaid commissions on the grounds that the employee’s agreement failed to specify when the commissions were earned, thus making them entirely discretionary.  Dolder v. Auto Boutique Collision, Ltd., 2018-Ohio-4508.  While the agreement specified the percentage range of the commission, it did not indicate when the commission would be earned, leaving them to the employer’s unfettered discretion.  Because the parties never had a meeting of the minds as to what would trigger the payment of the promised commission, the promise to pay a commission was illusory and unenforceable.

According to the Court’s decision, the plaintiff worked approximately 14 months for the defendant employer as the shop manager.  In addition to his salary, his employment agreement provided that he would receive “commission payments  . . . based on 10-25% OF SALARY of $57,000. This commission will be paid monthly on the thirtieth day of the following month.”  Although the plaintiff had been paid all of the salary which he had been promised, he had never been paid any commission as provided in his employment agreement.

The Court rejected the plaintiff’s argument that his agreement required that he be paid this “commission” every month on top of his salary.  The employer argued that the term was too ambiguous and indefinite to be enforced.  Because the agreement failed to define “commission,” the court relied on its commonly understood meaning: “compensation earned by an employee based on a percentage of revenue generated from the employee's services.”  This is contrasted with a salary which is a fixed compensation paid on a regular basis and which is not dependent on the revenue generated.

In view of these definitions, a salary payment is fixed and not tied to any numerical performance variable, whereas a commission payment is based on a defined calculus relating to the employee's performance in generating revenue.  Thus, the parties' use of the term commission here indicates a general intent to somehow link the payment to Dolder's revenue generating performance.  The commission payment provision sets forth how a commission is calculated, at least within a certain range, and when an earned commission is paid.  However, this provision does not define how a commission is earned, such as by meeting a certain revenue benchmark.  Because the contract contains no language addressing how the commission is earned, the commission payments were entirely at the employer's discretion, making the provision illusory. . . .

In sum, the contract's commission payments provision contains no indication the parties reached any agreement in defining the circumstances under which a commission would be due to Dolder.  Therefore, in the absence of a meeting of the minds as to what triggers the earning of a commission, this provision is indefinite and uncertain, rendering the promise illusory.

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.

Franklin County Appeals Court: Structure of Employment Agreement Implied Non-Compete Clause Into Founder’s Retirement Clause.

Last month, the Franklin County Court of Appeals affirmed summary judgment in favor of an east-side dental practice in a declaratory judgment action involving its obligation to make retirement, or deferred compensation, payments under an employment agreement to its founder who retired after a serious illness and then opened up a competing dental practice after his recovery. Drs. Kristal & Forche, D.D.S., Inc. v. Erkis, 2009-Ohio-5671. The dispute centered on the meaning of “retirement,” which was not defined in the agreement. The Court implied the non-competition obligation from the fact that the Professional Services Agreement signed by the defendant dentist contained a resignation clause which permitted him to leave the practice for any reason upon 90 days notice, but, unlike the retirement clause, did not obligate his remaining partners to provide him with deferred income during his retirement. Therefore, the Court concluded that “retirement” meant from the profession, not just the dental practice, or the resignation clause would be rendered superfluous.

According to the Court’s opinion, the defendant dentist formed the practice, which was ultimately joined by two additional dentists. They formed a professional corporation and each signed professional services agreements. The agreements provided that each dentist could resign upon 90 days notice. The agreement also provided that the defendant dentist could retire at any time and at any age and be entitled to over $1.1M in deferred compensation paid out in monthly installments of $40,000. Retirement was not defined in the agreement. The only other clauses where a dentist was entitled under the agreement to deferred compensation was when the dentist died or became disabled, which also involved leaving the profession, rather than just the practice.

In early 2003, the defendant dentist became seriously ill, accepted disability payments under the agreement and retired in May 2003. The practice purchased back his shares and paid him $306,000 in retirement compensation through May 2005. He then made a remarkable recovery and opened his own competing practice in October 2004, which involved soliciting some of his former employees and clients. The practice then filed a declaratory judgment action in August 2005 concerning its obligation to continue making retirement payments to the defendant dentist on the grounds that the defendant dentist had breached his agreement by competing against it and, by soliciting clients and referral sources, had decreased its revenue to the point that it could no longer afford to fund his “retirement.”

The practice argued that “retirement” meant from the profession, not just the practice. As a result, by the defendant-dentist’s competition against them, he breached the agreement by returning to the profession and relieved them of their obligation to make retirement payments to him. Thus, under the practice’s interpretation, the agreement’s retirement clause imposed an implied non-compete obligation upon the defendant dentist. In turn, the dentist argued that “retirement” meant any and all retirements and did not require him to remain unemployment or to leave the profession permanently.

The Court agreed with the practice’s argument because (1) the voluntary and involuntary termination provisions permitted the dentist to leave the practice without requiring the practice to provide deferred compensation and (2) deferred compensation was only required if the dentist left because of death, disability or retirement. Therefore, the Court could infer the parties’ intent from the structure of the agreement to define “retirement” as meaning from the profession, rather than just the practice.

Insomniacs can read the full opinion at http://www.sconet.state.oh.us/rod/docs/pdf/10/2009/2009-ohio-5671.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.