NLRB Takes Aim at Employee Reimbursement Agreements and Financial Penalties for Non-Compete Agreements

Earlier this month, the NLRB’s General Counsel issued Memorandum 25-01 explaining how she intends to enforce her existing position that non-compete agreements generally violate the NLRA.   She expands upon this policy to also target as “presumptively unlawful” common agreements where employees must repay their employer if they resign before a certain date, such as educational reimbursement, relocation reimbursement and signing bonuses.  Nonetheless, if the employer shows that the agreement was truly voluntary and optional, and does not require repayment if the employee is terminated without cause, it may still be enforced.    She also expands “make whole” remedies by requiring employers to compensate employees upon a simple showing that there was a better paying job elsewhere for which they were qualified – regardless of whether they would have been the best qualified or actually hired.   In short, an unlimited number of employees may be entitled to compensation even if there was only one potential job opening.   Nonetheless, she does not intend to begin enforcement against stay-or-pay provisions for 60 days in order to give employers the opportunity to rescind or modify such provisions that do not satisfy her four-part test below). 

According to the Memorandum, these types of provisions (non-competes and stay-or-pay) chill employee’s rights to seek better paying jobs regardless of whether the employer seeks to enforce them in court.  They may forgo seeking or obtaining a better paying job or accept a lower-paying job outside their field or in a different geographic area. 

The Memorandum recommends that employers be required to compensate employees whose rights were chilled as long as the employee can identify a single job vacancy for which they were qualified which offered better pay and/or benefits than their current job but which they were discouraged from seeking because of the non-compete or stay-or-pay provision.   Worse still, even if the employee cannot identify such a position – because they presumably were not looking for another job because of the non-compete, the NLRB can still order the employer to compensate the employee:

If the individual cannot point to specific comparator job opportunities within the industry because they were not pursuing them as a result of the non-compete, the Region may use other evidence to provide a within-industry earnings estimate.

There is no limit on the number of employees who could seek compensation from a single job opening.   This same compensation system would exist for employees who (i) obtained lower paying jobs outside their industry within the geographic scope of the non-compete clause, or (ii) moved to a job outside the geographic scope of the non-compete clause.

As for stay-or-pay agreements, the GC targets agreements requiring the repayment of tuition, training, relocation expenses or signing bonuses which are tied to a mandatory stay period.   However, she concedes that narrowly tailored agreements which are truly voluntary can be enforced, except which the employee is involuntarily terminated without cause.  She will be seeking the NLRB to find these types of agreements to be presumptively unlawful.  However, the

employer may rebut that presumption by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights, that is, the provision: (1) is voluntarily entered into in exchange for a benefit; (2) has a reasonable and specific repayment amount; (3) has a reasonable “stay” period; and (4) does not require repayment if the employee is terminated without cause. . . .

 . . . employees must be permitted to freely choose whether to do so and may not suffer an undue financial loss or adverse employment consequence if they decline—and must be in exchange for a benefit conferred on the employee.35 Ensuring that employees choose, of their own free will, to enter into such provisions is essential to minimizing any interference with Section 7 rights. If a stay-or-pay arrangement is optional, employees who are worried about retaliation for engaging in protected activity may opt not to enter into such an arrangement, thereby allowing them to exercise their statutory rights as freely as any other employee. In contrast, if employment is conditioned on a stay-or-pay arrangement, employees have no ability to preserve their Section 7 rights in this manner. . . .

Training repayment agreements with a stay-or-pay provision satisfy this proposed criterion so long as the training is optional. In many cases, an employer offers to pay for training or educational opportunities that an employee voluntarily elects to pursue with the understanding that the employee will “pay” costs back through continued employment for a given time period instead of paying for the program out of their own pocket (and repay the employer if the employee does not stay for the requisite period). . . . For example, if an employee needs a certain credential to be eligible for promotion, a stay-or-pay arrangement to finance that undertaking would be permissible. Likewise, subsidies covering the cost of classes or courses necessary to obtain or maintain a mandatory credential for an employee’s current job, such as a degree, license, or certification (“credential”), may be conditioned on a stay-or-pay provision if the classes are selected at the employee’s discretion from any third-party vendor, that is, the employee is not forced to take the classes through the employer. A stay-or-pay is voluntary in such situations because an employee could pay out of pocket in lieu of entering into a stay-or-pay arrangement. Doing so would amount to a justifiable financial burden since employees expect to bear such costs to gain and keep a credential that is portable to other jobs within the industry, and they can shop around based on price. Additionally, where educational degrees are concerned, employees typically have other financing options beyond becoming indebted to their employer and, thus, employees would not be compelled to accept a stay-or-pay to fund their educational pursuits. While not strictly required, it would be advisable to make the voluntary nature of the arrangement explicit in the contract, e.g., by stating that the training or credential is not mandatory or that the employee has the option of obtaining a mandatory credential from a third-party vendor instead of via the employer.

In contrast, a stay-or-pay arrangement that is tied to mandatory training—that is, orientation sessions, on-the-job training or other specific instruction that the employer requires an employee to attend—cannot satisfy this proposed criterion. In practice, employees are typically given no choice as to whether to enter into stay-or-pay agreements in exchange for training their employer mandates. The only way to inject “choice” into such an arrangement is to give employees the option of paying for the mandatory employer-specific, employer-provided or employer-arranged training upfront instead of entering a stay-or-pay—a choice that would be illusory. . . .

With respect to cash payments, such as a relocation stipend or sign-on bonus, in my view a stay-or-pay provision can only be considered fully voluntary if employees are given the option between taking an up-front payment subject to a stay-or-pay or deferring receipt of the same bonus until the end of the same time period. Only in this way can employees who anticipate possibly engaging in protected concerted activity avoid becoming indebted to their employer without a significant financial downside. If the only alternative was to decline the cash payment outright, that “choice” would be illusory because no reasonable employee would do so, and if they did, it would amount to paying their employer in order to safeguard their Section 7 rights by foregoing money that will remain in the employer’s account. . ..

 . . .

A reasonable and specific repayment amount: In order to be lawful, the repayment amount must be reasonable, that is, no more than the cost to the employer of the benefit bestowed, and the debt amount must be specified up front. Where the repayment amount is greater than the cost to the employer, the true purpose of the provision is no longer legitimate recoupment but rather coercive restriction of employee mobility, which, as noted above, is not a legitimate business interest. . . .

“Where the repayment requirement appears to be for the purpose of recouping the cost of bestowed benefits based on the contract language, but the surrounding circumstances undercut that legitimate justification and demonstrate that the real purpose is to force employees to stay against their will, the provision is unlawful without further analysis.”

Finally, the GC recommends that the NLRB amend its notices to alert current and former employees who are or were subject to non-compete agreements that they may be entitled to compensation.  They would have 6 months to file an unfair labor practice charge with the NLRB. 

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 Rejects Enforcement of Non-Compete and Trade Secret Claim Based on Information in Employee Cell Phone

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 (6^th 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.

Franklin County Court of Appeals Enforces Non-Compete Agreement Except When Employee Was Hired by Unrelated Entity Which Served Same Customers

Earlier this month, the Franklin County Court of Appeals affirmed a preliminary injunction and summary judgment against a former department head for breaching his non-compete agreement when he formed his own competing business and performed work for his former employer’s customers.  Capital City Mechanical, Inc. v. Bartoe, 2024-Ohio-4550.   While the court agreed that the employee could perform work for the employer’s customers if he was hired by an unrelated company which also provided services to the same customer, he was barred from performing services for his employer’s customers for two years even without a geographic limitation.  He also could not prevail on a tortious interference claim when the employer was permitted to inform entities that he had a non-compete agreement and when he could not show a firm expectation of being hired for any work.

According to the Court’s opinion, the defendant employee was hired shortly after the employer started business in 2001, became a key employee and was responsible for submitting bids and procuring supplies, etc. Customers would contact him through the employer-provided cell phone he had been issued.   He had no prior experience in this trade, but “had access to confidential information relating to company operations, strategy, logistics, trade secrets, customer lists, pricing, and margin information.” In 2019, in connection with an incentive compensation agreement, he was given an agreement containing confidentiality, non-solicitation and non-compete clauses. Similar agreements were signed several times thereafter.  In 2020, the employer was contacted about submitting a bid for construction work and to inform the general contractor that it would be performing the backflow work.  A few weeks, later, he formed his own competing business and he resigned from the employer a few months later.  He submitted a bid and then was hired by the general contractor the following month to perform work for the same customer of his former employer.  The employer learned a few months later and filed suit.   A TRO was quickly entered and a preliminary injunction was issued about eight months later.  Two years after the lawsuit had been filed the trial court granted the employer summary judgment.  The employer was awarded over $15K in damages.  This appeal followed, but by then, the agreement had expired.

The Court agreed that the employee had breached the non-compete agreement by using his knowledge gained from the employer to submit competing bids and performing work for its customers during the two-year restricted period.   The parties had disputed whether the end-user of the employer’s services could be considered as its customer when its invoices were submitted to and paid by the general contractor.  The courts agreed that end-users could be customers, but that the employee would not have breached the agreement if he had been hired by a different general contractor who had a pre-existing relationship with the same customer.  In other words, he “may work for an unrelated general contractor at an end-user without breaching the non-compete provisions, even if the end-user is a CCM customer. The objective of the non-compete agreement was to prevent unfair competition, but not all competition.”

There was evidence that he had turned down jobs offered directly by his former employer’s customers/end-users, but then would accept for the same end-user if they came through an unrelated general contractor that had never been a customer of his former employer.  No damages were awarded for work which he performed after being hired by a non-customer even if it was for an end-user that was also a customer of his former employer.

The court found the terms of the non-compete to be reasonable with a two-year restricted period and no geographic limitations. “The agreement was able to safeguard [the employer’s] protectable interest and allow [the employee] to earn a living in the plumbing trade.”

The Court also rejected the employee’s tortious interference claim because he could not prove that he had a pre-existing relationship with any non-customer or definite expectation of revenue:

The trial court determined that [the employee] did not identify any business relationships that were interfered with and was not able to identify any revenue that he lost as a result of interference. [One company] was [his former employer’s] customer, and [he] was already precluded from doing business with them pursuant to the non-compete agreement. [A second company] never solicited any bids from [him], and he had no firm expectation of receiving work. Without any evidence that [his former employer] cost [him] business from [the second company], recovery on a tortious interference claim is precluded.

[The employer] was allowed to inform people in the trade of the non-compete clause and that a preliminary injunction against [him] was in place. Summary judgment was proper on the tortious interference claim [in favor of the employer].

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.

Federal Judge Rules FTC Regulation Banning Non-Compete Agreements "shall not be enforced . . . . on September 4, 2024, or thereafter."

 Yesterday, Judge Ada Brown in the Northern District of Texas struck down the FTC's new regulation banning non-compete agreements, which was set to become final in two weeks on September 4, 2024.  Ryan LLC v. FTC, Case No. 3:24-cv-00986 (N.D. Tx Aug 20, 2024).   While the FTC plans to appeal, employers have some breathing room waiting for next steps.  The Court had previously preliminarily enjoined the rule only against the parties to the litigation.  

The Court's Order states in relevant part as follows:

    The Court sets aside the Non-Compete Rule, 16 C.F.R. § 910.1–.6, and the Rule shall not be enforced or otherwise take effect on September 4, 2024, or thereafter. This is a final and appealable judgment. See Fed. R. Civ. P. 54. All relief not expressly granted is denied.

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.

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.