Supreme Court Enforces Arbitration Clause so Arbitrator Can Rule on Validity of Non-Compete

On Monday, the Supreme Court issued a per curiam decision reversing the Oklahoma Supreme Court in a dispute over arbitration and non-competition clauses in an employment agreement. Nitro-Lift Technologies LLC v. Howard, 568 U.S. __,  No. 11-1377 (U.S. 11-26-12).  In Howard, the employer served a demand for arbitration on former employees who had gone to work for a competitor in violation of the non-competition clause.  Rather than comply, the employees brought a declaratory judgment action in state court seeking to void the agreement on the grounds that the non-competition clause was unenforceable under state law.  While the trial court referred the matter to arbitration in compliance with the Federal Arbitration Act, the employees appealed and the state supreme court ruled the non-competition agreement was a matter of a specific state law – not a general federal law – and was unenforceable under state law. The Supreme Court concluded that the validity of the non-competition clause was for the arbitrator to decide, not a state court, because the parties had a valid arbitration clause in the contract.

The Court repeated its years of jurisprudence that the enforceability of arbitration agreement is governed by the FAA.  Unless the party attacks the validity of the arbitration clause (rather than the validity of the contract itself), the dispute must be resolved by the arbitrator instead of a state or federal court:

For these purposes, an “arbitration provision is severable from the remainder of the contract,” Buckeye, supra, at 445, and its validity is subject to initial court determination; but the validity of the remainder of the contract (if the arbitration provision is valid) is for the arbitrator to decide.

This principle requires that the decision below be vacated. The trial court found that the contract contained a valid arbitration clause, and the Oklahoma Supreme Court did not hold otherwise. It nonetheless assumed the arbitrator’s role by declaring the noncompetition agreements null and void.

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 Supreme Court Reconsiders Its Acordia Non-Compete Ruling and Finds Successor Company Can Enforce Non-Compete Against Predecessor’s Employee’s Without Successorship Language in Agreement

This morning, in an unusual move, the Ohio Supreme Court reversed itself on a high-profile non-competition opinion it issued less than four months ago.  Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-4648.  As previously discussed here, the Court refused in the prior decision to enforce a non-competition clause against the plaintiff’s former employees because, among other things, they signed the agreement with the plaintiff’s predecessor company (which merged into the plaintiff company) and the agreement contained no successorship/assignment language.  While the agreement transferred to the plaintiff company upon the merger by operation of law, the Court found the plaintiff company could only enforce the agreement for the two year non-competition period in the agreement (which began to run upon the merger) and could not enforce it against employees who resigned five years after the merger.  However, upon a request for reconsideration by the plaintiff company (and a few amicus briefs), the Court clarified that the prior and current opinion only applied to non-competition agreements (rather than other corporate contracts) and agreed that it had misread prior court precedent to improperly limit the enforceability of the agreement.  Therefore, the Court held that the successorship/assignment language was unnecessary to enforce the non-competition clause.

The Court admitted that it had erroneously believed that the merged company ceased to exist entirely upon the merger and this erasure started the two-year non-competition period.  It now realizes that the merged company is instead absorbed into the surviving entity.  In particular:

The merged company has the ability to enforce noncompete agreements as if the resulting company had stepped into the shoes of the absorbed company. It follows that omission of any “successors or assigns” language in the employees’ noncompete agreements in this case does not prevent the L.L.C. from enforcing the noncompete agreements.

Based on the foregoing clarification, we note that any language in the lead opinion in Acordia I stating that the L.L.C. was unable to enforce the employees’ noncompete agreements as if it had stepped into the original contracting company’s shoes or that the agreements were required to contain “successors and assigns” language for the L.L.C. to have the power to enforce the agreements was erroneous.

Nonetheless, as mentioned in my prior description of the oral argument in this case, the Court remains sympathetic with the employees’ objection to the enforcement of a non-compete with a giant company (with a large non-competition area) when it only signed a non-compete with a small company (with a much smaller non-competition area of only one county).  The employees argued that their original intent should be considered, while the plaintiff company argued that the same result would have occurred if the original company had simply grown into a larger entity instead of being purchased by one.   The Court’s majority directed the lower courts to consider the employees’ objection to the enlarged scope of the non-compete area.

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 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.

Ohio Court of Appeals Denies Injunction Against Employee Competition

Last month, the Lucas County Court of Appeals affirmed the denial of a preliminary injunction requested by an employer against two former employees who began working for a competitor in violation of their non-compete agreement because the employer could not show any irreparable harm in light of damage to its reputation by the prior termination of a franchise agreement and the fact that it could not identify the loss of any customers because of the former employees. E2 Solutions v. Hoelzer, 2009-Ohio-772.

According to the court’s opinion, the employer had an exclusive franchise agreement with an HVAC equipment manufacturer which accounted for approximately 90% of its business. The manufacturer then terminated the agreement and brought suit in federal court against the employer because: “an audit of company records disclosed what they considered to be a "pervasive pattern of deception to cheat [the manufacturer]" out of "well over $1,000,000" that they claimed had been retained by appellant and were due [the manufacturer].” The manufacturer then opened its own distribution facility and show room. Thereafter, two employees resigned and went to work for a competitor. In doing so, the employees notified two of the employer’s customers and also submitted bids to two of the employer’s customers. The employer brought suit against the two employees and their new employer and sought a preliminary injunction, which was denied.

As noted by the trial court, “The facts demonstrate that proof of any irreparable harm or business loss caused by [the former employees] would be very difficult, particularly in view of the substantial damage to the business by loss of the [manufacturer’s] franchise and damage to its reputation by allegations by [the manufacturer] of fraud. The trial court noted that the allegations of fraud were ‘well known in the business community.’ The trial court concluded: ‘The evidence thus would suggest that, if Plaintiff has suffered a loss of business, [the manufacturer’s] action in canceling the franchise are just as likely, if not more likely, to be the cause of such loss of business.’" In addition, although the employer could show that the employees approached two of its customers, it could not show the loss of any customers as a result of these solicitations. “Under these facts, [the court] conclude[d] that the trial court did not abuse its discretion in denying a preliminary injunction. The trial court reasonably concluded that [the employer] failed to establish by clear and convincing evidence that it would suffer irreparable harm if the injunction did not issue and that [the employer] was likely to succeed on the merits.”

The Court also affirmed the denial of any trade secret claim. First, the employees had never been subject to a confidentiality agreement. In addition, any marketing information which the employees possessed was rendered obsolete by the prior termination of the franchise agreement. Unlike the trade secret product information at issue in Procter & Gamble Co. v. Stoneham (2000), 140 Ohio App.3d 260, this case “concerned company practices in service operations before the termination of the [manufacturer’s] franchise and that [the employer’s] service business has substantially changed because of the [franchise] termination and dispute.” The employee’s “knowledge related to service business and existing building sales when [the employer] was a distributor for [the manufacturer’s] products . . .. Before the franchise termination, as a distributor, [the employer] would make equipment sales on behalf of [the manufacturer] directly to the customer. . . . Now the majority of service work remains work on [the manufacturer’s] equipment. [The employer], however, no longer holds the status of a [manufacturer] distributor to assist in securing sales of service contracts. It purchases parts and equipment for [the manufacturer’s] products used in service just like any contractor in town. The record lacks evidence to indicate that the same marketing strategy or cost structure applied to the service and existing building sales part of the [the employer’s] business after termination of the franchise.”

A plaintiff is required to establish actual irreparable harm or the existence of an actual threat of such injury when the equitable remedy of an injunction is sought. . . . In such a case, proof of irreparable harm must be by clear and convincing evidence. . . . . Such proof is lacking here. This case does not present tangible, highly technical or specific evidence of trade secrets held by either [employee] upon which it could be said that the likelihood of irreparable harm was immediate and concrete as considered by the First District Court of Appeals in Stoneham.

Insomniacs can read the full court opinion at http://www.sconet.state.oh.us/rod/docs/pdf/6/2009/2009-ohio-772.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. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

Franklin County Ohio Court of Appeals: Inevitable Disclosure Doctrine Is No Substitute for a Non-Compete Agreement.

Just before Christmas, the Franklin County Court of Appeals reversed a six-month injunction precluding an employee from working for the competitor of his former employer when he signed a confidentiality agreement, but was never requested and never signed a non-compete agreement. Hydrofarm, Inc. v. Ordendorff, 2008-Ohio-6819. The Court held that it was an abuse of the trial court’s discretion to enter the injunction because the employer failed to show by clear and convincing evidence that the employee’s working for a competitor – 18 months after he had left his prior job -- would necessarily or inevitably result in the disclosure of the trade secrets of his former employer. Accordingly, the Court held that this situation was distinguishable from other cases when an Ohio appellate court has precluded – in the absence of a non-compete agreement -- an employee from working for a competitor because it would inevitably result in the disclosure of trade secret information.

According to the Court’s opinion, the employee worked for the plaintiff employer for approximately 14 years in the area of sales. During his employment, the employee necessarily became aware of trade secrets, as well as confidential and proprietary information that belonged to the plaintiff employer. The parties executed a Separation Agreement on November 30, 2005 “which, among other things, prohibited [the employee] from disclosing confidential information, unless compelled by legal process, but did not require [the employee] to forego employment with any competitors . . . Approximately one and one-half years later, on May 14, 2007, [the employee] was hired by . . . a direct competitor of [the plaintiff employer], for a position that was substantially similar to his” last position with the plaintiff employer.

The plaintiff employer filed suit for compensatory damages and injunctive relief “[a]lleging, among other things, breach of contract; unfair competition; misappropriation of trade secrets, a violation of the Ohio Uniform Trade Secrets Act, R.C. 1333.61, et seq.; disclosure of confidential information without [the plaintiff employer’s] consent, a violation of R.C. 1333.81; breach of a confidential relationship; breach of fiduciary duty; and conversion.” The employee counterclaimed, “[a]lleging breach of contract; tortious interference with a business relationship; tortious interference with a contract; and malicious prosecution.” Over objections from both parties, the common pleas court accepted the magistrate’s recommendation that the employee be enjoined from working for any competitor for six months. Both parties appealed and the employer was initially required to post a $25,000 bond in the event that the employee prevailed on appeal. However, the trial court reconsidered, stayed in the injunction and required the employee to post a $10,000 bond in the event that the employer prevailed on appeal.

As noted by the Court, different courts have evaluated the inevitable disclosure doctrine differently. “The rule against inevitable disclosure "holds that a threat of harm warranting injunctive relief exists when an employee with specialized knowledge commences employment with a competitor." Berardi's Fresh Roast, Inc. v. PMD Ent., Inc., Cuyahoga App. No. 90822, 2008-Ohio-5470, at ¶27. ‘[T]his doctrine is applied when a former employer seeks `injunctive' relief when a former employee begins work with a competitor while the noncompetition clause has not expired.’ Id. (Emphasis added.) Cf. Dexxon Digital Storage, Inc. v. Haenszel, 161 Ohio App.3d 747, 2005-Ohio-3187, discretionary appeal and cross-appeal not allowed, 107 Ohio St.3d 1682, 2005-Ohio-6480 (applying the "inevitable disclosure" doctrine to enjoin a former employee in the absence of a noncompetition agreement).”

The Court found that the inevitable disclosure doctrine may rarely substitute for a non-compete agreement to preclude an employee from working for a competitor only in different circumstances. “Although in Dexxon, the Fifth District Court of Appeals applied the "inevitable disclosure" doctrine to enjoin a former employee in the absence of a noncompetition agreement, Dexxon is factually distinguishable because in Dexxon both entities were engaged in the highly technical business of large-scale electronic data storage. Moreover, Dexxon does not reveal what sort of trade secrets the former employee possessed, or how these former employees afforded the rival entity an irreparable competitive advantage over the plaintiff.”

“In cases in which courts have enforced the "inevitable disclosure" doctrine in absence of a noncompetition agreement, the former employee possessed timely, sensitive strategic and/or technical, or both, information that, if it was proved, posed a serious threat to his former employer's business, or a specific segment thereof. See PepsiCo, Inc. v. Redmond (C.A.7, 1995), 54 F.3d 1262; Barilla Am., Inc. v. Wright (S.D.Iowa, 2002), No. 4-02-CV-90267; Proctor & Gamble Co. v. Stoneham (2000), 140 Ohio App.3d 260. On the record before us, the present case is distinguishable from those cases.”

Ultimately, the Court held that the employer failed to support its burden of proving entitlement to injunctive relief under its legal theory about the inevitable disclosure doctrine. “When resolving a matter involving trade secrets, "[a] court must balance `* * * the conflicting rights of an employer to enjoy the use of secret processes and devices which were developed through his own initiative and investment and the right of employees to earn a livelihood by utilizing their personal skill, knowledge and experience.' . . . Neither this court nor the Supreme Court of Ohio has applied the "inevitable disclosure" doctrine in a case that did not involve an enforceable noncompetition agreement. An employee possessed of his former employer's trade secrets ‘[has] the right to take employment in a competitive business, and to use his knowledge (other than trade secrets) and experience, for the benefit of the new employer[.]’ . . . . Although Ohio passed its version of the Uniform Trade Secrets Act after B.F. Goodrich, see, generally, R.C. 1333.61 et seq., the Act did not so much alter the common law as codify it. Consistent with common law, Ohio's version of the Uniform Trade Secrets Act provides that threatened misappropriation of trade secrets may be enjoined. See R.C. 1333.62. If the General Assembly had intended to permit injunction of competition or employment under the Act, it easily could have so specified. Instead, it left the law substantially intact; that is, employers or employees are free to, and frequently do, enter into noncompetition agreements, while the state has an interest in promoting morality in business affairs and innovation.”

In this case, the Court found that the fact that the employee both possessed knowledge of trade secret and confidential information and held substantially similar jobs with the plaintiff employer and, 18 months later, its competitor was insufficient to justify precluding the employee from working for the competitor in the absence of a non-compete agreement. Rather, the plaintiff employer would be required “to demonstrate by clear and convincing evidence not only that [the employee] possesses [plaintiff employer’s] trade secrets, but, also, that [the employee] will inevitably disclose them to [the direct competitor], or will utilize those trade secrets in his competitive work on behalf of [the direct competitor], and that those trade secrets will enable [the competitor] to achieve a substantial competitive advantage over [the plaintiff employer]. In other words, [the plaintiff employer] must demonstrate that the danger of misappropriation in this case threatens irreparable harm. ‘Actual irreparable harm is usually not presumed, but instead must be proved.’ Levine, supra, paragraph four of the syllabus.”

“Although the Ohio Trade Secrets Act permits injunction of threatened misappropriation of trade secrets, the usual elements for an injunction must be proved by clear and convincing evidence, even where the plaintiff seeks to invoke the "inevitable disclosure" doctrine to enjoin a former employee's employment with a competitor.” In this case, the plaintiff employer’s “executive vice president, testified that the information involved includes [the plaintiff employer’s] price lists and sales goals, but these are created annually, and it is unclear how 2-year-old price lists and sales goal information would produce a competitive advantage for [the competitor]. [He] testified that defendant [employee] possesses production information related to [plaintiff employer’s] "private label" sales, but because defendant [employee] was a salesman and not involved in the actual production of such products, it appears that his knowledge was limited to pricing and marketing efforts. Such information is hardly static. “

The executive “also testified that [the employee] possessed consumer research analysis; that is, the results of customer polling conducted in advance of each trade show, which was used to determine the product selection and display for each particular show. According to [the executive], there are numerous trade shows in North America every year. Thus, it is difficult to imagine, and [the executive] did not explain, how two-year-old customer polling results for shows that have already occurred poses the threat of an unfair competitive advantage. [The executive] also testified that [the employee] possessed information about new product concepts. However, he also testified that it was [the employee] who would suggest new products based on his conversations at trade shows and with customers. This information seems more the product of [the employee’s] own 14 years of sales and marketing experience than technical information posing a threat of misappropriation.”

The executive “further testified that [the employee] possessed information about [the plaintiff employer’s] marketing and advertising strategies. More specifically, this meant sales leads, pricing information, decisions as to which trade shows to attend, and information about the way in which [the plaintiff employer’s] products would be displayed and marketed at each trade show. Again, the pricing, sales leads and trade show selection information is out-of-date, and product displays would have been visible to anyone attending the same trade shows attended by [the plaintiff employer]. Finally, the record contains no evidence that the employee has misappropriated or disclosed any of [the plaintiff employer’s] trade secrets or other confidential business information, or that he engaged in any nefarious activities or attempts to circumvent any of the parties' agreements. In fact, [the executive] testified that he has no reason to believe that [the employee] has shared any confidential information with [the competitor].

Insomniacs may read the full opinion at http://www.sconet.state.oh.us/rod/docs/pdf/10/2008/2008-ohio-6819.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.

Cuyahoga Court of Appeals Limits Unfair Competition and Inevitable Disclosure Claims to Duration of Non-Competition Agreement.

In October, the Cuyahoga Court of Appeals ruled on a dispute between coffee barons which arose out of the division of a coffee business in a divorce (in which the wife’s attorney ended up with the business) after the husband began a new coffee venture (at the urgings of his disinherited children) following the expiration of his non-compete agreement. Berardi's Fresh Roast, Inc. v. PMD Enterprises, Inc., 2008-Ohio-5470 (8th Dist. 10/23/08). The courts agreed with the husband that his preparations to begin his new coffee business did not violate the non-competition agreement and he was entitled to engage in fair competition with his former business by promoting his “better” and “less expensive” coffee. The court also ruled that the inevitable disclosure doctrine did not justify relief for the plaintiff company because the confidentiality obligation did not survive the expiration of the non-compete.

Like most businesses, the Company started in happier days when the Executive and his wife began with a small retail store in Cleveland and the Executive’s talent with coffee blends grew the business to a nationwide scope. Fourteen years later, the Executive sold his share in the Company to his wife in a divorce, agreed to a three-year non-competition agreement (containing a perpetual confidentiality clause) and accepted a deferred compensation arrangement. However, after the wife sold the business to her attorney (thus disinheriting their children), the Executive’s sons asked him to re-enter the coffee business, which the Executive agreed to do following the expiration of his non-compete agreement. In the meantime, he lined up the financing and suppliers for his new business, investigated prices and blends, purchased the necessary equipment and signed an office lease. The day after the non-compete agreement expired, the Executive opened his new coffee business and he hired three former employees (who then worked for the Company). One of the Company’s major grocer clients then began buying its coffee from the Executive based on his reputation, his lower price and the taste of his coffee. The Company then filed suit against the Executive, his new company and its former employees.

“In its complaint, [the Company] alleged tortious interference with business, breach of the noncompetition agreement, theft of trade secrets, deceptive trade practices, civil conspiracy, and destruction or conversion of [the Company’s] personal property. The Executive counterclaimed for failure to pay the remainder of his deferred compensation. The trial court granted summary judgment to the Executive on all claims and the Court of Appeals affirmed that judgment, except that it reversed summary judgment on the conspiracy and on one of the trade secret claims.

Trade Secrets Claim. The Company’s trade secrets consisted of the coffee blend formulas the Executive developed when he owned the Company. “The formulas consist of both the origin of the beans (i.e. Africa, Columbia, Brazil) and percentage used of each type of bean.” Although the Executive’s new company created a sales cheat sheet to indicate which of its blends most closely approximated the Company’s coffee blends, a comparison of the formulas showed that the Executive’s coffee blends used different beans and percentages than the Company’s blends – with one exception. In that case, the Executive admitted that the formulas were identical, although he used a different roasting method which changed the taste. In addition, the Executive claimed that the formula for that blend actually belonged – in whole or in part – to the client who helped develop the blend and was its exclusive buyer. The client supported this contention. However, because the Company pointed out that the client was not even aware of the blend’s formula and had asked for a copy of the formula only a few months before the Executive opened his new coffee business, there was a disputed issue of material fact as to whether the Executive misappropriated this particular trade secret formula.

The courts rejected the remaining trade secret claims involving the confidential client list because the Executive showed that he created his new client list (of names and telephone numbers) from researching the yellow pages, the internet and client referrals and making cold calls, etc. There was no evidence that the Executive’s new client list overlapped identically with the Company’s client list or contained other information unique to the Company’s clients (such as buying habits, prices, etc.).

Conspiracy. Because the court of appeals resurrected this trade secret claim, it felt compelled to resurrect the civil conspiracy claim based on the alleged misappropriation of trade secret. “The elements of civil conspiracy are: (1) a malicious combination of two or more persons, (2) resulting in injury to person or property, and (3) existence of an unlawful act independent of the conspiracy.” In that the Executive is alleged to have conspired with his new employees to misappropriate the single coffee blend, that claim would be sent to a jury to decide its merits.

Inevitable Disclosure. The Company argued that the doctrine of inevitable disclosure should bar the Executive from hiring its former employees since those employees possessed trade secret information and could use it to compete against the Company. The courts indicated that this doctrine is limited to when “a threat of harm warranting injunctive relief exists when an employee with specialized knowledge commences employment with a competitor.” Because those employees were apparently not subject to a non-compete agreement and the Executive’s non-compete agreement had expired, the courts held that the doctrine was inapplicable to this situation.

Unfair Competition. The court rejected the Company’s arguments that the Executive’s preparations in forming his new business constituted a violation of the non-compete and unfair competition because there was no evidence that he was competing, was soliciting customers, was hiring or recruiting employees or advertising before the expiration of the non-compete agreement. The fact that the Executive’s son mentioned his father’s future venture to a Company employee a few months before the business opened was irrelevant.

Similarly, the court rejected the Company’s arguments that the Executive and its former employees tortiously interfered with its contracts with its customers by persuading them to switch suppliers (i.e., to buy from the Executive instead of the Company). Under Ohio law, competitors are permitted to engage in fair competition without actual malice. There was no evidence that any of the customers breached any contracts with the Company when they switched coffee suppliers. Rather, their contracts were terminable at will. Moreover, “informing potential clients that its coffee tastes better and was less expensive, does not constitute ‘actual malice.’"

The courts also rejected for lack of evidence claims that the Executive was providing customers with “cheat sheets” indicating that his coffee was the same as the Company’s or was placing his coffee in grocery bins identified for the Company’s coffee.

Deferred Compensation. The Company argued that it was not required to make the remaining payments of deferred compensation to the Executive because he allegedly breached the non-compete agreement. However, as discussed above, the court rejected all arguments that he breached the non-compete agreement. In any event, the courts found this to be irrelevant because, pursuant to the contractual terms, the deferred compensation obligation was independent of the non-compete obligation. The compensation was due because of past services rendered, not because of the non-compete provision.

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-5470.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Ohio Appeals Court: Employers Should Sometimes Leave Competing Former Employees Well Enough Alone.

In early July, the Ohio Court of Appeals in Stark County not only affirmed the trial court’s refusal to enforce the plaintiff-employer’s non-competition agreement against a competing, former employee, but the court also affirmed a significant damage award of $180,000 against the employer and in favor of the former employee on the employee’s unfair competition claim. United Studios of America v. Laman, No. 2007CA00277, 2008-Ohio-3497 (7/7/08). The basis for the employee’s successful counter-claim was that the employer only brought the non-competition lawsuit to cause the employee to incur legal fees.

In Laman, the employer operated a mobile photography studio which provided portraits at grocery stores and shopping malls, etc. in several states. Since at least 2000, the employer required all employees to sign an employment agreement which contained the following non-competition clause:

“Employee acknowledges that Company will expend considerable time, effort and expense in the training of employee and the methods used by Company; that Employee will acquire confidential and valuable knowledge and information as to Company's accounts, customers and business patrons, as well as confidential and valuable knowledge and information concerning the methods and forms developed and used by Company; and that Employee will acquire such knowledge and experience that upon leaving Company's employment for any reason, his engaging directly or indirectly, either alone or in association with any other person or firm, in the family portrait photography business will cause unfair disclosure of such valuable knowledge and information, irreparable harm and financial loss to Company."

The defendant employee signed such a clause when he was hired and he was later promoted to Vice President of the Company. Nonetheless, he eventually resigned from the plaintiff employer and formed his own photography business in Colorado. He then obtained a contract to provide portraits to customers of Safeway of Colorado. There is no discussion in the court’s opinion whether the plaintiff employer operated in Colorado or whether the employee competed against the employer in other states.

The court explains that the plaintiff employer filed suit against the former employee for breach of his non-competition agreement. The lawsuit apparently only sought monetary damages and did not seek equitable relief. When the employee failed to respond to the complaint, the employer moved for default judgment. However, on the same date, the employee requested and later obtained permission to not only file an answer to the complaint, but to file counter claims against the plaintiff employer for, among other things, unfair competition. The trial court granted summary judgment to the employee on the non-competition claims and on his counterclaims. Following a damages hearing, the court awarded damages to the employee in the amount of $180,260.39, including $116,468 in punitive damages and $58,234 in attorney fees.

The employer argued on appeal that the trial court erred in dismissing its non-competition claim on the grounds that the employer failed to prove that it suffered any damage from the breach of the non-competition clause. After all, according to the employer, the contract itself acknowledged that the employer would suffer harm from any breach of the non-competition provision. The court was unmoved:

“A contractual provision acknowledging harm will occur in the event of a breach, without more, is insufficient to withstand summary judgment. Where, as here, a party makes a claim for money damages, the party must demonstrate actual damages. [The employer] filed the within action alleging claims for breach of contract, breach of fiduciary duty, breach of Ohio Trade Secrets Act and intentional interference with contractual relationships. [The employee] moved the trial court for summary judgment on all of the above claims alleged in the complaint, and for summary judgment as to its counterclaim for unfair competition. [The employee’s] motion for summary judgment raises the issue that [the employer’s] claims must fail because Appellant has no evidence demonstrating damage or injury resulting from [the employee’s] actions. In response, [the employer] merely cites the contract provision stipulating damage to[the employer]. The contract did not include a provision for liquidated damages. While the contract provision stipulating to damages and irreparable harm may well provide grounds for an equitable injunction, we find [the employer’s] claims require proof of actual damages, and [the employer] failed to meet the burden.”

In contrast, the court affirmed the employee’s damage award because the employee “presented admissible evidence establishing [the employer’s] motives in filing the instant action were to cause [the employee] to incur legal fees and costs. Accordingly, the trial court properly granted summary judgment in favor of” the employee on his counterclaim for unfair competition against the plaintiff employer.

Insomniacs can read the court’s decision in full at http://www.sconet.state.oh.us/rod/docs/pdf/5/2008/2008-ohio-3497.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.

Ohio Appeals Court: Employee Handbook is Not a Binding Non-compete Agreement.

Last month, the Lake County Court of Appeals affirmed the dismissal of a fraud lawsuit brought by an employer against an employee after the plaintiff-employer incurred substantial litigation expenses in an earlier case brought by the employee’s former employer. Freedom Steel, Inc. v. Rorabaugh, 2008-Ohio-1330 (3/21/08). The employee salesperson left his long-time employer and was hired by the plaintiff-employer after assuring it that he had never signed a non-competition agreement with his long-time employer. However, he did not inform the plaintiff-employer that he had signed an employee handbook acknowledgment because it was not a non-compete agreement and he did not think that handbook’s non-competition provision was enforceable. The court ultimately ruled that the employee was correct.

When the employee resigned his long-time employment, he did not reveal the identity of his new employer. When the long-time employer asked him to not call on any of their customers, he responded that he did not have a non-compete and would do what he had to do to get and keep a job. In response, the long-time promised that it would sue him if he competed against it.

Not surprisingly, the employee generated sales by means of his prior customer relationships. In “March of 2005, [the employee] was served with a lawsuit filed by [his long-time employer] in Summit County. In the complaint, [the long-time employer] alleged violations of Ohio's Trade Secrets Act, interference with contractual business relations, conversion, and breach of contract. Shortly after being served, [the employee] notified [the plaintiff-employer] of the pending lawsuit [and was] questioned . . . again regarding whether he had signed anything "that would drag us into a lawsuit." [The employee] again denied signing such a document insisting "I will prove it to you, and you're going to apologize to me ***." Based on these assurances, the plaintiff-employer did not fire the employee at that time.

“Eventually, however, [the plaintiff-employer] was served with a subpoena from [the long-time employer] seeking disclosure of . . . . the names of ‘customers, where they are located, their addresses, who they are, what they buy, what you're selling them price wise, everything about the customers, it's an open book in other words.’ [The plaintiff-employer] fought the subpoena by filing a motion for protective order; however, the trial court overruled the motion. The trial court rendered the ruling a final appealable order and appellant subsequently filed an appeal with the . . . Court of Appeals. Before the appeal was heard,” the employee settled the lawsuit with his long-time employer.

On April 4, 2006, after the dismissal, [the plaintiff-employer] filed suit against [the employee] in the Lake County Court of Common Pleas alleging fraud. [The plaintiff-employer] asserted [the employee] defrauded [the plaintiff-employer] by concealing relevant information regarding his past employment which caused it to expend over $18,000.00 in attorney's fees to defend against the subpoena issued by [the long-time employer] in the Summit County case. . . . In February of 2007, the matter proceeded to jury trial. After deliberating, the jury returned a verdict” in favor of the employee.

During the trial, the trial court had instructed the jury that as a matter of law the employee handbook signed by the employee was not a binding non-compete or trade secrets agreement. Therefore, the employee had truthfully denied ever signing a non-compete agreement. On appeal, the Court of Appeals agreed that the employee handbook could NOT constitute a binding contract because the Acknowledgment page signed by the employee contained the following disclaimer:

"NOTHING CONTAINED IN THIS HANDBOOK IS INTENDED AS A CONTRACT AND THE POLICIES, RULES AND BENEFITS DESCRIBED IN IT ARE SUBJECT TO CHANGE AT THE SOLE DISCRETION OF FAMOUS ENTERPRISES WITHOUT NOTICE AT ANY TIME."

“Although the document indicates, by signing the receipt, [the employee] agreed to be bound by the statements contained within it, the document does not mention and thus does not bind [the employee] (or any acknowledging employee) to a non-compete clause. Moreover, although the document indicates that, by signing the document, [the employee] would not disseminate or use confidential information "CRITICAL TO THE SUCCESS OF FAMOUS ENTERPRISES" (emphasis sic), it does not use the term nor set forth any general trade secrets any current or past employee must not publish. The document merely states that confidential information, e.g., customer lists, pricing policies or other sensitive information, shall not be disseminated or used "OUTSIDE OF COMPANY PREMISES." As this statement appears in an employee handbook and, moreover, is vague as to what it specifically relates, it is reasonable to conclude that it simply reflects a policy requiring current and past employees not to disclose the information it stipulates as confidential.”

Not discussed by the Court is the fact that the plaintiff-employer likely would have been subpoenaed regardless of the arguable existence of a non-compete agreement because the trade secrets claim does not require the existence of an underlying breach of contract. However, the court of appeals incorrectly noted in a footnote that the use of the customer information from memory (as opposed to taking a list) was not actionable under Ohio's Trade Secret Act. (This issue was previously the subject of an earlier Ohio Supreme Court opinion on February 6, 2008 in Al Minor & Assoc., Inc. v. Martin, 2008-Ohio-292).

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/11/2008/2008-ohio-1330.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.

When Non-Disclosure Agreements Can Hinder Employees From Going to Work for a Customer.

In late January, the Cuyahoga County Court of Appeals upheld a preliminary injunction against the plaintiff-employer’s former employee from using knowledge he gained from the plaintiff-employer when – instead of forming his own business or going to work for a competitor -- he went to work for a customer of the plaintiff-employer (which “coincidentally” stopped using the services of the plaintiff-employer). KLN Logistics Corp. v. Norton, 2008-Ohio-212. Rather than require the employee to sign a non-compete agreement when he was hired, the employer instead required a Non-Disclosure and Non-Circumvention Agreement. In that Agreement, the employee agreed to safeguard proprietary information – including trade secrets, methodologies, personal and business contacts or business plans – and to not in any way whatsoever circumvent the employer or to use the proprietary information for personal gain or otherwise for three years following his employment without prior written permission from the employer.

The plaintiff-employer introduced the employee to several of its customers, including Customer H. The employer began negotiating an expansion of their business relationship, and towards that end, the employer went to great expense to lease warehouse space and engage in other preparatory activities in anticipation of an expansion of the relationship with Customer H. Unknown to the employer, the employee began using the employer’s resources for about a month to conduct his own research about how he could meet the needs of Customer H less expensively and was telling other customers that he could ship their freight less expensively than the employer. Customer H then terminated its relationship with the employer and hired the employee with a salary and profit-sharing bonus. Within a few weeks, the employer sought a temporary restraining order and preliminary injunction, which the trail court granted in December 2006 along with finding the employee in contempt of the TRO for continuing to work for Customer H. In particular, the trial court had enjoined the employee from using the proprietary information – including business contacts – and from having other communications with Customer H, “including without limitation by serving as an employee . . . or otherwise consulting with, any competing individual or group, and/or by soliciting any business from . . customer of [employer] (including without limitation, [Customer H] by using the proprietary information . . ..). . . “

On appeal, the court noted that both the employer and employee admitted that the Agreement was not a non-compete agreement and did not prevent the employee from becoming an employee of Customer H. Rather, the Agreement only prevented the employee from using the employer’s proprietary information, which included the names of business contacts, including Customer H, and the names of other “numerous vendors, suppliers, and customers in the freight forwarding industry, . . . and . . . the specialized services [the employer] provided. [The employer] explained that [the employee] was given access to [the employer’s] confidential information including customer lists, rates, profit margins and other business information” as well as the rates of insuring freight shipments.

The court rejected the employee’s argument that the Agreement only prevented him from disclosing the proprietary information to the employer’s competitors. “Circumvent means “to avoid or get around by artful maneuvering.” [The employer] presented evidence at the hearing to show that [the employee], while employed by [the employer] and in a fiduciary relationship, spent considerable time researching how to go into business with [Customer H]. As a result of his actions, [the employee] shares in [Customer H’s] business profits while [the employer] no longer has [Customer H’s] shipping or warehousing business.” Therefore, the trial court had not abused its discretion in enjoining the employee from using the employer’s proprietary business contact information and from using the proprietary information to perform competitive services for the employer’s customer at the employer’s expense.

Nonetheless, despite the terms of the Preliminary Injunction and the Agreement, the Court did not believe that the employee had necessarily violated the TRO in contempt of court by merely continuing to work for Customer H. The employee testified that after the TRO was entered, he stopped using shipping companies utilized by the employer, and instead, returned to using shipping companies with Customer H had utilized prior to working with the employer, such as UPS and FedEx. The employer did not identify any other proprietary information which the employee was using in violation of the Agreement. “Without evidence of something more than mere continued employment with [Customer H], which [the employer] has conceded is not precluded [by the Agreement], there is no evidence that appellant violated the terms of the TRO as written.” The Court does not explain why the business contact with Customer H was not sufficiently proprietary to justify enjoining the employee from working there (as found by the trial court), but it appears to be based on the employer’s concession that the Agreement did not preclude the employee from working for Customer H. Had the employer not made such a concession, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the customer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.
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There is no word on whether Customer H ever considered using the employer’s services again after the employee sued Customer H’s employee.

Employers should be aware that recruiting and hiring an employee subject to a Non-Disclosure Agreement could result in the employer being sued for tortuous interference with contract, among other things. In this case, the employee admitted that he had not informed Customer H about the Agreement beforehand because he did not think it applied to his working for a customer. Moreover, had the employer not conceded that the Agreement did not preclude employment with Customer H, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the employer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-212.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.

Franklin County Court of Appeals Reads Geographic Restriction Out of Non-Compete Agreement.

Late last month, the Franklin County Court of Appeals reversed a trial court and enforced a non-competition agreement against a hair stylist who did not solicit, but did continue to serve, customers of her former employer – outside the geographic scope of the non-competition clause. Penzone, Inc. v. Koster, 2008-Ohio-327. The court also extended the term of the non-compete by the amount of time which the stylist had continued to serve customers who sought her out at her new salon.

In that case, the stylist was hired directly from beauty school and worked for Penzone’s for 11 years until her resignation in 2006. When she was hired and when she was subsequently promoted, she signed a non-competition clause which prohibited her for eight months from serving any current or former customers of Penzone’s whom she had personally served during her employment “without regard to where those customers or the Employee's post-employment competition may be situated.” The agreement also contained a nine-mile geographic scope against competing against Penzone’s after her employment.

The stylist set up shop in Pickerington -- outside the nine-mile geographic radius of the non-competition agreement. Although she denied soliciting any former Penzone customers, about 95 former customers sought her out. (She had previously served about 200 customers each year). Approximately six months later, Penzone’s filed suit, alleging a breach of the non-competition agreement and theft of trade secrets. After discovery and a hearing, the trial court denied injunctive relief to Penzone’s and the salon appealed.

The contract term at issue is neither a non-solicitation clause nor a pure non-compete clause. Because the stylist’s new shop was outside the agreement’s nine-mile radius (which the court found to be reasonable), she could continue to work as a hair stylist in competition with Penzone’s as early as the day after her resignation. Non-solicitation clauses are typically not subject to a geographic limitation, but there was no evidence that the stylist had solicited any former Penzone clients. However, even though she did not solicit former Penzone customers, she did serve almost 95 of them -- in violation of the clear terms of the agreement – but outside the nine-mile geographic limitation on competition. According the agreement, there was no geographic limitation of any kind on this restriction to serve former clients, but there was a temporal restriction of only eight months. Apparently confused, the trial court found this restriction to be unreasonable (since she was required to screen her appointments as they arrived) and/or treated it as a non-solicitation clause which she had not violated.

The Court of Appeals seemed to be oblivious to the real issue in the case. While, on one hand, it paid lip service to the fact that the nine-mile restriction on competition was reasonable on its face, on the other hand, it provided absolutely no analysis as to why it was reasonable to prohibit the stylist from serving customers outside that nine-mile radius. For instance, the court noted that the “agreement allows Penzone a time period and a distance restriction to allow Penzone to retain clients as loyal Penzone customers.” (emphasis added).

What’s troublesome about the court’s decision is that the clause at issue is more akin to a non-compete clause than a non-solicitation clause because its violation does not depend on the employee misusing the employer’s customer information against its financial interest. Rather, the employee can violate the agreement by passively serving whatever customer comes through her door. “[W]hen faced with a covenant not to compete that imposes restraints that exceed what is necessary to protect the employer's legitimate business interests, the courts are empowered to modify the terms to create a reasonable covenant between the parties.” Nonetheless, there was no finding by the Court of Appeals that it was reasonable to restrict the hairstylist from serving customers beyond the nine-mile radius of the non-compete clause. There was not even a discussion by the court of its intent to enforce the agreement as written despite any reasonableness requirement.

Rather, the Court focused on a lack of harm to the public because the agreement did not materially affect the availability of hairstylists in the area. Moreover, the court found the potential harm to the stylist was minimal in light of the short eight-month restriction. Finally, the court found that Penzone’s invested significant sums in developing and promoting relationships between its stylists and its customers. While it could not be quantified how long any of the lost customers would have remained with Penzone’s or how many services they would have purchased from Penzone’s if they had not followed the stylist to Pickerington, the court was satisfied that Penzone’s had shown irreparable harm.

So, your happiness with this decision will depend on whether you are an employer which is considering enforcement of a non-compete clause against a former employee with a loyal customer base or whether you are an employer which is considering whether it can accept new, unsolicited customers from a competitor after hiring a new employee from that same competitor. Employers who hire employees subject to such a non-compete clause will need to take extraordinary steps for the duration of the non-competition period to ensure that unsolicited customers were never served by the new employee during his or her prior employment.

Insomniacs may read the decision in full at: http://www.sconet.state.oh.us/rod/docs/pdf/10/2008/2008-ohio-327.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.

Sixth Circuit: Another Employer Victory in Limiting Retaliation Claims.

Employers often feel powerless to defend themselves against employees who grouse about the employer to anyone who will listen, particularly after the employee files a lawsuit alleging illegal employment discrimination. However, today, a unanimous Sixth Circuit reminded employers that not all complaints made by an employee are protected by the federal employment laws. Fox v. Eagle Distributing Co., No. 07-5203 (6th Cir. 12/14/07).

In Fox, the plaintiff filed an age discrimination lawsuit against the employer and then bragged to a customer that upper management had been “out to get him” and that he had filed a $10M lawsuit that “would get their attention.” The customer reported the plaintiff’s statement back to his immediate supervisor and, after a more thorough investigation, the plaintiff was eventually fired. Not surprisingly, the plaintiff then alleged that his termination was illegal retaliation for engaging in protected conduct by protesting the employer’s unlawful treatment of him in his conversation with the customer. However, the Sixth Circuit agreed with the trial judge that the plaintiff’s misconduct in complaining to a customer about his employer was not protected by federal employment laws.

The court found that the plaintiff’s “statements to [the customer] are not protected because they did not amount to opposition to an unlawful employment practice by [the defendant employer]. In order to receive protection under the ADEA, a plaintiff’s expression of opposition must concern a violation of the ADEA.” The plaintiff’s complaints to the customer were too vague to constitute opposition to an unlawful employment practice. In fact, there was no evidence that the plaintiff had ever referred to age discrimination implicitly or explicitly. A “vague charge of discrimination in an internal letter or memorandum is insufficient to constitute opposition to an unlawful employment practice. An employee may not invoke the protections of the Act by making a vague charge of discrimination. Otherwise, every adverse employment decision by an employer would be subject to challenge under either state or federal civil rights legislation simply by an employee inserting a charge of discrimination.” While the plaintiff had referred to a “$10M lawsuit,” he never mentioned that the basis of his lawsuit was age discrimination. The plaintiff’s “vague charge that [the employer’s] management was ‘out to get him’ is insufficient to constitute opposition to an unlawful employment practice and does not merit ADEA protection.”

Insomniacs can read the full decision at http://caselaw.lp.findlaw.com/data2/circs/6th/075203p.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. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.