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.
