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.

Fayette County Appeals Court Reverses Directed Verdict on Tortious Interference with Non-Compete and Sale of Good Will

Last week, the Fayette County Court of Appeals reversed in part a directed verdict entered in favor of a large dental practice on claims that it had tortiously interfered with the non-compete and sale of good will contract of a dentist it hired who had signed the contract with the plaintiff dentist when selling his practice.   Ginn v. StoneCreek Dental Care, 2015-Ohio 1600. The defendant practice hired the defendant dentist with full knowledge of the terms of his non-competition provision and sales agreement, which included the sale of good will, including his trade name and trade marks.  It then targeted advertising using his name and voice in the area of the non-compete territory during the non-compete period and employed him within the non-compete territory.  While the Court affirmed the dismissed of the claims for tortious interference with prospective contractual relations (i.e., patients), it held there was sufficient evidence that the defendant practice had tortiously interfered with both the five-year, 30 mile non-compete provision and sale of good will from the defendant dentist.  It also found that the plaintiff had sufficient evidence of damages even though he could not identify a single patient that left his practice for the defendant practice.

According to the Court’s opinion, the plaintiff dentist purchased the practice of the defendant dentist and agreed to employ him one day each week.  The purchase agreement included a sales price, a five-year non-compete with a 30-mile territory and a provision about transferring goodwill, including his trade name and trade mark (which was the name of the defendant dentist).  The defendant dentist resigned after approximately six months and, shortly thereafter, went to work for the defendant dental practice, which was located within the non-compete area. He had provided the defendant practice with a copy of his sales agreement, including the provisions governing non-competition and good will.   About six months later, the defendant practice began radio advertisements with the defendant dentist’s name and voice to recruit patients to its practice.  About a year later, the plaintiff dentist filed a lawsuit against the defendant dentist for breach of contract and against the defendant practice for tortious interference with contract and prospective contractual relations.  The defendant dentist left the defendant practice about ten months later.  The case proceeded to trial and at the conclusion of the plaintiff’s evidence, the court entered a directed verdict for the defendant practice on the grounds that it lacked sufficient intent to interfere with the contract.  The plaintiff appealed.

The Court affirmed dismissal of the tortious interference with business relations claim because the plaintiff remarkably could not identify a single patient that left him for the defendant practice. He testified that his “staff would have handled any transfer of patients and that he does not keep a record of where patients transfer.”  (Maybe he did not want to offend them by identifying them as witnesses).

The defendant practice claimed that it only negligently violated the non-compete and goodwill provisions and that its “mere knowledge” of the defendant dentist’s contract was not enough to show intent.  While the court agreed that a party’s mere knowledge of the fact of a contract is not sufficient to show intent, knowledge of the terms of that contract is a horse of a different color.   Because the defendant practice had a copy of the contract and knowledge of its terms, it could not claim to have “mere knowledge” of the existence of a contractual relationship.

As for negligence, the defendant practice claimed that it believed that it was outside the 30-mile non-compete territory because it calculated the distance using driving miles.  However, the legal standard is straight line miles.  Therefore, the jury was entitled to weigh the evidence to determine if it believed the defendant practice acted improperly, especially considering its other actions in this case (such as advertising within the non-compete territory).

As for interference with the good will provision of the sales contract, the Court agreed that broadcasting commercials in the non-compete territory with the defendant dentist’s name and voice while it had knowledge that the defendant dentist had assigned his commercial rights in his name to the plaintiff dentist was sufficient evidence to prove an intention by the defendant practice to interfere with the good will provisions of the sale contract.

The Court partially rejected the defendant’s claim of competitor’s privilege because it only applies when the contracts at issue are terminable at will.  In this case, the non-compete had a five-year duration.  While the good will provision did not have a specific duration, a “reasonable time” restriction is imposed by law.  However, what constitutes a “reasonable time” is a question of fact: 

In the sale of a business, even when the sale carries with it goodwill and the name of a business, the seller may reengage in business only after reasonable time has passed that allows the buyer to establish the customers of the purchased business as his own. . . Whether sufficient time has passed in order for the buyer to establish the customers of the purchased business as his own is a question of fact. Id. Three years has been held a sufficient time.

                               . . .

In regard to the goodwill provision, there is a question of fact as to whether Stonecreek Dental employed wrongful means in competing with [plaintiff dentist] by broadcasting advertisements within the geographic proximity of [plaintiff dentist’s] office using [defendant dentist’s] name and voice approximately one year after the sale of the practice. Because no timeframe applied specifically to the sale of the goodwill of the business, including all right, title, and interest in the name R. Douglas Martin, DDS, it is a question for a jury to determine whether one year was a reasonable time to have passed to allow [the plaintiff] to establish [defendant dentist’s] patients as his own before Stonecreek Dental broadcast such radio advertisements. 

The Court also found that the plaintiff had produced sufficient evidence to show the proximate cause of and amount of his lost profit, even though he could not specifically identify a single patient who left him for the defendant practice.   A jury is permitted to infer that patients left because of the advertising targeted within a non-compete territory.  Further, the damages are calculated based on the number of patients lost by the plaintiff, not by the number of patients gained by the defendant. Mathematical certainty is not required.   In this case, the plaintiff produced evidence about the historical growth of his practice and anticipated growth from purchasing the practice of the defendant dentist, compared to the size of his practice after the tortious activity began. 

When considering Dr. Ginn's substantial decline in revenue soon after Dr. Martin left, in conjunction with the timing of the radio-broadcast advertisements utilizing Dr. Martin's name and voice, it can reasonably be inferred that Stonecreek Dental's interference with the contract was the proximate cause of Dr. Ginn's loss of profits. As such, there is some evidence as to whether Stonecreek Dental's actions proximately caused the decline in Dr. Ginn's revenue, and whether Dr. Martin leaving the practice and working and advertising for Stonecreek Dental proximately caused damages to Dr. Ginn is a question for 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.

Sixth Circuit: Tortious Interference Claim Based on Termination of ERISA Plan Is Not Completely Pre-Empted

This morning, the Sixth Circuit Court of Appeals reversed a defense judgment on a motion to dismiss the tortious interference with contract claim brought by executives covered by a terminated ERISA plan and remanded the case back to state court.  Gardner v. Heartland Industrial Partners, LP, No. 11-2327 (6^th Cir. 2013).  The supplemental executive retirement plan allegedly had been terminated in order to expedite the sale of the interest of a controlling shareholder to another entity.  The case had been removed to federal court on the grounds that the claim was completely pre-empted under §1132(a) of ERISA.  The Sixth Circuit, however, found the claim to be completely independent of the terms of the ERISA plan, and therefore, not covered under §1132’s complete pre-emption clause.  Therefore, not only should the claim not have been dismissed, but it should not have been removed to federal court in the first place.

According to the Complaint’s well-plead allegations, the plaintiff executives were covered by a Supplemental Executive Retirement Plan (SERP), which contained a change of control provision.  The individual defendants were Board members and/or executives of the employer and also owned an investment fund, which was a shareholder of the employer corporation and was also a defendant.  The investment fund agreed to sell its shares in the employer to another investment fund, which triggered the SERP’s Change of Control provision and created a $13M liability to Plaintiffs.  When the purchasing company found out about the $13M liability, it threatened to back out of the deal.   The individual defendants then convinced the employer’s Board to terminate the SERP – without notifying the Plaintiffs – and consummated the sale the following month. At least one of the individual defendants made $10M from the sale.   Plaintiffs were notified of the SERP termination the following month and then brought suit for tortious interference with contract.

Defendants asserted that Plaintiffs’ claims were completely pre-empted under §1132(a)(1)(B) of ERISA, removed the case to federal court and moved to dismiss.  The District Court granted the Motion and this appeal followed.  The Sixth Circuit concluded that the tortious interference claim was not completely pre-empted because the merit of the claim was independent of the terms of the SERP.

The issue here is whether Plaintiffs’ state-law “tortious interference with contractual relations” claim is within the scope of § 1132(a)(1)(B) [the complete pre-emption provision] for purposes of this rule. A claim is within the scope of § 1132(a)(1)(B) for that purpose if two requirements are met: (1) the plaintiff complains about the denial of benefits to which he is entitled “only because of the terms of an ERISA-regulated employee benefit plan”; and (2) the plaintiff does not allege the violation of any “legal duty (state or federal) independent of ERISA or the plan terms[.]” Id. at 210.

Plaintiffs’ tortious interference claim was independent from the SERP because the state-law duty was not dependent upon the terms of the SERP and the damages would be paid, if at all, by Defendants and not by the SERP or the employer. 

Defendants’ duty not to interfere with Plaintiffs’ SERP agreement with Metaldyne arises under Michigan tort law, not the terms of the SERP itself. And more to the point—unlike the state-law duties in Arditi and Davila, respectively—Defendants’ duty is not derived from, or conditioned upon, the terms of the SERP.  Nobody needs to interpret the plan to determine whether that duty exists. Thus, Plaintiffs’ claim is based upon a duty that is “independent of ERISA [and] the plan terms[.]” Davila, 542 U.S. at 210.

The Court rejected the defense argument that a tortious interference claim required proof of a breach, which in turn, required an interpretation of the terms of the SERP:

But the issue is immaterial here, because under Michigan law one party’s complete repudiation of a contract is enough to establish breach.  . . .  And Plaintiffs have alleged facts amounting to repudiation here. See Complaint ¶ 41 (“on December 18, 2006, without stating a reason, or giving plaintiffs any opportunity to be heard, [the Metaldyne Board] declared the Amended SERP invalid”).

A determination of Defendants’ liability therefore does not require any interpretation of the SERP’s terms. It is true, of course, that those terms would likely be relevant in measuring the amount of Plaintiffs’ damages. As shown above, however, that is beside the point for purposes of Davila’s second prong. Moreover, in this case, as in Stevenson, any damages “would be payable from [Defendants’] assets, not from the” plan itself. 609 F.3d at 61. Finally, Heartland’s remaining arguments pertain less to preemption under § 1132(a)(1)(B) than they do to whether Plaintiffs’ claims are [expressly] preempted under § 1144(a)—which is an issue upon which we take no position here.

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: It Takes More Than Sour Grapes To Prove Tortious Interference and Fiduciary Breach

Late last month, the Cuyahoga County Court of Appeals rejected the claims of a disappointed parts distributor against a former executive and his new employer (a used parts distributor). N. Coast Engines, Inc. v. Hercules Engine Co., 2008-Ohio-793 (2/28/08). In that case, the plaintiff company (the parts distributor) had an exclusive distribution agreement with a manufacturer. The plaintiff-company had promoted the defendant executive to president of the company because of his years of experience selling that manufacturer’s parts and because he had been an excellent employee for five years. The executive was employed at will for $50,000/year and, importantly, did not have any non-competition, confidentiality or non-solicitation agreements with the plaintiff company. The defendant-company was a used parts distributor, who hired the defendant executive (at the same salary, but subject to a non-compete agreement, and a three- year employment agreement with health insurance benefits) on January 10, 2005 and then shortly thereafter – on January 25, 2005 -- won the exclusive right to resell the manufacturer’s new parts. The plaintiff company ended up without a talented president and without its exclusive deal with the manufacturer.

The plaintiff company had considered selling itself to its former president during the prior year. However, when the defendant company learned of that possibility, it expressed its interest in buying the plaintiff instead. When the plaintiff presented the defendant with a confidentiality agreement before permitting due diligence, the defendant company realized that it did not want the business that much and withdrew its interest. Learning that the plaintiff company was for sale, the defendant executive then began exploring other employment opportunities, including going to work for defendant-company. He gave his notice of resignation to the plaintiff-company on January 17 and continued working for the plaintiff through January 28. The last few days were spent helping transfer its inventory to his new employer, which had won the exclusive distribution agreement from the manufacturer on January 25 when the manufacturer learned that it had hired defendant executive.

The Court rejected the breach of fiduciary duty claim against the executive because there was no evidence that the executive “sustained any financial gain, any kickback, or any promotion for joining: the defendant-company or showing that he “intentionally changed employment in order to divest the” plaintiff employer of its exclusive agreement with the manufacturer. As an at-will employee, he was free to resign at any time. In the absence of a restrictive covenant, he was also free to begin working for a competitor following his employment and to continue serving former business contacts also served by his new employer. There was no evidence of any secret dealing or conflict of interest.

The Court rejected the claim that the defendant-employer tortiously interfered with the executive’s fiduciary duty because there was no breach of fiduciary duty. Moreover, there was no tortuous interference with the plaintiff’s exclusive distributorship arrangement with the manufacturer because there was no evidence that the executive had been hired with the intent of inducing the manufacturer to terminate its relationship with the plaintiff company. Rather, the defendant company hired the executive because of his extensive knowledge of the manufacturer’s parts (which the defendant company sold used).

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-793.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.

Defamation and Privilege in the Workplace

Last month, the Ohio Court of Appeals affirmed the dismissal of most of the claims of defamation and tortious interference brought by a discharged supervisor against the employees’ and union officials whose allegations had led to his termination. Gintert v. WCI Steel, Inc., 2007-Ohio-6737 (12/14/07). In that case, the supervisor had been accused over the course of a couple of years of, among other things, sexually harassing two male co-workers, making racial slurs and leaving work early without permission to begin his vacation. He then brought suit against the employees who made the allegations and the union stewards who brought the allegations to the attention of management, which terminated. (The lawsuit against the employer was stayed when the employer filed for bankruptcy).

The Court dismissed all but one of the claims because the challenged statements were reasonably connected with the union grievance procedure and, therefore, were protected by a qualified privilege. “Under the doctrine of qualified privilege, statements made in good faith on a matter of common interest between an employer and an employee, or between two employees, concerning a third employee are protected in an action for defamation. . . . If the requirements for the qualified privilege are established, then the burden falls on the plaintiff to show by clear and convincing evidence that the statements were made with actual malice, i.e., that the statements were made with knowledge or reckless disregard for their truth or falsity.” In addition, Ohio recognizes “that "union officers and employees are immune from personal liability for acts undertaken as union representatives, on behalf of the union."

However, the court found that one of the sexual harassment accusations could have been made with actual malice because the plaintiff supervisor denied categorically to having made any of the alleged sexually harassing statements and this raised a question of fact as to whether the defendant made the accusation with knowledge or reckless disregard for the truth. Nonetheless, the court dismissed the tortious interference claims because of the same privilege and held that the accusations were not outrageous enough to sustain an emotional distress claim.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/newpdf/11/2007/2007-ohio-6737.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.