Employee Breached Implied Duty of Confidentiality When Using Customer List

Last week, the Franklin County Court of Appeals affirmed in part and reversed in part an $81k verdict against a former employee and his new business for misappropriating a client list – which his employer had earlier sold to the plaintiff -- to start his marketing campaign.  MNM & MAK Ents., L.L.C. v. HIIT FIT Club, L.L.C., 2019-Ohio-4017.  The Court found that the employee’s misappropriation of the password protected client information violated Ohio’s Trade Secret Act and that the taking was unlawful based solely on every Ohio employee’s implied fiduciary duty of loyalty.  Nonetheless, the Court remanded for a recalculation of damages because the award was improperly based on gross revenue and mistaken assumptions did not account for expenses for declining growth in new clients.


According to the Court’s opinion, the individual defendant was initially hired as an independent contractor subject to an agreement with a confidentiality clause protecting the employer’s proprietary information, as well an arbitration clause.  He was later hired as an employee, but had not employment agreement.  He was given access to all client contact information, which he eventually downloaded to help start his own competing business in August 2017 a year after the employer closed its New Albany facility.  He was unaware that the employer had sold in October 2016 the customer list to another entity, which clearly objected when those clients signed up with the defendant’s new competing business.   The employer and the buyer asserted claims for misappropriation against the former employee and his new company.  After a bench trial, the court awarded $81,777 in damages.  This appeal followed.


The Court found that the independent contractor agreement was relevant for the purpose of showing that the defendant employee knew that the customer information was confidential, but did not otherwise govern the dispute. “There is no public record of the list, and [the employer] never used the list in a public way or provided the list to any mailing company.”   


The Court rejected the employee’s argument that his downloading of the information was not unlawful misappropriation because he had lawful access to the information by his employer giving him the passwords and did not subject him to a confidentiality agreement. “[E]xpress consent to access trade secret information in the course of employment does not also confer express or implied consent to use the information for non-work, personal purposes.”  Employers are not required to enter into express confidentiality agreements with their employees to protect their trade secrets from misuse:

Employees owe a duty of good faith and loyalty regardless of whether they signed an employment agreement with their employer.   . . . The presence of an explicit, binding confidentiality or employment agreement is not required to find misappropriation of a trade secret.

Victorious plaintiffs are entitled to recover damages for the defendant’s unjust enrichment from the misappropriation. “Regardless of whether the damages calculation is based on a plaintiff's loss or a defendant's gain, the damages figure " 'cannot be based upon a gross revenue amount.'  . . . . Rather, "Ohio law 'requires that evidence of lost profits be based upon an analysis of lost 'net' profits after the deduction of all expenses impacting on the profitability of the business in question.'"  Yet, in this case, the Court found the trial court abused its discretion in awarding damages based the figure on defendants’ gross revenue and speculation tying it to the misappropriation:

Here, appellees requested damages in the amount of $81,776.77 based on their calculation of the membership fees and other revenue HIIT Fit allegedly received from individuals who were previously Knockout members — i.e. appellants' profits, rather than appellees' losses.  Appellees admittedly based their calculation on appellants' gross revenue . . .  The trial court never considered or discussed whether and how to reduce this proposed gross revenue figure by appellants' expenses to try to reach an amount representing appellants' net profits.  The trial court's failure to consider appellants' expenses and net profit was an abuse of discretion.

Further, the plaintiffs admitted that they calculated their damages by extrapolating the defendant’s revenue from its first five months – when it’s biggest month was only its first month – over an entire year even though records showed significant decline in new memberships over that year.   Plaintiff’s also mistakenly attributed non-customer revenue – from merchandise sales, etc. --  to their damages.


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.

Flurry of Restrictive Covenant and Trade Secret Activity This Spring

There has been a number of developments affecting employment agreements, non-compete agreements and trade secrets this Spring.  First, a new federal statute was enacted last month, the Defend Trade Secrets Act of 2016 which, as discussed below, creates federal court jurisdiction over civil trade secret theft lawsuits, authorizes courts to issue ex parte seizure orders in “extraordinary circumstances” and authorizes treble damages and attorneys’ fees  only when the employer amended its confidentiality agreements and/or policies to permit confidential disclosure to government agencies, under seal in litigation, and to attorneys in whistleblower situations, but does not permit court to enjoin individuals from obtaining employment with a competitor.   In one lawsuit, the Ohio Court of Appeals affirmed judgment for an employer who revoked a former employee’s severance pay when he began working for a company and the severance agreement permitted the employer in its “sole discretion” to deem it a “competitor.”  In the second, the employer lost in its attempt to keep temporary employees from continuing to work for a client through a competitor supplier because the court interpreted the contract to only apply if the defendant employees had voluntarily resigned, which they had not.  Finally, in the last decision from earlier this month, the court reversed a shortening of the restrictive period from one year to six months because the hardship on the employee was not undue in light of his considerable financial resources.

 Congressed passed the DTSA in April and it was signed by the President in May.  Federal court may be invoked when a trade secret involving a product or service used in interstate or federal commerce has misappropriated within the prior three years.   In extraordinary circumstances, a court may – without prior notice to the defendant – issue an order for the seizure of property necessary to prevent the dissemination or propagation of the misappropriated trade secret.    The Court may also grant other civil remedies, but may not enjoin an employment relationship or enjoin information that the person simply knows (as opposed to misappropriated trade secrets).  In other words, Congress did not adopt the inevitable disclosure doctrine and only provides a remedy when the misappropriation was through “improper means” or was acquired by someone who knew that the information was “derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret.”  “Improper means” was defined to “include[] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” but “does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not preempt state law or change the burden of providing that particular information is, in fact, a trade secret.

In order to obtain an ex parte seizure order, the plaintiff needs to show that a TRO (i.e., temporary restraining order) would be inadequate because the defendant ‘would evade, avoid, or otherwise not comply with such an order and the plaintiff would suffer immediate and irreparable injury if the property were not seized.  The plaintiff need also show that the harm to the defendant and third parties is outweighed by the plaintiff’s harm, that the defendant has possession of the trade secret and property to be seized, and that it is likely that information is in fact a trade secret which was misappropriated through improper means (or through such a conspiracy).  Finally, the plaintiff needs to show that the application for a seizure order has not been publicized and, if it were, that the defendant (and/or his/her co-conspirators) would move or destroy or make inaccessible the property to be seized.  The property seized is then placed in the custody of the court.  The defendant could have an action for wrongful seizure against the plaintiff.

In order to obtain treble damages or attorney’s fees following the successful prosecution of a trade secret theft action, the employer must have first provided notice of the DTSA’s statutory immunity to defendant through “any contract or agreement with an employee that governs the use of a trade secret or other confidential information”  which is signed or modified after May 11, 2016 or through “a cross-reference to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law.”   “Employees” includes contractors and consultants.  This statutory immunity protects individuals from being held criminally or civilly liable under any federal or state trade secret law if the individual’s otherwise unlawful disclosure was made in confidence to a federal, state or local government official or any attorney solely for the purpose of reporting or investigating a suspected legal violation, or was disclosed in a complaint or other document filed under seal in a lawsuit or, if the individual  files a whistleblower retaliation lawsuit for retaliation against his or her employer, was disclosed to the individual’s own attorney  or used in the court proceeding if the information is filed under seal and only disclosed pursuant to a court order.

As for non-competition agreement cases, the first case involves a non-competition provision inserted in a severance agreement.  Saunier v. Stark Truss Co., Inc., 2016-Ohio-3162.  The non-competition clause was not very strict.  The employee agreed to not work for any competitor for a year, but even if he did, he would only lose his severance pay.  In addition, the Agreement permitted him to work for a competitor in certain non-sensitive positions (i.e., maintenance), but again, if he did so, his severance pay would cease.  The determination of what entity was a “competitor” was left to the “sole discretion” of the employer without any reasonableness standard.   The employee obtained a job shortly thereafter and, wouldn’t you know it, the employer deemed that entity to be a competitor and cut off his severance pay.  The employee sued and lost because the Court found that the Agreement gave the employer the “sole discretion” to deem the entity a competitor.

In the second case, the employer lost in attempting to keep its temporary employees from continuing to work for its client through a competitor.  Drone Consultants, L.L.C. v. Armstrong, 2016-Ohio-3222.  The plaintiff employer provided temporary employees to a client.  Those employees were required by contract to provide two weeks advance notice of resignation so that their replacements could be recruited and trained and then precluded from returning to their temporary assignment with that client through a competitor.   After the client terminated its contract with the plaintiff employer, the employer notified the six defendant employees that their employment was being terminated and they could collect unemployment.  Instead, they were hired by a competitor who placed them right back in their previous assignments with that client and the plaintiff employer sued.  The Court interpreted the contract to only require the employees to provide notice if they voluntarily resigned, which they had not.  Similarly, the restriction against returning to their previous assignments through a competitor also only applied in the event of their voluntarily resignation and, therefore, did not apply in the event of their involuntary termination.    Although the court ultimately did not discuss or apply it, the plaintiff employer’s contract to provide contingent workers to that client provided that it was required to waive any restrictive covenants that would preclude those workers from continuing to work for the client in the event the plaintiff employer’s contract was terminated by the other party without cause (which it had been).

The final case from earlier this month reversed the trial court’s shortening of the non-compete period from one year to six months.   AK Steel Corp. v. Arcelormittal USA, L.L.C., 2016-Ohio-3285.  In that case, a senior executive with knowledge of the plaintiff employer’s strategic plans for the future was subject to a one-year world-wide non-competition agreement and was recruited to the be the COO of a larger competitor.   The trial court reduced the restrictive period to six months on the grounds that it constituted an undue hardship to the defendant employee without a corresponding benefit to the plaintiff employer.  The appeals court found the restrictive period to be reasonable in light of his confidential knowledge of strategy, business plans, manufacturing processes for current and next generation products, future plant locations, pricing and awarding of contracts, etc.

To be sure, there is no allegation that Howell has in any way attempted to steal confidential or trademarked information for the benefit of ArcelorMittal. Furthermore, it is acknowledged among the parties that certain information available to Howell, such as highly complex and detailed manufacturing processes and patented technology, are simply not capable of reproduction from memory. Rather, the pertinent concerns related to confidential information involving company strategy and information that is relied upon at such a fundamental level that makes non-disclosure nearly impossible. Although there is no evidence to suggest any malicious intent on the part of ArcelorMittal, as competing multibillion dollar companies operating worldwide, there is a certain amount of information, in particular strategic decisions, that the companies have a legitimate interest in remaining confidential. The record establishes that AK Steel has a legitimate interest in restricting Howell, the fourth-highest executive within the company, from accepting employment from a competitor for a one-year period.

Finally, the Court rejected the trial court’s concern with hardship on the defendant employee because every employee suffers some hardship from these covenants, but they can only be modified or eliminated when the hardship is undue:

 . . the trial court failed to consider that "sole means of support," as noted by the Raimonde decision is not limited to employment income. The record here supported a finding that Howell was a highly sought after senior executive of a major steel company, and was recruited by an even larger competitor. Although there was testimony that Howell had a family that depended on his income, there was also testimony that Howell had a large, vested retirement plan from AK Steel, and his new employment with ArcelorMittal would include a $900,000 signing bonus. In resolving the issue of "undue hardship," we find the trial court erred by failing to consider the additional resources in determining whether the noncompete provision deprived Howell of his sole means of support.

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

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.

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.