Court Rejects Non-Compete Which Applied Following Employee "Termination" When the Employee Voluntarily Resigned

Earlier this month, the Franklin County Court of Appeals affirmed a judgment for physicians and a medical officer manager who were alleged to have violated post-employment restrictive covenants and misappropriated trade secrets.  Buckeye Wellness Consultants, L.L.C. v. Hall, 2022-Ohio-1602.   The Court agreed that the one-year terms of the employment agreements did not automatically renew when the contracts lacked language indicating automatic renewal and both physicians indicated that they wanted to renegotiate their contracts before they ultimately resigned between six and 16 months following the expiration of their agreements.   The non-solicitation clauses only applied during the term of the agreement and one for one year after termination of the agreements.   The clause had expired before one of the physicians had resigned.   While the court indicated that the clause could not be enforced against the other physician who had resigned only six months after his agreement expired, the Court also pointed out that the employer had failed to identify a single patient who had been inappropriately solicited and refused to find notification of a change of practice to constitute a solicitation.   The Court also agreed that one non-compete was unenforceable because the employee never worked in the restricted territory.  The Court also found that the other non-compete did not apply because the employee voluntarily resigned, his agreement implied a distinction between termination and (voluntary) separation, and the clause only applied “for one year “following termination of the Employee.”   Finally, the Court rejected the trade secret claim because the employer failed to produce any evidence that the defendants had inappropriately accessed the password protected trade secret lists or used them. 

According to the Court’s opinion, the defendants all worked at the same medical office before being hired by the plaintiff employer.  Each physician also practiced elsewhere.   The two defendant physicians entered into one-year employment agreements which contained restrictive covenants prohibiting competition and solicitation of patients.   One non-compete applied “so long as the Employee is employed by the Employer, and for a period of one (1) year following termination of the Employee.”  The other non-compete applied for one year “following termination by the Medical Doctor/Physician.”   Both non-solicitation clause applied only for one year following “after termination of this agreement.”  Interestingly, the agreements did not provide for automatic renewal.   Both physicians attempted to negotiate better terms after the first year and, when unsuccessful, submitted their resignations.  One resigned six months after his agreement expired and one 16 months after his agreement expired.   The office manager never signed an agreement or non-compete.   They ultimately formed a new practice and all patients were informed by the defendants and plaintiff of their move.  The employer then filed suit for breach of contract, tortious interference, theft of trade secrets, conversion, conspiracy, unjust enrichment, etc.  The trial court entered judgment for the defendant employees.

The most significant issue was when the one-year restrictive covenant periods commenced and expired.  As an initial matter, both clauses applied “during the term of the Agreement” and for “so long as the Employee is employed” by the employer.   Both non-solicitation clauses expired one year after termination of the agreements.   The employer argued that the term of the agreements and non-competes continued until termination of employment, but the Court disagreed.  Each clause indicated that “[t]he term of this Agreement shall commence on the Effective Date of this Agreement and shall continue for one (1) year(s) thereafter” and that the parties could revisit the physician’s compensation at the end of each contract year.  The agreements were silent as to the manner or duration of any renewal.  The employer asserted that renewal was implied, but the Court disagreed.   The language indicating that the agreement had a term of one -year was clear and unambiguous, particularly when renewal was never mentioned.   Generic references in other clauses of the agreement to potentially renewable terms was not a substitute for an explicit term discussing how long and when the contract would be renewed.  The reference to “year(s)” did not make the agreement ambiguous because it simply meant that the term “one” could have been made “five” while being negotiated.

The Court then addressed whether the restrictive covenants continued to apply after the agreements expired on their terms. 

The general rule of contracts under such a situation was " '[w]here a contract of employment for a definite time is made and the employee's services are continued after the expiration of the time, without objection, the inference is that the parties have assented to another contract for a term of the same length with the same salary and conditions of service, following the analogy of a similar rule in regard to leases.' . . . . The employee who continues working under the same terms and conditions after the employment agreement has expired becomes a hold-over employee.

However, the presumption that arises from an employee's continued employment is "rebuttable by proof that a new contract for the continued period has been entered into, or by facts and circumstances showing that the parties did not intend to continue upon the terms and conditions of the original contract."

In this case, at the expiration of the employment agreements, both physicians indicated their displeasure with their terms and conditions of employment and attempted to negotiate new agreements.    Among other things, one wanted to become a part-owner and the other wanted to work more days each week and spend more time with each patient and see more investment in EMR, etc.  “The evidence shows that the doctors did not intend to continue working under the terms and conditions of the original employment agreements, so a new one-year contract does not arise by implication of law.”  Accordingly, the terms of their prior written agreements no longer bound them and they became employed at will, entitling each of them to resign prior to completing another year of employment. 

The non-compete language was slightly different for each physician and their employment agreements expired at different times.   With respect to Dr. Santiago, the Court agreed that the non-solicitation covenant – which applied for 12 months after expiration of the employment agreement --  had expired by the time he had resigned 16 months after his employment agreement had expired.   The duration of the non-compete was ultimately irrelevant because he always worked outside the 5-mile restricted radius.   Both covenants applied so long as they were employed and were triggered by their terminations.   Although the Court thought that the language “termination by” the physician was ambiguous when Dr. Santiago had voluntarily resigned and the agreement did not define “termination,” the ambiguity was ultimately irrelevant.    In other words, the non-solicitation clause did not apply because it had expired before he resigned.  The non-compete duration was irrelevant because he had never worked inside the restricted territory.   

Dr. Hall’s situation was more complicated because he resigned only six months after his agreement had expired (before the non-solicitation clause expired) and the duration and territory of his non-compete were different:

During the term of this Agreement, including the renewals hereof, so long as the Employee is employed by the Employer, and for a period of one (1) year following termination of the Employee, Employee shall not . . . . Employee shall further not solicit any patient or employee of Employer for a period of one (1) year after the termination of this agreement.

Unlike Dr. Santiago’s agreement, Dr. Hall’s agreement contained a separate provision governing terminations which apparently did not explicitly apply to this dispute.  Also, unlike Dr. Santiago’s agreement, Dr. Hall’s agreement defined “employment separation” as "’the separation or termination of Employee's employment with the Company, regardless of the time, manner or cause of such separation or termination.’  . . . . ‘13(D) also refers to actions based on an employee's ‘termination or separation.’"  While “separation” was never mentioned in the non-compete clause, the definition of employment separation indicated that termination and separation were different terms with different meanings.  “The employment agreement clearly provided different meanings for the two terms, and they are not interchangeable.”  Because the non-compete only applied after employment if Dr. Hall were terminated, the Court concluded that it did not apply after employment if he voluntarily resigned.  

There was no discussion of the use of the terms in IRC 409A(a)(2)(A)(i) or 26 CFR § 1.409A-1 ("An employee separates from service with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer.")

Oddly, the Court then converged the language of the non-compete clause with the language of the non-solicitation clause in rejecting the employer’s argument that the “termination” mentioned in the non-compete clause meant termination of their relationship, not the employee:  “the plain meaning limits termination to firing of the employee, which did not happen here. Hall was not subject to the covenant not to compete and solicit.”

The Court also rejected the claims that the defendants had misappropriated trade secrets (i.e., a password protected list of patient names and attorney referral sources).   The Court of Appeals found that the employer failed to produce any evidence that the lists were misappropriated, how or when the lists were obtained or how or when they were used.  Indeed, the employer could not identify a single patient who was supposedly misappropriated or solicited.  The Court concluded that it was mere speculation that the employer lost patients and the defendants gained patients based only on a misappropriation of password protected patient and referral source lists.

The Court rejected any argument that patients were improperly solicited when they were informed that the defendant physicians had changed medical practices:

Hall and Santiago, pursuant to their professional obligations, informed their patients that they were moving to a new location. Doctors have an obligation to their patients to ensure continuity of care and prevent a patient from being abandoned. These letters do not rise to the level of solicitation.

It is notable that there are a limited number medical providers who accept new workers' compensation patients, and so it is logical that patients will seek continuing care with a familiar provider, even when the provider moves. In addition, when you consider that Spanish speaking patients only have one or two medical providers who speak fluent Spanish, Santiago is in great demand by both patients and attorneys,  . .

Indeed, it appears that patients followed Dr. Santiago from his prior practice to the employer when he was hired and he was always busy with Spanish-speaking patients.

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

Collecting LTD Can Constitute Employment for Purposes of Qualifying for Unemployment

Last month, the Butler County Court of Appeals reversed the denial of unemployment compensation to a claimant who had not worked in more than 18 months while receiving long-term disability compensation.  Harmon v. ODJFS, 2022-Ohio-1142.  The ODJFS, UCBR and trial court had concluded that the plaintiff had not satisfied the 20-week qualifying work requirement since the employer had not reported wages in at least 18 months.   The Court of Appeals reversed, finding “it was unreasonable to conclude that [she] was not employed during her base period simply because she did not physically provide services during that time” when she was still considered an active employee and received LTD during the entire base period.   The Court did not address whether the claimant was available and able to work.

According to the Court’s opinion, the plaintiff was hired in 2010, was injured in February 2018 and was unable to return to work because of disabling depression.     After receiving LTD for more than 18 months from the employer’s insurance carrier, the employer informed her in August 2019 that she would be removed from “active employment” and terminated under its maximum leave policy unless she was able to return to work in the foreseeable future.    Because the plaintiff was unable to return to work, she was terminated in October 2019, continued to collect LTD until August 2020 and sought unemployment compensation after the LTD compensation ended.   Her claim was denied on the grounds that she had not worked or been paid qualifying wages for at least 20 weeks in the prior 15 months.   The employer had not reported any wages being earned since 2018.  

It is undisputed that Harmon was on Honeywell's long term disability benefit plan throughout her entire base period. Consequently, the dispositive issue in this case is whether Harmon's receipt of disability payments, resulting from an employer-approved medical leave and paid by an insurance company via her employer's policy, constitutes "employment" pursuant to R.C. 4141.01(R).

Employment is generally defined as "service performed by an individual for remuneration under any contract of hire, written or oral, express or implied." R.C. 4141.01(B)(1). Thus, the statute requires both remuneration and service in order to be eligible for unemployment compensation. . . . "'Remuneration' means all compensation for personal services, including commissions and bonuses and the cash value of all compensation in any medium other than cash[.]" R.C. 4141.01(H)(1).

The Court determined that the LTD compensation constituted renumeration for personal services rendered prior to the claimant’s medical leave:

classifying [her] disability income as remuneration is consistent with the broad language of R.C. 4141.01(H)(1), which encompasses "all compensation for personal services" in its definition for remuneration. (Emphasis added.)  . . . Additionally, such a broad interpretation of the definition of remuneration is supported by the Ohio Administrative Code, which defines the term "remuneration" to include "vacation pay or allowance, separation pay, holiday pay, paid absence allowance [and] downtime paid absence allowance[.]" Ohio Adm.Code 4141-9-04(B).  As such, it is evident that the term "remuneration" was intended to encompass private disability payments an employee  receives pursuant to her employer's disability policy.

The Court also concluded that the claimant could be considered to have served while she was still on active employment status even thought she did not personally work a single day while on medical leave:

Ohio law clearly recognizes that an applicant may be entitled to unemployment compensation and can establish "qualifying weeks" during her base period without providing actual service to an employer during that time. Such a proposition is consistent with the statutory language of R.C. Chapter 4141, which suggests an employee's service and remuneration for that service are not required to be contemporaneous to establish a qualifying week or constitute remuneration. See R.C. 4141.01(O)(1) (defining qualifying week to include weeks the individual "earns or is paid remuneration in employment"). . . .

Based upon this language, we find that an employee's past "service" can be used to establish a "qualifying week" for unemployment compensation purposes. This is because R.C. 4141.01(O)(1) clearly indicates a qualifying week may be based upon remuneration that is earned before it is ultimately paid to the employee. As such, we conclude that an applicant, like Harmon, can establish a "qualifying week" based upon her receipt of disability benefits paid by her employer as remuneration in exchange for services she previously provided during her employment.

Indeed, the Court found the UCBR to be unreasonable in denying unemployment compensation:

it was unreasonable to conclude that [she] was not employed during her base period simply because she did not physically provide services during that time.   This is because, and as explained above, [she] was an active status employee receiving remuneration in the form of disability payments while on an employer-approved disability leave during her entire base period. [She] received this remuneration in consideration of the services she had previously provided to Honeywell before becoming injured and totally disabled in 2018.

                . . . we conclude that the weeks during which Harmon received disability benefits during her base period are "qualifying weeks," and the UCRC erred in disallowing Harmon's application on the basis that she did not have 20 weeks of employment during her base period.

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.

Conclusory Allegations Will Not Save FLSA Complaint

 Last week, the Sixth Circuit affirmed the dismissal of a complaint for failing to allege sufficiently detailed facts to state a claim under the FLSA.   Forrester v. American Protection and Security Service, LLC, No. 21-5870 (6^th Cir. 5-13-22).   In it, the plaintiff complained about not being paid when the employer required employees to show up 10-15 minutes prior to their shift and stay as late as 10-15 minutes after their shift in order to ensure unbroken coverage.  However, the plaintiff failed to plead what, if any work, she did during this period of time so that the court could determine whether the 15 minutes before and after her shift were compensable under the FLSA.   The allegations in the complaint stated legal conclusions, to which the defendant employer was not required to admit or deny.  Despite having ample opportunity to do so, the plaintiff never formally attempted to amend her complaint or to submit a proposed amended complaint for the trial court to consider whether the deficiencies had been corrected.  Therefore, the trial court was within its discretion to dismiss the complaint without giving the plaintiff the opportunity to try again.

According to the Court’s opinion, the 10-15 minutes before and after each employee’s shift was to ensure an overlap and adequate coverage during the shift hand-offs.  The employer apparently did not keep records of this time or pay employees for this time.   However, the employer had disciplined employees who failed to report early for their shift.   The plaintiff brought a class action to challenge this practice and recover unpaid overtime and attorney’s fees.

The court observed that employers are not required to pay for every minute that an employee is at work.  The Supreme Court had previously held that the Portal-to-Portal Act does not require employers to pay for or record time an employee spends commuting to and from work or for time going through an employer’s security checkpoint after work.   The security checkpoint was not an integral part of the employees’ principal activity which the employees were employed to perform.  However, in this case, the plaintiff never pleaded any facts from which the court could determine whether any work was actually performed during the 10-15 minutes before and after her shift.   At best, she alleged that there were “shift-change duties,” but did not elaborate what those entailed.   The court was left to guess whether those “shift-change duties” could be eliminated without impairing the plaintiff’s ability to work.  If so, the “shift-change duties” would not be compensable.

Despite being on notice that her complaint may be factually deficient, the plaintiff never formally requested to amend her complaint or to submit an amended complaint which would have provided detailed allegations.  Accordingly, the trial court was within its discretion to dismiss the complaint without giving the plaintiff leave to amend her complaint and try again. 

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.

Some Interesting Arbitration Agreement Legal Issues

 There have been a few interesting arbitration decisions this year.  One is from the Supreme Court and the other from the Sixth Circuit. Both of them rejected the employer's arguments.  

While the Federal Arbitration Act, 9 U.S.C. §1 et seq.  gives federal courts the power to decide disputes over arbitration, the Supreme Court had previously ruled that the FAA does not create federal question jurisdiction.  Accordingly, federal courts – as courts of limited jurisdiction -- must examine and "look through" to the underlying complaint to find federal question or diversity jurisdiction before entertaining petitions to compel arbitration under §4.   In this case, the employee brought federal and state discrimination claims and sought to vacate an adverse arbitration award through state court.  Badgerow v. Walters, No. 20-1143 (3-31-22).  The employer, citing federal question jurisdiction, removed the case to federal court.  Federal courts have the power under §§ 9 and 10 to vacate and confirm arbitration awards.  However, the Court held that the “look-through” authority to find the underlying federal question (or diversity) only applied to petitions brought under §4 and not to petitions to vacate or confirm brought under §§ 9 or 10.   Unlike §§9 and 10, Section 4 specifically explains that petitions may be filed with the federal court which would have jurisdiction “save for [the arbitration] agreement.”  Sections 9 and 10 merely refer to filing the petition in the federal court where the award was made; they do not specifically refer to the question of jurisdiction.  The omission of a reference to jurisdiction in §§9 and 10 was deemed deliberate by Congress.   Moreover, because arbitration awards are creatures of contract and settlement agreements of disputes over federal law are also regular contracts, they are generally creatures of only state law, not the federal law which was implicated by the underlying dispute.   Therefore, an issue over a regular contract dispute does not create a federal question necessary to support federal court jurisdiction over petitions to vacate or confirm under the FAA. 

·     The Sixth Circuit held that the arbitration agreements of the individual employee class plaintiffs – which explicitly applied to ERISA claims -- did not apply to an ERISA plan on whose behalf the employees brought an ERISA breach of fiduciary duty action against the employer.  Hawkins v. Cintas Corp., No. 21-3156 (6^th Cir. 4-27-22).  The plaintiffs alleged that the employer had breached its fiduciary duty to the Plan by failing to include passively-managed fund options in the Plan and charging the Plan excessive fees. “Section 502(a)(2) suits are ‘brought in a representative capacity on behalf of the plan as a whole.’”  The Court distinguished the arbitration clause which covered only “claims” and not the plaintiffs’ “rights” to bring a fiduciary duty claim on behalf of the ERISA Plan. “Had Plaintiffs brought a claim under § 503(a)(1)(B), or a claim that should have been brought under that section, then it might be the kind of individual claim subject to arbitration under an individual participant’s employment agreement.” Further, the Court refused to impute to the Plan the employer’s agreement to arbitrate. There was no evidence that the Plan itself had agreed to arbitrate its claims or to permit the plaintiffs to agree on its behalf.  “In the absence of a sufficient manifestation of the Plan’s consent to arbitrate these claims, we hold that the Plan has not consented to arbitration.”

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.

Requesting a Reasonable Accommodation is Not a Protected Activity Under Ohio Retaliation Law

The Crawford County Court of Appeals last month affirmed an employer’s summary judgment on claims asserting that the plaintiff had been terminated for requesting a reasonable accommodation.  Hall v. Crawford County Job and Family Services, No., 2022-Ohio-1358.  The Court held that requesting a reasonable accommodation is not a protected activity under Ohio law which can support a retaliation claim.  Rather, denying a reasonable accommodation may be unlawful discrimination, but the request itself is not a protected activity for purposes of a retaliation claim.  Further, the Court found that the plaintiff had voluntarily disclosed her disability to her employer and it was justified in requesting a fitness-for-duty examination when she claimed her disability adversely affected her job performance and submitted an FMLA request. 

According to the Court’s opinion, the plaintiff voluntarily disclosed to her supervisor that she suffered from MS which sometimes made her mind foggy and could impair her job performance.    She brought it up again during a March 20 pre-disciplinary conference and was recommended to apply for FMLA leave.  Although she said she objected and did not require it, she submitted FMLA paperwork on March 26, which did not mention her MS diagnosis.  She was also requested to submit to a fitness-for-duty examination.   She was given a three-day suspension and ultimately terminated.  She filed suit, claiming retaliation and improper medical inquiries.  The trial court found that she had been provided with a reasonable accommodation, could not prove causation, etc.

The plaintiff alleged that the employer’s request for a fitness for duty examination was an improper medical inquiry.  However, the court found that the plaintiff voluntarily disclosed her MS disability and claimed that it could be impairing her job performance.  Moreover, once she had requested FMLA leave and a reasonable accommodation, the employer was entitled to request information about the nature and extent of her alleged disability.

The plaintiff alleged that she was terminated in retaliation for requesting a reasonable accommodation.    The court found that requesting a reasonable accommodation is not a protected activity under Ohio Revised Code Chapter 4112 which could support a retaliation claim.  While terminating an employee for requesting a reasonable accommodation might be unlawful discrimination, it does not fit within the types of activities that constitute protected conduct under Ohio law, such as opposing discrimination, testifying, participating in an investigation, etc.

The plaintiff denied that she had attempted to pursue a failure-to-accommodate claim, and objected the trial court granting summary judgment to the employer as though she had done so.  The appellate court refused to address this argument. 

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.