Former Employee Free to Set up Shop Despite One-Year Non-Compete Agreement

Companies trust their employees with valuable resources, such as their trade secrets, confidential information, customer lists, and reputation.  Companies often ask their employees to sign non-compete agreements in order to protect those assets.  Reasonable non-compete agreements are enforceable in Ohio, but companies should be careful that their agreements cover everything the company wants protected.  As a recent Ohio case makes clear, Ohio courts will not rewrite non-compete agreements in order to reach additional activities that the company neglected to include.  Berk Ents., Inc. v. Polivka, No. 2012-T-0073 (Trumbull Cty.)

In Berk, the company sold plastic cutlery and other disposable kitchen items, and required its sales representatives to sign non-compete agreements.  The agreements, among other things, barred the representatives from attempting to divert business from or competing with the company for one year following the termination of their employment.  The employee-defendant worked as a sales representative for the company, and by 2010 he was responsible for all company sales across the Atlantic seaboard, including Florida and Texas.

In July 2010, however, the employee decided to go into business for himself.  He spoke to customers to tell them that he was no longer employed with the company, but he did not try to divert their business at that time.  He also began to import his own plastic cutlery, but did not attempt to actually sell it.  The company sued, alleging that the employee had violated his non-compete agreement.

The trial court held that the employee had breached his contract because, even if he had not actually competed with the company, he was preparing to begin competing as soon as the non-compete period expired.  Although the trial court found for him on one of his counterclaims – that the company had underpaid one of his commissions by $14,000 – it held that the company did not have to make the payment until after the expiration of the new non-compete period, and that the payment would not accrue interest until that date.  Before the company sued him, the employee had not tried to collect on the underpaid commission.

On Nov. 12, the court of appeals reversed.  The court held that the employee had not, in fact, breached his non-compete agreement because, although the agreement prohibited him from engaging in a business that presently competes with the company, the agreement said nothing about forming a business or preparing for future competition.  The court could not enforce an agreement where it did not apply.

Then, the case got slightly more expensive for the company.  The court held not only that the company owed the employee the underpaid commission immediately, and not only that the company owed him post-judgment interest on the unpaid commission, but also that the company owed the employee prejudgment interest dating from when the commission was originally due – about three and a half years ago.

This case demonstrates the importance to a company of understanding completely its non-compete agreements – knowing what the agreements cover and what they do not cover.  If the agreements do not cover everything a company wants, the company can draft new ones with the assistance of business counsel.  This option could be lost, however, once the employee resigns.

Companies should also make sure to retain business litigation counsel that will thoroughly examine the facts of a potential breach and provide an accurate assessment of the relative merits and risks of bringing a lawsuit.  Those risks often go beyond the inability to enforce the agreement.  For example, non-compete agreements often include provisions requiring the loser in any breach of contract lawsuit to pay the winner's attorney's fees.  In such cases, it is even more important for companies to have business litigation counsel that they can trust.  No company wants to pay its opponent's lawyers just to find out that an agreement is unenforceable.

About The Author

Jason Palmer | Faruki Attorney