Protection of a company's competitive advantage is vital. This is particularly true in today's age and labor market environment where Covid-19 has wreaked havoc on employers who now, simply put, are facing the sometimes daunting challenge of finding and keeping good, trained employees on staff and minimizing the loss of investment made in those employees (and the company's legitimate business interests, such as trade secrets and customer lists). Therefore, it is necessary that employers understand the options available when evaluating how best to protect their company and be cognizant of the various changing laws. The following updates a prior analysis of non-compete agreements in Ohio.
Generally, a non-compete agreement is a contract between an employer and employee where the employee agrees not to compete with the employer after termination of the employment relationship. Not all states permit non-compete agreements, or they limit their application, and those states' numbers seem to be increasing. In 2016, the White House made a "call to action" for states to reform their restrictive covenant laws. In 2021, the President issued an executive order encouraging the FTC to "consider working…to curtail the unfair use of non-compete clauses and other clauses that may unfairly limit worker mobility." Several states have done just that by proposing and passing laws that provide more protection to employees by limiting, or banning, certain non-compete agreements. For example, effective August 10, 2022, Colorado now has a statute, C.R.S. 8-2-113, which voids most non-compete clauses and makes it a crime (a misdemeanor) for violating the law.
Nevertheless, Ohio remains a state that recognizes that non-compete agreements with employees or independent contractors is a valid and enforceable means for employers to protect their economic interests – but, the agreement must be reasonable. This has been the law of Ohio since 1975, when the Ohio Supreme Court issued its opinion in Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E.2d 544 (1975), a case that not only explains the factors for what makes a non-compete provision reasonable, but also gives courts the ability to re-write the provision to make it reasonable and, therefore, enforceable. (Whether the Ohio courts will continue to use their power to re-write unreasonable provisions or simply declare them unenforceable as a matter of law in today's ever-changing labor climate remains to be seen.)
What Constitutes a "Reasonable" Non-Compete Agreement?
In Ohio, a non-compete agreement is reasonable if the agreement: (1) is no greater than is required for the employer's protection of a legitimate interest; (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. MetroHealth Sys. v. Khandewal, , 2022-Ohio-77, 183 N.E.3d 590, ¶ 12 (8th Dist.) (relying on Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E.2d 544 (1975), paragraph two of the Syllabus); AK Steel Corp. v. ArcelorMittal USA, LLC, 2016-Ohio-3285, 55 N.E.3d 1152, ¶ 11 (12th Dist.) (same).
The Ohio Supreme Court set forth several factors for examining the reasonableness of a non-compete agreement and those remain the guiding factors today. Raimonde, 42 Ohio St.2d at 25. The factors include the length of time and geographic scope of the restrictive covenant, whether the employee is the sole contact with the customer, whether the skills seeking to be restrained by the agreement were developed during employment, whether an employee came into possession of confidential information or trade secrets during the employment, and whether the covenant seeks to protect against unfair competition as opposed to ordinary competition. Id. No one factor is dispositive. Determining whether a non-compete is reasonable is a highly fact intensive endeavor and is made on a case-by-case basis.
The employer bears the burden of establishing the reasonableness of the agreement. Keep in mind, what may have been reasonable in 1975 or even 2005, may not be reasonable today. Therefore, be practical when evaluating the scope of restraint to impose on an employee. Consider the legitimate interests that you as an employer may have – are there confidential information, trade secrets, costumer lists, or skills and training acquired during employment? Also, be cognizant of any undue hardship on the employee – although, in Ohio, hardship has to be unduly harsh; not being able to work for a period of time is generally not enough by itself. Finally, consider the sophistication and position of the employee or independent contractor involved. Courts will consider all of these factors. Thus, even if the employee agrees to an overly broad and aggressive non-compete agreement, she may challenge the validity of the agreement later, and a court may find the agreement unenforceable in its entirety.
As mentioned above, trial courts in Ohio have the option to modify an overbroad or unreasonable covenant not to compete, but it is within the court's discretion whether to do so. Rather than risk the court striking down the agreement altogether, or re-writing it so that its worth is severely diminished – particularly considering the current landscape on non-competition reform throughout the country – put the time in on the front end to consider what exactly needs protection and what is the least restrictive means of affording such protection. Compare, Shepard & Assocs. v. Lokring Tech., LLC, N.D. Ohio 1:2-CV-02488, 2022 U.S. Dist. LEXIS 19219, *103-105 (Feb. 2, 2022) (looking at the Raimonde factors and finding a one year non-compete period to be reasonable but finding the geographic scope to be unreasonable and re-writing the agreement to narrow the geographic scope to extend only to the former sales territory over which the distributorship operated) and Mech. Constr. Managers, LLC v. Paschka, S.D. Ohio No. 3:21-cv-302, 2022 U.S. Dist. LEXIS 90045, *24-25 (modifying the terms of non-solicitation agreement under Raimonde) with Geloff v. R.C. Hemm's Glass Shops, Inc., 2021-Ohio-394, 167 N.E.3d 1095, ¶ 33 (2d Dist.) (trial court did not err in failing to reform the non-compete agreement after finding it unreasonable based on the Raimonde factors: "We have noted previously that "if a court finds that a covenant not to compete imposes unreasonable restrictions upon an employee, then the court is empowered to modify or amend…the agreement…. Yet the court is not affirmatively required to amend an unreasonable, noncompetition agreement." It instead can simply declare it "unenforceable as a matter of law.").
What Other Terms Should be Included In A Non-Compete Agreement?
A non-compete agreement can be as simple or involved as necessary to protect the legitimate interests of a business, and how you word the agreement is important. Ohio courts interpret non-compete agreements following ordinary contract interpretation principles, including that any ambiguities will be construed against the drafter. Therefore, you should be careful to use plain and ordinary language when setting forth the specific terms of the non-compete agreement. Typically, even the most straightforward non-compete agreements contain some of the following clauses.
Choice of Law and Forum Selection. A choice of law provision determines which state's law will govern an action seeking to enforce the agreement. A forum selection provision determines the court in which such an action must be brought. In Ohio, these provisions have long been found to be enforceable so long as there is a reasonable basis for the chosen law and forum, they have a substantial relationship to the transaction, and enforcement of the term(s) would not be contrary to a fundamental policy of a state having a greater interest in the case. Schulke Radio Prods., Ltd. v. Midwestern Broadcasting Co., 6 Ohio St.3d 436, 453 N.E.2d 683 (1983), Syllabus.
If, however, the law and forum selected have no substantial relationship to the transaction at issue, then these provisions may not be enforced by the court. In fact, some states are voiding choice of law and forum selection clauses in employment agreements; be sure to keep this in mind, particularly if you have employees working in other states. California, for example, prohibits most non-compete agreements and now it specifically prohibits in employment agreements choice of law and forum selection clauses that call for application of some other state's law. See, California Labor Code § 925. Thus, even if the agreement contained an Ohio choice of law provision, if the relevant acts took place in California and/or substantially affect business in California, then a court may find that California law applies, not Ohio law, because California has a significant interest in the outcome of the case and has a fundamental policy against non-compete agreements. See, e.g., Lifestyle Improvement Centers, LLC v. East Bay Health, LLC, S.D.Ohio No. 2:13-cv-735 (Oct. 7, 2013) (finding that, despite an Ohio choice of law provision, California law applied and the non-compete provision was unenforceable under California law). But see, Down-Lite Int'l, Inc. v. Altbaier, 821 Fed. Appx. 553, 555-56 (6th Cir. 2020) (Sixth Circuit upheld a contract's choice of law clause requiring application of Ohio law, rejecting the employee's argument that the choice of law clause should be set aside because California law is hostile to covenants not to compete. In this case, the Sixth Circuit explained: "Although Altbaier has significant connections with California, we cannot say that state has a materially greater interest in determining the dispute than Ohio. Down-Lite is a close Ohio corporation and the Shareholder Agreement containing the covenants at issue is designed to protect Ohio shareholders. Moreover, Altbaier's work extended well beyond the borders of California (and the United States for that matter) when he worked for Down-Lite….California has a meaningful interest in protecting its resident from Down-Lite's desire to restrict competitive conduct. But that interest is not materially greater than Ohio's interest in protecting one of its closely held businesses operating in the global economy." The Sixth Circuit also explicitly chose not to follow Lifestyle Improvement finding it factually distinguishable); Stone Surgical, LLC v. Stryker Corp., 858 F.3d 38, 390-91 (6th Cir. 2017) (finding that "Louisiana's interest in protecting its employee from unfair noncompete clauses is not materially greater that Michigan's interest in protecting its businesses from unfair competition.").
Courts in Ohio also may void forum selection and choice of law clauses in employment contracts even where the substantive law of Ohio would not violate the substantive law of another state with a "greater material interest" if there has been overreaching or it would be unreasonable or inconvenient to litigate in Ohio. See, e.g., InVentiv Health Communs., Inc. v. Rodden, 2018-Ohio-845, 108 N.E.3d 605 (5th Dist.) (finding forum selection and choice of law clauses unenforceable even though the substantive law of Ohio would not violate the substantive law of North Carolina, which state had a greater interest, where the court determined that the employer overreached or took advantage of the employee in requiring a forum selection or choice of law clause, and where Ohio was inconvenient for the parties).
Confidentiality. Depending on the nature of the business or employment relationship, the parties may seek to keep the terms of the non-compete agreement confidential. While these types of provisions are fairly straightforward, be careful to allow exceptions necessary to effectuate any term or provision of the agreement, to disclose the agreement to a party's accountant or lawyer for use in connection with providing professional services, and as required by law.
Non-Disparagement. A non-disparagement provision prohibits the parties from bad-mouthing one another. Non-disparagement provisions seem to go hand-in-hand with a non-compete agreement. After all, the overall purpose of the agreement is to protect a company's competitive advantage. What good is it if the employee refrains from working for a competitor if she is bad-mouthing the company all over town? Of course, other laws are available to protect a company's reputation and business interests (e.g., defamation, tortious interference, etc.); however, a non-disparagement clause is a simple way to remind the employee (and employer) to maintain professionalism despite the end of the employment relationship and ensure protection of the company's reputation and competitive advantage.
Opportunity to Review and Consider the Agreement. Even where there is a question whether the employee understood the contents of a non-compete agreement, Ohio law charges the employee with knowledge of the contents of the agreement so long as she read and signed the agreement. Still, given the recent trends in other states that make it a requirement that the employer provide the employee with notice of the non-compete and be given an opportunity to review, it is prudent to include a provision where the parties expressly acknowledge that they have read and understood the agreement, that they have had sufficient time and opportunity to review the agreement, confer with legal counsel if they so desire, and that they fully understand and appreciate the meaning of each of the agreement's terms.
Liquidated Damages. Liquidated damages clauses are not necessarily common practice, but such provisions are worth mentioning here, as they have not been stricken outright in Ohio in the context of a breach of covenant not to compete. Kidney & Hypertension Specialists Chillicothe v. Adena Health Sys., Franklin C.P. No. 12CVH-15862, 2014 Ohio Misc. LEXIS 9317, at *18 (May 6, 2014) (denying summary judgment motion requesting that a liquidated damages provision in a non-compete not be enforced on the basis of unreasonableness). A liquidated damages clause provides that, in the event of a material breach of the agreement, the breaching party is liable for a sum certain, in addition to actual damages and injunctive relief, if so requested. Be careful of these types of provisions – you may be on the receiving end if the provision is mutually applicable to the parties. Careful consideration should be given to whether inclusion of a liquidated damages clause is appropriate.
Severability. A severability clause protects the agreement from complete avoidance should one of the provisions be found invalid. In other words, if any of the provisions of the agreement are rendered invalid by a court, then the parties agree that such a finding will not preclude enforcement of the remainder of the agreement. For example, if a liquidated damages provision was included in the agreement, but the court found it punitive in nature and, therefore, unenforceable, then the remainder of the agreement is still enforceable. Again, a word of caution for the employer. If a severability clause is not included in the contract, the court will then look to the intent of the parties as determined by looking at the terms and provisions of the contract as a whole and "whether the parties reached an agreement regarding the various items as a whole or whether the agreement was reached by regarding each item as a unit." Freeman Indus. Prods., LLC v. Armor Metal Group Acquisitions, Inc., 193 Ohio App.3d 438, 2011-Ohio-1995, 952 N.E.2d 543, ¶ 23 (12th Dist.). An employer should always consider including a severability clause, but additionally consider treating the non-compete provision as a separate document to be presented to the employee separately and signed separately to avoid any later confusion or ambiguity.
Applicability to Successor and Assigns. Despite the Ohio Supreme Court's decision in Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St.3d 356, 2012-Ohio-4648, 978 N.E.2d 823 ("Acordia II") (finding that "employee noncompete agreements transfer to the surviving company after a merger has been completed pursuant to R.C. 1701.82(A)(3)" even without the employee's consent), it is still prudent to include specific language in a non-compete agreement regarding its applicability to successors-in-interest. See, e.g., Lumenate Techs., LP v. Baker, S.D.Ohio No. 1:14-cv-125, 2015 U.S. Dist. LEXIS 172163, at *40 (Dec. 28, 2015); Freeman Indus., 2011-Ohio-1995, ¶35-39. Additionally, successor businesses should evaluate their non-compete agreements to ensure that they are fully protected. Just because the non-compete may transfer does not mean that the agreement is enforceable. As reiterated in Acordia II, "employees still may challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in this case created additional obligations or duties so that the agreements should not be enforced on their original terms." If your business is the successor-in-interest, one option is to require the employees to sign a new non-compete agreement as a condition of their continued at-will employment.
When Should I Have My Employees Sign A Non-Compete Agreement?
A frequently asked question is when an employer may ask his employee (or independent contractor) to sign a non-compete agreement. In terms of at-will employees, Ohio courts have found that there is sufficient consideration to support the covenant when it is signed (a) at the outset of the employment relationship (as a condition of employment), and (b) during the employment relationship (as a condition of continued employment or a change in employment terms). In addition, an employer may ask an employee to sign a non-compete agreement after the employee is discharged from employment, but only if sufficient consideration is offered in return. For example, the employer may offer severance in exchange for the employee's agreement not to compete.
Another word of caution about severance agreements: if you enter into a severance agreement with an employee who had signed a non-compete agreement at the time of or during employment, be sure that you do not inadvertently render that previously-entered non-compete void. A severance agreement that does not include its own non-compete agreement, or that does not explicitly incorporate by reference a previously entered non-compete agreement (such as one found in the original employment agreement), and that also says that it supersedes all prior agreements has been found to have rendered void and unenforceable the previously entered non-compete. Bortz v. Freedom United States, Summit C.P. No. 2017 06 2566, 2017 Ohio Misc. LEXIS 8036, at *4-5 (Dec. 6, 2017).
If there is any concern regarding competition, then the best practice is to have employees sign a non-compete agreement at the outset of the relationship – either as a stand-alone agreement or as part of the employment contract. The agreement may be revised, supplemented, and amended as the employee changes roles, is promoted, etc. But, again, be careful. An oral extension of a noncompetition agreement may be barred under the statute of frauds if it cannot be performed in a year. Make sure any extension or revision of the agreement is in writing and signed by both parties.
It is also good practice to remind your employees of their agreement not to compete. For example, it may be prudent to have certain employees review and initial the agreement annually. Another option is to incorporate a review and acknowledgement of the agreement into exit interviews. This practice not only reminds the employee of his obligations, but also reiterates to the employee the seriousness of the agreement to the employer.
Non-compete agreements are a useful tool for employers to protect their competitive interests. It is important, though, that these types of agreements are used sensibly. Covenants not to compete are more likely to be enforced if they are narrowly tailored to protect only a company's legitimate, identifiable business interests – not to control a particular industry or prevent former employees from making a living. As this area of the law continues to progress, in Ohio and elsewhere (as shown below in the recent legislation proposed and passed), it is always smart to consult with a lawyer before entering into any restrictive covenant.
Some of the Recent Legislation Proposed or Passed on Non-Compete Agreements in Other States
Colorado: C.R.S. section 8-2-113 voids agreements that restrict trade, such as non-competition and non-solicitation covenants, unless they fall within a specific statutory exception such as for the purchase or sale of a business or its assets, for protecting trade secrets; for recovering education or training expenses associated with an employee who has been with an employer for less than two years; or for a restriction on executive or management personnel.
California: Business and Professions Code §16600 voids noncompetition contracts; Labor Code § 925 prohibits employers from entering into choice of law and forum selection agreements with employees that require application of some other state's law or litigation outside of the state; the law does not apply to contracts entered into before January 1, 2017, or to those where the employee was represented by counsel.
Connecticut: House Bill 5249 was introduced in February 2022, and would limit non-competes to exempt employees who make at least a minimum threshold income, to one year post-employment and to the geographic areas where the employee actually worked; it would require the non-compete to be separate from the offer of employment and the employee would have 10 business days before being required to accept an offer of employment or otherwise sign the non-compete. If passed, it would still allow the use of non-solicitation, no rehire, and confidentiality provisions in employment agreements.
Idaho: I.C. § 44-2701, et. seq. allows covenants not to compete so long as they are reasonable in duration, geographic scope, line of business and no greater than reasonably necessary to protect the employer's business. Part of the statute was repealed in 2018; in particular, the statute no longer includes a rebuttable presumption of irreparable harm of loss of key employees; the employer must establish irreparable harm for all former employees in order to obtain injunctive relief for breach of a non-compete agreement.
Illinois: On August 13, 2021, the Illinois Freedom to Work Act (820 ILCS 90/10) was signed into law, imposing new conditions on non-compete and non-solicitation agreements entered into on or after January 1, 2022 (with no retroactive application). The Freedom to Work Act imposes earning thresholds, banning non-competes for Illinois employees making less than $75,000 per year and non-solicitation agreements for employees making less than $45,000 per year. It also bans noncompete agreements for employees who are terminated or laid off due to Covid-19, unless enforcement of the covenant not to compete includes some compensation to the employee. Employers also must provide employees at least 14 calendar days to review non-compete or non-solicitation agreements before signing them, and employers must advise employees in writing to consult with an attorney before signing such agreements. Under the amended act, a noncompete or nonsolicitation covenant is illegal and void unless: (1) the employee receives adequate consideration; (2) the covenant is ancillary to a valid employment relationship; (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer; (4) the covenant does not impose undue hardship on the employee; and (5) the covenant is not injurious to the public.
Nevada: NRS §§ 613.195 and 613.200 (effective October 1, 2021) provides that post-employment non-compete agreements are enforceable where they are supported by valuable consideration, do not impose restraints that are greater than are required to protect the employer, do not impose an undue hardship on the employee, and impose restrictions that are appropriate in relation to the consideration supporting the non-compete. However, the statute now bans post-employment non-compete agreements with hourly wage employees. "A noncompetition covenant may not apply to an employee who is paid solely on an hourly wage basis, exclusive of any tips or gratuities." "One violating the statute is guilty of a gross misdemeanor and shall be punished by a fine of not more than $5,000."
New Mexico: N.M.S.A. §§ 24 1I-1 and 24 1I-2 prohibit non-competition agreements with physicians and now nurse practitioners; they also now prohibit choice of forum and choice of law clauses in contracts with physicians and nurse practitioners. Otherwise, noncompete agreements are enforceable if they are reasonable.
New York: Senate Bill S734 was introduced to codify the non-compete standards followed by New York courts—allowing non-competes only when they are no greater than required for the protection of the legitimate interest of the employer, do not impose an undue hardship on the employee, are not injurious to the public, and are reasonable in time period and geographic scope. On July, 22, 2022, this bill was stricken, however, and recommitted.
Massachusetts: Mass. General Laws c.149 § 24L (effective 2018) requires certain minimum requirements for a noncompetition agreement to be enforceable, including such things as it must be in writing and signed by both the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing, given to the employee 10 business days before the commencement of employment, no broader than necessary to protect the employer's legitimate business interests, not exceed 12 months unless there's a breach of fiduciary duty or taking of property then it can be up to 2 years, reasonable in geographic reach, reasonable in scope, and "consonant with public policy."
New Hampshire: The current law in New Hampshire, NH Rev. Stat. § 275.70, requires disclosure of the non-compete agreement to the employee prior to the employee's acceptance of an offer of an employment. However, NH Rev. Stat. § 275.70-a makes void and unenforceable any noncompete agreement between an employer and a low-wage employee (someone who earns an hourly rate less than or equal to 200% of the federal minimum wage).
New Jersey: On May 2, 2022, the New Jersey Legislature introduced Bill A3715, which would prohibit post-employment restrictive covenants against a broad range of workers and limit their duration to a maximum of 12 months, and require employers to pay 100 percent of the separated employee's wages during the restricted period. It would also require 30 days' notice and right to counsel must be stated prior to signing. Under current New Jersey law, a post-employment restrictive covenant is enforceable if (1) its terms are reasonably necessary to protect an employer’s business interests; (2) does not cause undue hardship to the employee; and (3) does not impair the public interest.
Oregon: ORS 653.295 (signed into law on May 21, 2021), provides that non-competition agreements entered into on or after January 1, 2022 cannot exceed 12 months in duration post-employment; and is limited to certain employees. Under the new law, a non-compete entered into with an Oregon employee after January 1, 2022 is void for several reasons including if it extends longer than 12 months, if the employee earns less than $100,533.00 in 2021 dollars, if it was not provided in writing to a new employee at least two weeks before, and if the employer did not provide a copy of the signed agreement to the employee.
Pennsylvania: Pennsylvania courts have generally found non-compete agreements to be enforceable if the agreement is reasonably necessary for the protection of the employer and the restrictions imposed are reasonably limited in duration and geographic scope. House Bill 681, also known as the "Health Care Practitioner Non-Compete Agreement Act" was introduced to prevent the use of non-compete agreements in health care practitioners' employment contracts. It appears that the bill, however, was removed from table on June 14, 2022.
Vermont: House Bill 556 would prohibit "agreements not to compete or any other agreement that restrains an individual from engaging in the lawful profession, trade, or business." Nothing has happened with this bill since 2018.
Washington, D.C.: In 2021, the District of Columbia enacted The Ban on Non-Compete Agreements Amendment Act which bans post-employment non-competition agreements. This Act goes into effect on October 1, 2022.