Will Your Non-Compete Agreement Withstand a Court Challenge
Non-compete agreements have become more common in the workplace. A recent Franklin County Court of Appeals decision should have businesses reviewing these documents to make sure they will withstand scrutiny from the court system. In a case involving Midwestern Auto Group (MAG”) and a former salesman, John Curran, the Court concluded that unless an employee possesses confidential or proprietary documents or trade secrets, or uses that information to solicit the former employer’s customers, non-compete agreements will be difficult to enforce in court.
John Curran began selling European automobiles in 1984. In 1993, he worked for MAG but left in 1997 to join Byers Imports as sales manager for three franchises. He returned to MAG as a sales manager for Audi and Saab franchises. In March, 2000, MAG notified its sales managers that compensation packages were to be restructured. Shortly after hearing about the new pay plan, Curran contacted his old boss at I3yers Imports and returned there in April, 2000.
When Curran began his employment with MAG in January, 2000, he signed an employment contract which included non-compete and confidentiality clauses. The non-compete clause stated that Curran would be given valuable confidential and proprietary information of his employer and that upon leaving MAE he could not, for eighteen months, attempt to divert or solicit any clients, prospective clients, or employees of MAG to a new employer. It also included language prohibiting Curran from working at a business which sold, leased, or serviced European vehicles, including many of those which Curran had dealt with at both Byers and MAG This specific prohibition also was for eighteen months and was limited in scope to Franklin and Delaware counties.
When Curran returned to Byers as sales manager, MAG sought injunctive relief in the Franklin County Common Pleas Court to bar Curran from working for Byers. The trial court prohibited Curran from disclosing confidential information he obtained while employed by MAU but it denied MAO’s request to enforce the non-compete clause in the employment contract. MAG unsuccessfully appealed that order to the Court of Appeals.
As in many instances, the Court of Appeals referred to a decision of the Ohio Supreme Court for guidance. That case said that in order to enforce a non-compete clause, an employer had to show by clear and convincing evidence that the restrictions met three guidelines:
- The restrictions were no greater than necessary for the protection of the employer’s legitimate
- The restrictions did not impose undue hardship on the employee; and
- The restrictions were not injurious to the public.
The Court also pointed to several questions to consider when making the determination that a non- compete clause is reasonable:
- Does the clause have geographic or time limits?
- Is the employee the sole customer contact?
- Does the employee possess confidential information or trade secrets?
- Does the non-compete clause seek to restrain ordinary rather than unfair competition?
- Does the clause stifle pre-existing skills of the employee, or those skills vhich were developed while the individual was working for that specific employer?
- How does the non-compete clause work to the detriment of the employer and the employee?
- Does the clause restrict the employee’s sole means of support?
- Is the restricted employment merely incidental to the main employment?
WHAT IS A LEGITIMATE BUSINESS INTEREST?
The Court concluded from the record that Curran did not take any of MAG’s confidential documents or trade secrets. Most of the information pertaining to advertising, pricing, and inventory which MAG claimed as a trade secret was information readily known to the public or known by Curran as a result of his extensive prior experience in European automobile sales. The Court recognized that individuals such as Curran. who had sold European automobiles for sixteen years, had skills and information which were not necessarily developed while working for MAG.
MAG argued that the loss of a ‘key” employee like Curran caused a severe disruption to its business. and that the prevention of such a disruption was a legitimate business interest which required enforcement of the non-compete clause. The Court rejected that argument, finding that MAG had to demonstrate that the loss of a particular employee’s services were of such character as to make the replacement impossible, or to cause the employer irreparable injury. The Court thought it was significant that MAG never argued that Curran was a “special, unique or extraordinary” employee, and, further, noted that Curran only held his job for three months, that he worked with only two of the dealership’s eleven automobile lines, and that he was “at best middle level management.” In order to make this key” employee argument, the Court was looking for evidence that Curran was an invaluable or virtually irreplaceable” employee. In a sentence that would seem to apply to many instances where employees leave for better financial deals, the Court stated:
The mere fact that the loss of an employee to ‘greener pastures’ is disruptive to a business does not justify the business limiting the rights of its employees to obtain the highest possible return for their services.
DOES THE NON-COMPETE AGREEMENT IMPOSE UNDUE HARDSHIP ON THE EMPLOYEE?
The appellate court spent little time discussing this aspect of the non-compete agreement, but it is certainly one that employers must consider when they create such language. The trial court found that since Curran had only been with MAG three months, and since much of his talent as a sales manager of European automobiles was based on his years of experience. a prohibition against Curran working for any dealer of European automobiles in Franklin or Delaware counties would impose undue hardship. The Appeals Court disagreed. finding that Curran’s experience in selling automobiles should be transferable to other types of cars.
MAG’s geographic exclusion of only two counties did not seem unreasonable to the Court of Appeals. However, since the Court found that MAG had not proven its legitimate business interests were affected, the trial court’s finding that Curran was unduly restricted geographically was harmless error. One may assume that the Court’s suggestion that Curran could apply his general sales experience to other cars would bode well for restrictions of this type.
DOES THE NON-COMPETE AGREEMENT CAUSE INJURY TO THE PUBLIC?
The final area of concern in non-compete agreements involves the general public’s interest in promoting a competitive business climate, or. as the Court stated in its list of factors: “Does the restriction seek to eliminate unfair, or merely ordinary, competition?” The focus of such an inquiry will be on how much competition will remain for the general public if an exclusion were upheld. For instance, if an employer would have a near monopoly for its products or services in a specific market by virtue of a non-compete agreement, then it is likely that the enforcement would be denied because of harm to the public at large.
The Court noted that there were six European automobile dealers in central Ohio, so upholding the non-compete agreement for Curran wouldn’t harm the public’s ability to find such cars. However. since MAG was unsuccessful in its “legitimate business interest” argument, and an employer must prove all three of those factors, MAG still lost its appeal.
Employers should carefully draft non-compete agreements to ensure that they comply with the standards for this recent case. Unless an employer can prove, by clear and convincing evidence, that the restrictions are necessary to protect the employer’s legitimate business interest, do not impose undue hardship on the employee, and do not injure the public, then the agreement will not be upheld. Employers are cautioned to consider which employees sign such agreements. In almost every case involving non-compete agreements, one finds the phrase “Covenants not to compete are disfavored by the law,” For this reason, employers should scrutinize existing agreements and prudently use them in the right situation to make sure they will hold up in court.