Suppose you’ve decided that you’ve learned all you can from where you work now and want to put it to use by opening your own company. Or the grass is looking mighty greener at another company in your industry and you’d like to make a move. Hold on a minute! Before you turn in your resignation, you need to consider whether you are subject to a noncompetition agreement, and if so, how that will affect your ability to move on.
What Noncompetes Do
Noncompetition agreements, or noncompetes as they are often called, may be a separate agreement, but are frequently part of an employment agreement. Their purpose is to protect an employer from unfair competition by restricting the ability of an employee to compete with his or her former employer immediately following termination of employment. Sometimes employees are asked to sign such an agreement after they have already been employed for quite a while.
Essentially, an employee signing a noncompete promises not to start, work in, own, or otherwise be involved with another company competing for the same business for a specified period of time after that employee stops working for the original company. The idea is that in the course of doing his or her job, an employee learns valuable nonpublic information about how the company operates. In addition, an employer may have invested time and money in training the employee.
General Enforceability
Usually, employees asked to sign a noncompete have little choice but to agree if they want to work or continue to work for the employer. Not infrequently, the question comes up as to whether this sort of agreement can be enforced. Perhaps predictably, the answer depends on many things, including what state you are in and how stringent the restrictions are.
A few states such as California, Montana, and Oklahoma tend to view enforcement of noncompetes as against public policy and severely limit their enforceability. Others have specific statutes governing use of noncompetes. Several states apply a “reasonableness” test, with some making an up or down decision based on the noncompete as written and others modifying the restrictions as they deem necessary. Wikipedia has a very detailed Non-compete clause entry which focuses specifically on enforceability in California, Massachusetts, Ohio, and Virginia.
In Ohio, so long as the employer hasn’t gotten greedy, noncompetes are generally enforceable, even if they aren’t signed until long after employment originally began. The Ohio State Bar Association’s News You Can Use feature offers a concise FAQ regarding “Are Noncompetition Agreements Enforceable in Ohio?” In determining enforceability, Ohio courts look at three main factors enunciated in Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E. 2d 544 (1975):
- Whether the restriction is no greater than is necessary to protect the employer’s legitimate interests
- Whether the restrictions impose undue hardship on the former employee
- Whether the restrictions are injurious to the public
How Reasonableness Plays Out
How do these factors work in “real life”? Of course, every case is different, but there are some general principles. The duration, geographic range, and scope of the prohibition are especially important. Thus, noncompetes of one year or less are often found enforceable while longer periods become progressively less enforceable.
Geographic range is related to the nature of the business; if it has a single location and serves only a local clientele, a noncompete prohibiting employment anywhere in the world is unlikely to be enforced. If there are multiple locations, the prohibited proximity becomes important; restrictions forcing the former employee to work in the next county may be enforceable in these cases.
Noncompetes which have the effect of preventing any sort of employment by the former employee will generally be found overly broad. The prohibited activity must be related to the company’s existing or perhaps realistically potential business or industry.
One recent case involving a hairstylist with an eight month noncompete (Charles Penzone, Inc. v. Koster, 2008 Ohio 327 (10th App. Dist.) illustrates how subjective the factors for determining enforceability of noncompetes really are. It also clearly demonstrates the predominant employer-friendly perspective on the issue which seems to be held by many Ohio courts.
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The trial court, in part because there was no evidence the hairstylist had done anything other than service former customers who sought her out, refused to enforce the noncompete. It also felt that forcing the hairstylist to “scrutinize every potential client who walked through the salon door” was an undue hardship and preventing members of the public from utilizing their preferred stylist was injurious to the public.
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The Franklin County Court of Appeals reversed, finding that the hairstylist could easily tell which customers were “off-limits” and that the restriction did not prevent those customers from having other hairstylists service them during the restricted period.
In another case involving a rival title company hiring away a key employee with a five year noncompete, the United States Sixth Circuit analyzed the issues this way in Chicago Title Ins. Co. v. Magnuson, 487 F.3d 985 ( 2007):
Overall, because Chicago Ttle had critical customer and employee relationships to protect, because these relationships directly affected Chicago Ttle’s ability to compete in the market, because Magnuson could influence the continuity of these relationships, because the [noncompete] Covenant contained appropriate geographic and temporal limits, because Magnuson had other means to support himself (his law degree), and because at least some of Magnuson’s relationships were established or strengthened during his employment with Chicago Title, we find that the district court properly concluded that the Covenant was reasonable for at least two years following Magnuson’s departure from Chicago Title.
So what happens if you violate a noncompete? Your former employer can sue you for damages which may be lost business because of your actions – this could result in very expensive attorney fees -- and the pending lawsuit will often have the effect of lengthening your noncompete period.
Clients sometimes ask me whether it matters that they signed the noncompete years ago, apparently in the hope that there is some sort of automatic expiration period. No it does not matter how long ago or how recently you signed the noncompete.
What if other people have left and the employer has never really enforced the noncompete before? Well, maybe you might have something here. This is, by the way, why you should expect to be sued if you violate a noncompete; failing to come after you might make it more difficult for the employer to enforce the noncompete later against someone else.
What if the company gets sold to a new owner? Read my post on "Can a New Owner Enforce a Noncompete Made by an Employee with the Prior Owner?"
Drafting Tips for Employers
From an employer perspective, the key is to be realistic about the restrictions placed upon former employees. A 2006 article in HR Magazine by Stephen L. Richey entitled “Tailor Non-competes to a T: a One-Size-Fits-All Non-compete Agreement Won’t Pass a Judge’s Inspection” provides several helpful hints about what to think about. Employers can also take some comfort in the fact that Ohio courts will usually modify noncompetes that go too far rather than simply refusing to enforce them at all.