Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

In addition to what is proving to be an unusually interesting Presidential election campaign, one of the "hot" issues in Ohio this year is a ballot issue called the Healthy Families Act .  Voters will be asked to decide whether to enact into law a measure that would force businesses with 25 or more employees to guarantee their employees at least seven (7) days sick leave.  Similar measures are apparently playing out all across the country according to the National Partnership for Women & Families.  There's also a bill in Congress on the subject as explained by the HR Capitalist blog in the post: Why You May Add 7 Paid Sick Days to Your PTO Policy in 2009.

I am not a labor lawyer and as yet I haven't really digested the proposed law.  But last week I actually got a call from one of the factions asking if I was going to write about it.  So that got me to thinking about the importance of this proposed legislation to Ohio businesses and made me decide that I probably should make a post about it.

Mike Bowers of the Ideas to Deals blog has an excellent post summarizing the basics of the Healthy Families Act.  A Columbus Dispatch editorial supports passage of the law. However, as Ohio Employer's Law Blog's Jon Hyman notes in his post, Governor Strickland's press release against the Healthy Families Act, Ohio's Democratic Governor has come out against the Act.  In this press release, Gov Strickland calls the ballot initiative " unworkable, unwieldy, and ,,, detrimental to Ohio's economy." 

Solely in the interests of providing information (and not necessarily as an endorsement) here is a fact sheet and an economic impact fact sheet provided to me from those seeking to defeat the measure.  If someone wants to send me similar fact sheets in favor, I'll post those too.   

Earlier this year, Jon Hyman of the Ohio Employer's Law Blog posted a fairly detailed analysis concluding the measure should be rejected in his post Deconstructing the Ohio Healthy Families Act and received many posted comments.  Jon has also promised to post further updates as we get closer to decision day.  

In Jon's post, he also gathers some links to organizations interested in the Act, most of which seem to be opposed to the measure.  In the interests of full information being out there, here are some other links:

• Ohioans for Healthy Families, the group lobbying for the legislation on its Sick Days Ohio website has several news items favoring the Act, explains why one might.believe it's necessary, and how to get involved on that side of the issue
• Policy Matters Ohio, a nonproft research organization has also come out in favor of the Act.
• Ohio Business Votes, a lobbying group opposing the measure, has an informational website explaining how the Act would negatively affect both employers and employees. 

Jon also provides some guidance as to Should businesses be reviewing paid sick leave policies in advance of the Healthy Families Act.

I'm not really sure yet what I think,either professionally or personally.  On the one hand it boggles my mind that there are actually businesses of any size out there that don't provide at least this much paid sick leave in this day and age.  And it seems fundamental to me that, especially given how long it usually takes to see a doctor once you show up for your appointment, we ought to require this sort of thing.

On the other hand, I am mindful of the burden the Healthy Families Act may place on businesses.  And the fact that Gov. Strickland thinks it's a bad idea is also very influential on me.

So for me, the issue is really about understanding how big a burden this places on businesses.  If I ultimately conclude it's enormous, then I will probably, reluctantly, be opposed to its passage.

UPDATE: The Healthy Families Act has been pulled from Ohio's November ballot.  The push for federal legislation continues.

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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. 

• 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.
• 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.  

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Now that I've been doing this law blog thing for about eight months, I've had a chance to get acquainted with my neighbors in the blogosphere.  There are of course my subject matter compatriots all across the country that I've enjoyed coming to know through their blogs (Chris Moander of the relatively new Wisconsin Business Law and Litigation blog and Rush Nigut of Rush on Business from Iowa (the home in my youth) especially come to mind).  But today I wanted to focus on my geographically proximate neighbors practicing law in Ohio while writing their blogs.  

Like anyone else I have my favorites.  I don't claim to be any arbiter of quality or worth so the following is really nothing more than what I've found I've liked the most so far. 

Perhaps my own personal favorite Ohio-based blog is The Briefcase which has been published by solo practitioner Russ Bensing for quite a while.   It promises to provide "commentary and analysis of Ohio law" and it certainly delivers.  Russ gives brief summaries and case updates of Ohio civil and criminal cases decided by the various Court of Appeals and the Ohio Supreme Court with a bit more criminal than civil cases.  While this is of course useful, his regular "Friday Roundup" feature focusing on the more entertaining legal cases out there is a must-read for me every week.  In addition, even the case updates and summaries are given with a definite bit of "attitude" that makes them much more interesting than the usual dry case summary.  And his "About" section is particularly well done.  Russ's stuff is not often the sort of thing I tend to link to (which may say more about me than him), but I certainly appreciate his contributions.

My other "substantive" favorite  Ohio-based blog is the Ohio Employer's Law Blog published by Jon Hyman of Kohrman, Jackson & Krantz  for more than a year.  Its tagline is  "Practical employment law information for businesses in Ohio and beyond."  What I like about this blog is Jon's well written, informative, and useful (even "practical") posts about important issues in the labor and employment law areas.  I also think Jon's analysis of the legal issues he covers is clear and seems right on point.  In addition, I like his regular "What I'm Rreading" series which features several quick links to other interesting posts around the blogosphere.  I don't practice in this area so I appreciate having such excellent resource available to keep me up to date about pertinent legal developments. 

Ohio Employer's Law Blog is one of two Ohio-based blogs focusing on employment and labor issues.  The other is Porter, Wright, Morris & Arthur's Employer Law Report which says it will be "Reporting on recent legal developments and trends affecting employers".  It has been published sporadically over the last couple of years, but now seems to be adding new worthwhile posts more frequently. 

The D&O Diary published by Kevin M. LaCroix of Oakbridge Insurance Services, an insurance intermediary focused exclusively on management liability issues, focuses on perhaps the most complex issues of any Ohio-based law blog.  It is intended to be "A Periodic Journal Containing Items of Interest from the World of Directors and Officers Liability, with Occasional Commentary".  I haven't had much chance to become fully acquainted with this blog yet, but hope to so in the near future.

When it comes to coverage of both substantive and professional developments of interest to Ohio lawyers, I like the Cleveland Law Library Weblog the best.  It explains that "our goal is to inform local attorneys of major legal developments important to their practice".    I often find ideas for posts by reading this blog and appreciate the links usually provided.  The Cincinnati Law Library Blog  and the Moritz Legal Information Blog which provides "Legal Information and Research Resources Brought to You by The Michael E. Moritz Law Library at The Ohio State University" also provide these sort of services.

One of the newest Ohio-based law blogs is the Ohio Real Estate Blog published by the attorneys of the Real Estate Practice Group of Kohrman, Jackson & Krantz which started up only a couple of months ago in April.  In same real estate practice area is the Build on This! blog published by the attorneys of the Real Estate and Construction Practice Group of Buckingham, Doolittle & Burroughs, LLP which offers "Current news, information, and events affecting the real estate, construction and land use industry and its professionals".

Another recent addition to the blogosphere is the Reasonable Doubts blog published by Jeffrey Davis.  It started in March 2008 and, as its name would suggest, focuses on crminal law.  In addition, the Ohio Family Law Blog, published by Robert Mues of Holzfaster, Cecil, McKnight & Mues, LPA, began in December 2007 and tries to provide "Family Law and Divorce Information for Ohio Families Seeking Solutions".

Interestingly, there are TWO Ohio based law blogs called Sixth Circuit Blog.  One seems to focus on criminal law and offers "Case summaries and commentaries by federal defenders of the Sixth Circuit".  The other, published more sporadically by Eric Zagrans, focuses primarily on civil law and is "Devoted to Appellate Law and Practice Within the Sixth Circuit and Its Constituent States"

Rounding out the roster of Ohio-based law blogs (at least those I'm aware of) are the following with which I am less familar, in part because they relate to areas of law with which I have less experience in my day to day practice:

• The Ohio Trust and Estate Blog published by Michael D. Bonasera of Buckingham, Doolittle & Burroughs, LLP
• Tsibouris & Associates Law Blog published by the attorneys at Tsibouris & Associates 
• Consumer Rights Law Blog published by Ron Burdge  and focusing on "Motor Vehicle Lemon Law, Consumer Protection Law, Car Law, News, Notes, Issues, and Updates"

While there are several newer Ohio based law blogs, there are also many that have been published for two or three years or even longer.  There are also some earlier Ohio-based blogs that are no longer publishing.  In addition, there are several "business" blogs based in Ohio that touch on legal issues from time to time, but that's a subject for another day.

I hope I haven't forgotten anyone, but if I have, just add a comment with your URL and then we'll know about you too. 

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Lots of interesting posts recently in the world of employment law.....

Chris Moander of the Wisconsin Business Law and Litigation cautions Employee references are like ghosts -they can haunt you forever.  He links to an article in the April 2008 issue of the Wisconsin Lawyer  by Matthew L. Mac Kelly entitled Employer Liability for Employment References.  According to the article, the four areas of potential liability employers face when responding to a reference check are:

• defamation
• invasion of privacy
• retaliation claims
• negligent refertal/failure to warn

The article explains how each of these problems might arise and provides some useful guidance for minimizing an employer's risk in providing reference information on former employees.

Jon Hyman of the Ohio Employer's Law Blog reports that EEOC settles landmark "cat's paw" discrimination  case.  As Jon explains, this case points up that employers can be held liable for adverse employment decisions made in reliance on information provided by a supervisor or other employee motivated by an impermissible bias such as racism.  

Jon also has an interesting post Court vindicates employer who turned a blind eyeto a request for a reasonable acomodation about an Ohio Eighth Appellate District case Buboltz v. Residential Advantages, Inc.  Although the employer successfully survived the charge it failed to provide reasonable accomodation to a blind employee, Jon believes that employers should not underestimate their continuing duty in this area.

Mike Hamblin over at the Michigan Business Lawyer Blog provides advice about What Should a Michigan Business Do If It Suspects One of Its Employees is Committing a Crime?

Dan Schwartz of the Connecticut Employment Law Blog provides a helpful reminder about the importance of notifying your insurance carrier early of employment liability claims if you are unfortunate enough to have events occur that might result in litigation. 

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Earlier this month, Jon Hyman over at Ohio Employer's Law Blog made several excellent posts about making sure your interview process for prospective employees doesn't inadvertently violate the law: 

• How to "Avoid Hidden Interviewing Traps"
• "Common Stereotypes to Avoid During Job Interviews"
• "Avoiding More Discrimination Traps"

Jon makes the point that some perhaps seemingly innocuous questions can be impermissible under employment law.  To illustrate this, Jon gives some specific examples showing both the right way and wrong way to ask a question.  Some of them are more obvious than others such as "How old are you?" which I think we all know is a bad question for a variety of reasons.  Others such as "That is an interesting accent, where were you born?" were not things I would have necessarily thought impermissible.

Jon also provides some very helpful guideposts regarding topics and stereotypes to avoid during the interviewing process.  For example, when interviewing someone with a disability, don't ask "What happened to you?" or "How will you get to work?" Jon also cautions against stereotypes in your advertisement of the position (e.g. "young grad").

Here again, some are things you already know (or should know) better than to do and might be things you don't think you would ever do anyway.  But others such as not over-emphasizing the city's aspects as a family friendly environment and a terrific place to bring up children are much less obvious.   

In addition, Jon points out that what you write down in your notes  of the interview with the prospective employee can be just as devastating as failing to establish proper procedures or asking impermissible questions.  For example, if the applicant has a name commonly used by both men and women, don't write "female" in your notes.  If you do and you ultimately don't hire her, you might find yourself on the receiving end of a lawsuit alleging discrimination.  

Bottom line - stick as closely as possible to the job requirements and how an applicant's work-related background matches up.  And be very careful what you write down in your notes of the interview.   

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Your best salesperson has just left for your major competitor.  Although you are fairly certain she didn't take any company documents or written customer lists, you are equally sure that she knows EXACTLY who your best customers are and the most effective way to contact them.  You always meant to get an Employment Agreement, complete with noncompetes and confidentiality provisions, signed up with this employee, but somehow never quite got around to it.  So what now?  Is there anything you can do?

Well, last week the Ohio Supreme Court brought joy to the hearts of procrastinating employers everywhere in the state when it ruled that the use of a memorized customer list by a former employee to the detriment of his one-time employer constituted a trade secret protected under Ohio's Uniform Trade Secrets Act.  In Minor & Assoc. v. Martin, 2008 Ohio 292, a unanimous Ohio Supreme Court upheld a trial judgment in favor of the employer in the amount of $25,973 even though the employee had no employment agreement and was not subject to any noncompete or confidentiality provisions.  The Public Information Office of the Ohio Supreme Court issued this summary of the decision.

Issue Presented. The new Employer Law Report blog [welcome to the blogosphere], in a post prior to the issuance of the decision, framed the dilemma facing the Court as "creating what in  most cases would be a non-solicitation prohibition of an indefinite term" and a ruling that "could open the doors to the creation of de facto non-competition/non-solicitation agreements for which neither employers nor employees bargained."  As seen by the Ohio Supreme Court itself, the positions of the parties were as follows:

Martin asserts that a client list memorized by a former employee cannot be the basis of a trade secret violation and that the appellate court's decision in this case overly restricts his right to compete in business against AMA.  He also argues that AMA should not have the right to control the use of his memory and that AMA had the opportunity to protect its confidential information by way of an employment contract, which it did not do.

 

AMA counters that public policy in Ohio favors the protection of trade secrets, whether written or memorized; that the definition of a trade secret should focus on the nature of the information and the potential harm that its use would cause the former employer; and that no meanigful difference exists between a written and memorized client list.  

Decision.  This decision resolved a split in Ohio appellate courts.  Despite initially framing the issue somewhat more broadly, the Ohio Supreme Court chose to focus on the extremely narrow issue of whether the fact that the client list in question was memorized took it outside the protection of the Uniform Trade Secrets Act, codified in Ohio Rev. Code Chapter 1333.  After noting that the majority view made no distinction "between information that has been reduced to some tangible form and information that has been memorized" and recognizing that protection of trade secrets involves a balancing of public policies, the Ohio Supreme Court held:

the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee.  Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.  It is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one's memory, or in any other medium.  

In somewhat interesting dicta, the Ohio Supreme Court hastened to add:

Every employee will of course have memories casually retained from the ordinary course of employment.  The Uniform Trade Secrets Act does not apply to the use of memorized information that is not a trade secret pursuant to R.C. 1333.61(D).

>>Unintended Consequence.  Jon Hyman of the Ohio Employer's Law Blog sees the decision as an expansion not only of trade secret protection, but also the class of employees against whom noncompetes can be enforced.  While that might initially appear to benefit employers wanting to protect sensitive information, Jon adeptly points out that this may also complicate matters for employers hiring former employees of competititors.  Just asking these new hires whether they are subject to noncompetes or confidentiality provisions and ensuring they've brought no documentation with them may no longer be enough.  

For some of the other thorny questions raised by the decision, read Kevin Griffith's post in the Employer Law Report Blog.  In particular, Kevin wonders whether the "simple knowledge that the Al Martin clients were in need of pension analysis services would have trumped the publicly available information  [obtained through Google] to preserve the protection of the trade secret."  He also agrees with Jon that employers hiring employees from competitors may now have addditional hurdles to that decision.

Issue Not Addressed.  I agree with Jon and Kevin that the decision raises troubling questions for employers considering hiring one of the employees of the competition.  However, one of the  things I find most interesting about the decision is what WASN'T ADDRESSED, namely the scope of what constitutes a "trade secret" in the first place.  While Martin briefed this issue, it apparently was never raised in his memordandum in support of jurisdiction so the Ohio Supreme Court made it clear that this issue was not before it, in essence assuming without deciding that the customer list in question was in fact a trade secret.

To really evaluate what this decision means for the future, I think you have to go back to the Franklin County Tenth Appellate District Court of Appeals decision, 2006 Ohio 5948 , which spends considerable time on this particular question.  It notes that "[a] customer list is an intangible asset that is presumptively a trade secret when the owner of the list takes measures to prevent its disclosure in the ordinary course of business to persons other than those the owner selects."  The Court of Appeals then goes into some detail about the measures taken by the employer in this particular instance:

the trial court determined AMA's client list was an intangible asset that AMA acquired by devoting considerable time and resources over a 20-year period.  The trial court also concluded AMA took sufficient precautionary measures to assure the client list remained confidential, including (1) informing its employees that its client information was confidential and was not to be made public; (2) circulating a Computer Usage Policy that reminded its employees the client names and associated information were confidential, were not to be made public, and were not to be removed from the confines of the office; and (3) securing client information from those entering AMA'a office....

 

the trial court, through its magistrate, found that although a browser could enter an individual client's name into http://www.freeerisa.com/ and obtain the client's contact information, a browser could neither independently obtain a compiled list of the clients AMA serviced nor determine which clients needed third-party pension plan administrative services....

 

The evidence demonstrates AMA spent considerable time and energy compiling its client list and used adequate measures to protect the client information from its competitors.  Because the evidence reflects no readily available means by which someone outside the employ of AMA can specifically identify AMA's clients and readily determine which clients need third-party pension plan administrative services, AMA's client list is a trade secret under R.C. 1333.61(D).            

What is perhaps even more interesting is the Court of Appeals take on the "tension between a company's right to be protected against unfair competition and an individual's right to the unhampered pursuit of livelihood."  Because the request for injunctive relief had been withdrawn, the Court of Appeals felt that it was not called upon to resolve this tension and explicitly states that "the trial court's judgment does not enjoin defendant from contacting AMA clients in the future but only requires defendant to compensate AMA for past monetary damages."  In addition, the Court of Appeals rather tantalizingly takes note of "the constantly changing nature of business information and the relatively short period of time during which such information can be deemed sufficiently relevant to warrant trade secret status." 

So what I'm wondering is how would this all come out if a former employee of a start-up business (which never really had a chance to implement precautinary measures to protect customer lists) moves to a more established competitor with a customer list in his head largely consisting of customers this employee brought into the former employer, especially if a few months go by between the time the employee leaves the start-up and starts working for the established corporation. 

Bizpointers.  So what does this all mean for the mobility of key employees and the effect on businesses?

• If you're an employer concerned about protecting customer lists and other sensitive information, you are certainly in a stronger position than before, especially with respect to information being carried around in the heads of key employees.  However, you can't just assume that you're now covered as far as trade secret protection.  DO take the time to implement at least some precautionary measures emphasizing the confidentiality of this information with employees.  Formal written policies would be best, but even customary office practices will help.  And, yes, having employment agreements, noncompetes, and/or confidentiality agreements for key employees is still a good idea.  

• If you're an employer considering hiring away some of the competition's best people, the recruiting process may have gotten more complicated.  You still need to ask about noncompete and confidentiality agreements, but now even if the prospective employee isn't subject to one, there could be trouble down the road.  If you really want to be safe, consider having these individuals work in other capacities within your company for a few months.

• If you're an individual considering making a move across the street, understand that the process may now be more complicated, even if you are not subject to a noncompete or confidentiality provision.  Go easy on contacting customers of your old employer for the first few months at your new position.

• And one more thing....  If you're considering selling a business with confidential customer lists and other trade secrets and ensuring that key employees stay with the company following the change in ownership is important to the value of the business, recognize that this new decision by the Ohio Supreme Court may mean you can assign some additional value to the business that a prosective buyer may be willing to pay. 
  • To the extent it just got harder for competitors to hire top employees, the buyer can be more assured of retaining the employee base and the extra value associated with that continuity.   
  • In addition, if the seller of a business can be prevented from using "customer lists" that are in his/her head, there is a value to that.  This is particularly true when the seller has operated a business for many years and has long-time customers who have become friends.  (In other words, the seller did not review a customer list, repeat the list to himself over and over until he/she got to the car, and then scribbled the list frantically before leaving his former employer's parking lot).  Apparently, under this decision, the seller may NOT solicit, contact or use that knowledge to compete with the buyer--even when the buyer did not protect himself by negotiating a non-compete/non-solicitation agreement, at least for some period of time.  When negotiating an asset purchase transaction, this decision might be relied upon to create value and designate some sum of the purchase price to this intangible asset.  Hat tip to my colleague Chris Pettit here at Lane Alton for suggesting this possibility.       

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Suppose you want to incentivize and reward motivated employees, but you've read my earlier post on The Ugly Truth About Giving Others (Especially Employees) a Piece of Your Business and you have been become understandably concerned about giving up even a sliver of ownership in the company.  What can you do?  One answer may be to offer some sort of "mirror" or "shadow" equity which allows participating employees to benefit from the growth of the company in the same way they would if they were truly equity owners, but lets you avoid some of the control and fiduciary duty issues that might arise if they really were.

Years ago (and often still), these sort of plans were often called "phantom stock" plans, a term I suppose many found slightly offputting.  After all, if it's "phantom", how can it be real and why would anyone want something not real?  So sometimes they came to be called "stock appreciation rights" or something similar.  In any event, the terms which may now be coming into vogue are "mirror equity" or "shadow equity" -- which does have a fairly nice ring to it.

Importantly, for both the company and the participating employee -- unlike the grant of actual ownership equity in the form of stock or membership interests -- with "mirror/shadow equity", there are NO tax consequences for either party until the employee actually receives a cash payment under the plan.  For the participating employee, this may be more beneficial than receiving actual restricted equity which cannot be sold for a period of time, but nevertheless counts as income upon which taxes must be paid. 

Essentially, "mirror equity" allows participating employees to have the benefits of equity ownership by granting them deferred compensation based upon such factors as longevity of employment and the financial performance of the company over time.  In many respects, it can operate in much the same way as a 401(k) program does with the same sort of vesting schedule decisions for the employer, i.e. it can be a gradual progressive vesting or a "cliff" schedule requiring a period of time before vesting occurs.  And, unlike a 401(k), the employer can selectively choose to allow only certain employees to participate and can grant differing amounts of mirror/shadow equity to various employees based on their particular performanace  and value to the company.  Thus, there is a great deal of flexibility and customization which can be included in whatever program the company decides would be advantageous.  

Here's how it works.  Participating employees are granted a "unit" of some kind whose value is tied in a specified way to the actual value of the company.  This might be exactly equal to a share of stock in the company or it might be tied to some other financial benchmark such as net income.  As the actual value of the company increases, so too does the value of the mirror/shadow equity. 

Depending upon the format of the plan, participating employees earn bonuses based on positive financial performance of the company according to the benchmark metrics selected.  The plan can provide for payouts annually, after a certain period of time, or tied to particular events such as the employee's retirement or the sale of the company.  Often, the value of any dividends declared is also added to the participating employee's mirror/shadow equity account.  Payouts may be made in installments or as lump sums.  Click here for a discussion of a specific example of how this might work in practice.   

Thus, from the participating employee's standpoint, they receive much of the financial benefit of actual ownership without having to expose themselves to the less rewarding "risk" aspects of actual ownership, including the possibility that there may be no buyer on the open market for ownership interests in a smaller privately held business.  From the owner-employer's standpoint, deserving employees crucial to the growth and success of the business are able to share in the financial success of the business, but ultimate control over the direction and future of the company has not been sacrificed.  In addition, payouts could also be conditioned upon compliance with applicable noncompetes or confidentiality provisions.

The one downside for both parties is that depending upon the complexity of the plan, benchmarks, and formulas selected, recordkeeping  and accounting may require some sophistication.  In addition, the Internal Revenue Service recently issued Section 409A regarding some valuation considerations that must be taken into account.  Click here and here to learn more about this.   

Overall, mirror/shadow equity provides an excellent way to reward and incentivize employees in a beneficial manner to owners.  Employees can enjoy the economic benefits of ownership while owners retain control of the company.

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Thinking about rewarding a loyal employee by giving him or her a small ownership piece of your company?  Figure you'll still "call all the shots" because your ownership piece is so much bigger?  You may be unpleasantly surprised if you and your new business "partner" don't see eye to eye on how the business should be operated or what price it should be sold for.

Every business owner faces the question of whether to share ownership of his or her company with others.  Sometimes it happens early in the company's life cycle and is seen as a way to attract and compensate talent that might otherwise not be available to a young business.  It may also arise as the founder of the business approaches retirement and seeks a successor.  Other times it may simply seem like the "right' thing to do to reward and motivate loyal employees.

Whatever the reason, it is important to understand what sharing ownership really means under Ohio law.  Selling or giving even a very small ownership stake to someone else can restrict your rights to control the company and its operations in ways you may not have intended or even considered.  This is because under Ohio law, owners in small privately held companies owe one another a "fiduciary duty" to treat one another fairly.

It may seem logical to reward longstanding loyal employees with "skin in the game" by giving them an actual ownership interest in the business they have served so well for so many years.  Giving your new business "partner" access to financial data and other company books and records may seem like an excellent way to further motivate and recognize a deserving employee.  You may also feel you need to do this to attract key talent at a crucial point in the company's life cycle when you might not otherwise be able to pay a competitive compensation.  

In a business context, however, allowing others to hold even a very small ownership stake may come with rights and responsibilities you weren't counting on.  Are you willing to have this individual hold up the sale of the entire business?  What about letting your new co-owner influence and affect when the company repurchases some or all of your ownership stake?  What happens when this person leaves the employment of the company voluntarily or at your insistence?  If your new co-owner becomes intolerable to work with, ending the relationship is no longer as simple as saying "you're fired!"  Even something as ordinary as employing an owner's children in the business can be a problem if the same opportunity is not available to all owners.      

Fiduciary Duty of Owners to Each Other. Under Ohio law, owners of small businesses with only a few shareholders, members, or partners have a "fiduciary duty" toward one another.  Essentially, every owner must treat every other owner "fairly" when it comes to the company's business and financial affairs and opportunities.  The interests of the company must come before that of any particular owner. 

Using one's controlling ownership interest to cause the company to take action(s) unfairly favoring the majority owner at the expense of those with only a small ownership interest is not an option.  "Sweetheart" deals with other businesses resulting in financial benefits only to those with the largest ownership share become suspect. 

Effect on Exit Strategies.  Adding another owner can also affect exit strategies.  By statute, minority shareholders in a corporation have the right to demand the "fair cash value" of their shares upon the sale of the corporation or substantially all of its assets.  This becomes important if the corporation is struggling and the minority shareholder believes the majority stakeholder is selling out for too little.  It can also be an issue if the majority owner is perceived to be getting a "juicy" consultant arrangement with the new owners.  Receipt of any extra "premium" payment for the control a majority owner's ownership share provides may also be successfully attacked in some cases.  Similarly, having the business to buy back the shares of the founder's widow at a premium might seem fair, but if the same opportunity is not given to owners with smaller equity stakes, a breach of fiduciary duty may have occurred. 

Firing Your New Business "Partner".  Have you considered how your new shared ownership of the company complicates terminating that person's employment should that become necessary or desirable?  While you may not be immediately aware of it, granting an employee an ownership interest can subtly change the at-will nature of that employment.  You may no longer be able to terminate that person's employment for no reason other than you felt it was time. 

Now courts will require demonstration of a "legitimate business purpose" for terminating a fellow owner's employment, no matter how small the ownership interest held.  Termination must be based on a good reason.  It cannot be merely the product of a strategic move by the majority owner to "squeeze" the minority out of the company on overly favorable terms to the majority stakeholder.     

Firing your fellow owner because he or she cheated on your child/sibling or because they have simply become insufferable is unlikely to qualify.  Even something like declining productivity may not be enough in some cases.  Vehement disagreement about what direction the company should take which results in the majority owner believing his employee-owner is not satisfactorily pursuing the proper course may, or surprisingly often, may not be sufficient grounds for terminating the employment of a fellow owner.

LLC Applications.  Nor is this a problem restricted to corporations.  While no statute exists, courts have generally applied the "fiduciary duty" rule to limited liability companies, as well as corporations. 

Why Does It Work This Way?  Why do courts restrict the rights of the principal owner of a business this way?  Courts protect owners with only a small equity stake in the business because, unlike shareholders of large public corporations, they have no readily available market in which to sell their ownership interest and recoup their investment.  In addition, courts recognize that owners in privately held businesses often depend on their continued employment with the company for their livelihood, regardless of the size of their ownership interest.

Things to Think About Before Sharing Ownership.  So what can you do if you still want to include your employee in ownership?  Make sure you understand what you are also giving up before you bring someone else in as an owner.  The key is often to make sure everyone understand the ground rules from the beginning.  Explain in detail, in writing as well as orally if possible, how this will affect the employment relationship.  Be clear and specific as to what your expectations are concerning such matters as possible sale of the company or repurchase of your ownership interests.

A shorter version of this article was recently published in Columbus Business First, the Central Ohio Business Authority. 

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 Guest column by Donald M. Collins of Lane, Alton & Horst, LLC 

Originally, the Ohio Civil Rights Commission had proposed a rule that would allow pregnant employees to take pregnancy leave starting the day after they were hired.  After a series of public hearings and opposition from the business community, they modified this position to mean a pregnant employee could take 12 weeks of pregnancy leave the day after they were hired only if it was medically necessary.  For more on the factual saga, read John Hyman's Ohio Employer's Law Blog by clicking here, here, and here.

This was a concession to the interests of the business community.  When the Ohio Civil Rights Commission had this new proposed rule in front of the Joint Committee on Agency Rule Review, they were rebuffed.  In addition, the Governor announced his withdrawal of support for the appointment of Barbara Sykes as head of the Ohio Civil Rights Commission.  She has since resigned.

 The Ohio Civil Rights Commission position was more advantageous to employees than that required under Federal law.  Under the Family Medical Leave Act, an employee had to be at work at least one year and the employer needed at least 50 employees to fall within the ambit of FMLA.  The Ohio Civil Rights Commission proposal would have granted this benefit to employees starting on the second day of employment and for employers who have as few as 4 employees.

 Now the Ohio Civil Rights Commission has to decide what it is going to do.  Their main argument all along was that the rule clarified already existing regulations.  They argued that this proposed change merely specified when employees could take that leave.  Now with the stern opposition to this proposal, even the rule that exists is in jeopardy.

Come hear Ohio Civil Rights Commission Legal Counsel Matt Miko and Executive Director G. Michael Payton discuss what might be next at an Employment Law Briefing on January 25, 2008 at the law offices of Lane, Alton & Horst.  To learn more, click here or here.

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In Seawright v. American Gen Fin Servs., Case No. 07-5091, the United States Sixth Circuit handed down a contract case this week in the context of an employment law issue. At issue in the case was whether an arbitration clause contained in a written employee policy whereby any disputes between the employee and the company were required to go to arbitration was enforceable. The Court, applying Tennessee law, framed the issue as whether the employee's continued employment at the company constituted assent and held that it was. Ross Runkel provides an excellent overview of the facts and holding in the case in his Ross' Arbitration Blog, as well as links to other blogs commenting on the case.

Much of the attention in the case has gone to a particularly witty footnote penned by Judge Boyce Martin in his dissent which aptly illustrates his point that it is difficult to know if the offeree has truly accepted when the absence of a signal is taken as assent:

Homer Simpson talking to God: " Here's the deal: you freeze everything as it is, and I won't ask for anything more. If that is OK, please give me absolutely no sign. [no response] OK, deal. In gratitude, I present you this offering of cookies and milk. If you want me to eat them for you, please give me no sign. [no response] Thy will be done."

Comments to Jon Hyman's posting in his Ohio Employer's Law Blog on the case suggest that the case might come out differently under Ohio law and reference the 2001 unreported case of Strasser v. Fortney & Weygant, Inc. out of Cuyahoga County (2001 Ohio App. LEXIS 5738). (Interestingly, while the case easily came up on a LEXIS search, I could not find it at all on the Ohio Supreme Court's public website of Ohio appellate court opinions.) Strasser involved a terminated employee who had received an employee handbook containing an arbitration provision regarding any employee disputes with the employer.

In Strasser, the Ohio Court of Appeals spent a large portion of its opinion discussing the disclaimer the employer had included in the handbook specifially to avoid making the handbook become an enforceable contract, eventually holding "An employee cannot be held to accept the guidelines of a handbook that an employer is not bound to keep." The Court also focused on the fact that the arbitration provisions were not conspicuous.

Seawright and Strasser can be harmonized by distinguishing between a policy which binds both employer and employee as in Seawright and one that does not as in Strasser. However, dicta in the more recent unreported Franklin County case of Corl v. Thomas & King, 2006 Ohio 2956, 2006 Ohio App. LEXIS 2828 suggests that Seawright might very well come out the same way under Ohio law. That case involved an employee who voluntarily terminated her employment with Applebee's after being attacked as she exited the restaurant after her shift when the company refused to provide her with a police escort going forward.

Although there was some disagreement as to the precise date the promotion occurred, the employee in Corl had recently been promoted to being a restaurant manager and had signed indicating receipt of a manager handbook containing an arbitration provisions. While the decision turned on the fact the employee had signed and initialed the arbitration provisions, the Court also stated, "even if plaintiff were promoted to manager prior to October 1, 2002, plaintiff's continued employment with Applebee's and Applebee's forbearance from discharging plaintiff served as consideration needed to form an agreement."

In an employment context, the result in this case may well make sense. Employers frequently adopt new policies affecting employees in everything from health insurance and reimbursement procedures to more important substantive employee conduct policies. Most people expect and accept this to happen.

Of greater concern is how this might work in other contractual situations. For years, the "battle of the forms" has raged in transactions as each side tries to impose its terms on a particular deal. In this context, it is the acceptance of delivery that mirrors the continued employment as manfesting consent to the new terms. Courts have tried to prevent the "last shot" type of offer and acceptance the concept advanced by Seawright might encourage. Thus one hopes that the case will remain limited to its facts or at least its factual context.

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Jon Hyman over at Ohio Employer's Law Blog made a couple of interesting posts this week about the importance of having an efficacious sex harassment policy and the consequences of failing to do so.  One case involved a sixteen-year old part-time employeee at her general manager boss at a Milwuakee Burger King and the other involved South Dakota school district co-workers.  In the Burger King case, the Seventh Circuit Court of Appeals commented negatively about the complexity of the employee complaint process for bringing such a claim to the attention of management.  In the school district case, the Eighth Circuit Court of Appeals found the remedial process in place to be completely ineffective.  

 While neither of these cases involved Ohio law, they do illustrate the importance of having effective anti-harassment policies.  As Jon points out, there are several key components of having an effective policy and procedures for handling complaints.  Among them are that any procedure must be:

1. Easy to understand.  The process for handling complaints must be realtively straightforward and easily understood by employees.

2. Enforced.  Remedial action should be progressively more harsh and there must be follow-through on the sanctions employees are told to expect for inappropriate behavior.

3. Employee-centered.  Because the improper behavior may include that of a supervisory employee towards a subordinate, there must be multiple avenues available to employees to express their concerns, including some that allow an employee to bypass their immediate supervisor.

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Is an employee with a non-compete or confidentiality agreement still bound by it after the employer sells the business to a new owner?  Can the new owner enforce such an agreement which was made between the employee who continues working for the company and the prior owner?

Everyone understands that before buying another company, lots of "due diligence" about finances, customers, products, and general business operations should be done.  While these are certainly important concerns, you must also not lose sight of the "human capital" in the form of employees that you will be inheriting regardless of whether you choose to structure the transaction as an asset or a stock transaction.  How can you be certain that key employees won't depart to work for a competitor?

You can of course "rehire" employees, taking care to have each of them sign new confidentiality and/or noncompete agreements.  But what about employees who simply decide they'd rather go work somewhere else than remain employed under new ownership?  In addition, inevitably, not all of the "rehires" will have signed the new agreements.  There may also be cases where it is simply not feasible to have everyone sign new agreements.  So the issue becomes whether the new owner can rely upon noncompetition and confidentiality agreements predating the change in ownership.

Ohio, like many other states, generally views noncompetition agreements with some degree of skepticism.  Confidentiality agreements must likewise be supported by good business reasons.  As a result, these agreements, while enforceable, will be strictly construed.

The same reluctant enforcement also applies to the ability of new owners to enforce noncompetition and confidentiality agreements made by the employee with the previous owner.  As one might expect, as long as a business merely changes its corporate form (as when a sole proprietor decides to incorporate), but otherwise remains the same with the same ownership  and operations, it has long been the law in Ohio that noncompetes remain enforceable.  Rogers v. Runfola & Assoc., Inc., 57 Ohio St.3d 5, 565 N.E.2d 540 (1991).  It's also fairly clear that if an employee simply chooses of his or her own accord not to work for the new owner, the new owner is permitted to enforce such covenants.  However, where there has been a change in ownership and the employee remains employed, it becomes more complicated.

When ownership of the business changes hands and the employee remains employed for a period of time, Ohio courts ask two basic questions: (1) whether it was contemplated that the noncompete/confidentiality covenant would be assigned; and (2) whether allowing the enforcement of the noncompete/confidentiality covenants against the employee is important to preserve the goodwill of the business sold.  See The Fitness Experience, Inc. v. TFC Fitness Equipment, 355 F. Supp. 2d 877 (N.D. Ohio 2004); Artommick Int'l v. Koch, 143 Ohio App.3d 805, 759 N.E.2d 385 (10th App. Dist. 2001). 

In answering the first question, it is not essential that the underlying noncompete/confidentiality covenant specify that it is assignable, but that is certainly helpful.  Courts have also found that a general assignment of the employment contract without specific mention of the noncompete/confidentiality covenant is sufficient.  In this regard, Ohio is more liberal than many other states which require affirmative provisions allowing assignment. 

In addressing the goodwill issue, Ohio courts may look at the underlying business as it exists following the change in ownership.  For example, in Relizon Co. v. Shelly J. Corp., the Court noted that the new owner had led the employee to believe that his customers would no longer be service dby the company and the Court thus concluded that since it was "unclear" what goodwill was being protected, the noncompete was unenforceable by the new owner.

For more information about how other jurisdictions address this issue, information can be found at 12 A.L.R.5th Enforceability, by purchaser or successor of business, of covenant not to compete entered into by predecessor and its employees.

 PRACTICAL COUNSEL:  

1. When preparing a noncompetition or confidentiality agreement to be signed by employees, be sure to include a provision allowing assignment of the agreement.  This can add value later if you want to sell the business.

2. Don't despair if there isn't a provision allowing assignment of the prior noncompete or confidentiality agreement, but recognize that this may be a loophole.  Some Ohio courts have also found the fact that the new owner tried in vain to have employees sign new noncompete agreements as supporting its conclusion that the prior agreements were nonenforceable so be careful about insisting on new agreements.

3. Don't give courts a reason to decide that allowing enforcement does nothing to preserve the goodwill of the business which has been purchased.  Consider adding something to the business purchase agreement recognizing the importance of the assignment of these agreements.  Be careful how quickly you phase-out marginal aspects of the business.

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