Non-competes gain popularity, but not always enforceability

Today’s American workforce is more mobile, sometimes switching jobs every few years. As a result, there are more non-competition, non-solicitation and non-disclosure agreements or covenants (commonly referred to as non-competes) being established and enforced than ever.

Once reserved almost exclusively for high-level executives with access to trade secrets, non-competes are commonplace today. Nearly 20 percent of American workers are currently bound by some type of non-compete agreement.

“Not only do these agreements cause uncertainty for an employee who has intentionally or unintentionally been separated from employment, but they also create challenges for those employees’ prospective new employers who typically don’t want to become involved in litigation with the old employer,” says David Cuppage, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA.

Smart Business spoke with Cuppage about the enforceability of employee non-compete agreements.

What distinguishes an enforceable from an unenforceable non-compete?

Although Ohio courts generally look upon such covenants with skepticism and have cautiously considered and scrutinized them, they can be enforced. A non-compete that imposes unreasonable restrictions upon an employee, however, will be enforced only to the extent necessary to protect an employer’s legitimate business interest. The covenant is reasonable if the restraint is ‘no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.’

In non-compete cases, the future effects of the covenant must be considered. Ohio courts generally must determine whether real or long-term damage will result to the employer’s goodwill or to the employer’s future income because of the operation of the competing business. Paramount to enforcement of a non-compete is to prevent ‘unfair competition, not ordinary competition.’

What happens when enforcement of a non-compete prevents ordinary competition? 

There are cases in which a former employer, who has no legitimate basis to seek enforcement of a post-employment restrictive covenant, sends cease and desist letters to an employee or to the employee’s current employer.

There are also instances in which a former employer, who has failed to pay an employee the consideration called for in the agreement containing the covenant, sends a cease and desist letter to the employee or the employee’s current employer. In those cases, the questions become, is the employee without rights or remedies? And must the employee simply wait out the time period set forth in the covenant or engage in competition at the risk of being sued? Not necessarily.

There are several situations in which Ohio courts have ruled against non-compete agreements. One example is when an employer has ceased its business activity in a particular field and no longer has a legitimate interest in competing in that field. Another example is when an employer has failed to pay consideration called for in an employment agreement. Other situations may also cause the court to rule in the employee’s favor.

What happens if the court rules that the non-compete is unfair and unenforceable?

In these types of cases, an employee may decide to go on the offense and seek declaratory and injunctive relief from a court to prevent the former employer from enforcing or attempting to enforce a non-compete.

While irreparable harm must be demonstrated by the employee, courts have found that injury to an employee’s reputation, active opposition to an employee’s attempts at finding gainful employment, lost employment opportunities and the need for a severed employee to regain industry stature within a short period of time may constitute irreparable injury.

This could then justify the issuance of a temporary restraining order and/or preliminary injunctive relief that prevents the enforcement or attempted enforcement of an invalid post-employment restrictive covenant.

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