The 411 on Restrictive Covenants
As the modern economy continues to evolve into one based in service and technology, and as competition for the best employees increases, employers and employees alike may be faced with challenge presented by restrictive covenants.
The term “restrictive covenants” is legal jargon for employment related agreements that seek to limit an employee’s rights and/or reduce an employer’s exposure upon expiration or termination of the employment relationship. These usually take the form of non-compete, non-disclosure, and non-solicitation agreements. Sometimes the restrictive covenants are a separate document. More often, they are often included as provisions in an employment agreement or even as part of an employee handbook.
Whether an employer or employee, there are certain aspects of restrictive covenants that should be understood prior to utilizing. Employers often think they have the right to craft any type of restrictions and thus usually impose unduly burdensome and unenforceable restrictions. Conversely, employees often do not really understand what they are signing or the ramifications of the restrictive covenants on their ability to find work if the employment relationship ends. Regardless whether an alleged violation of a restrictive covenant is intentional or unintentional, employers and employees often find themselves litigating the enforceability of restrictive covenants.
Below are three keys elements of restrictive covenants that both employers and employees should strive to understand.
- First, the bottom line is that Ohio law generally disfavors restrictive covenants. Frederick D. Harris, M.D., Inc. v. Univ. Hosps., 2002 Ohio 983 (Ohio 8th Dist.). This is an important concept because it means that any restrictive covenant is automatically suspect in Ohio. Greff v. Meeks & Co., 1995 Ohio App. LEXIS 1658 (10th Dist. Apr. 20, 1995). As courts look at restrictive covenants with a critical eye, employers should be careful to not over reach when considering limiting employees’ rights at the end of the employment relationship.
- Second, before employees grow too confident in the potential to avoid restrictive covenants, the concept of “blue lining” must be understood. Ohio law permits courts to modify overly burdensome restrictive covenants to comply with traditional notions of fairness and reasonableness. Raimonde v. Van Vlerah (1975), 42 Ohio St. 2d 21, 24-25. So, even if the court finds a restrictive covenant to be too broad, the court can (and usually will) modify the contract to be reasonable and according to the parties’ intention at the time of contracting. Id. In this scenario, the employee will still be subject to the modified restrictive covenant and liable if in fact they violated it. In Rainmonde, the Court held “[a] covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer’s legitimate interests.” Id. at syllabus paragraph 1.
- Third, what do courts look at when considering the reasonableness and fairness of restrictive covenants? “A [restrictive] covenant … is reasonable if it 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.” Raimonde, 42 Ohio St. 2d at 26. Amongst other factors, courts look at whether the restrictive covenants impose geographic and temporal limits on the employee. Raimonde, 42 Ohio St. 2d at 25. The narrower the geographic and temporal restrictions, the more likely the court will enforce the restrictive covenant. For example an 18 month / county wide restriction will likely be more easily enforced than a 2 year / state wide restriction.
The prevalence of the Internet and a global economy presents unique challenges to the concept of reasonable geographic limitations. For example, if a salesperson for Company X is subject to a 2 year / statewide restrictive covenant, does she violate that covenant by taking a job with an Internet marketer which sells similar products to customers within the State? These are issues that employers and employees should think about carefully.
Finally, courts will consider the substance of the restriction itself. Does it prevent a person from obtaining meaningful employment in their field? Does it seek to prevent them from utilizing their personal skill, knowledge & experience by claiming them as trade secrets? Does it restrict trade or eliminate competition within a geographic area? Raimonde, 42 Ohio St. 2d at 25; Try Hours, Inc. v. Douville, 2013 Ohio 53, ¶45 (6th Dist.).
Restrictive covenants are here to stay, so employers and employees should understand their effect. The attorneys at WWKC are knowledgeable and experienced at advising, creating, and enforcing all types of restrictive covenants. We have represented both employers and employees throughout Portage and Summit counties, as well as northeast Ohio in general. If restrictive covenants are a legal issue you currently face please do not hesitate to contact our office to discuss your options.