Ohio courts do enforce covenants not to compete, which are also known as non-compete agreements, under certain circumstances. It is important to be aware, however, that a new law, called the Non-Compete Clause Rule, will govern non-compete clauses across the country, including in Ohio.
This new law bans the majority of non-compete agreements and only provides one exception. The law will be discussed at the end of this article.
Covenants not to compete are provisions contained within an employment contract or in a separate agreement. They require the employee who has signed the agreement not to work for a competitor of the employer after they stop working for the employer.
Or they may require the employee not to go into business for themselves and compete with the employer. They also might prevent the employee from soliciting the employer’s customers or clients when they leave their employment. These might be referred to as “non-solicitation agreements.”
Employers put covenants not to compete in their employment contracts because employers fear that former employees may reveal trade secrets to their new employers. Essentially, employers fear their competitors hiring their employees for the purpose of obtaining the employer’s trade secrets or other proprietary information in order to gain an unfair advantage.
Employees in many fields sign non-compete employment contracts. The employer may present the agreement to them at the start of their employment, during it, or even at the end of a person’s employment as part of a severance package.
The fact is that they can have a negative effect on a person’s ability to get a job and earn a living in the future. In Ohio, a person wants to carefully consider what rights they are giving up if they sign a non-compete agreement and what they get in return.
Many states do not allow non-compete agreements or limit their application, but Ohio is not one of them. In Ohio, an employer can still sue a former employee who violates the terms of a non-compete agreement for breach of contract. The employer might request a temporary restraining order or other court-ordered injunctions as part of their action.
Ohio courts enforce agreements that they view as reasonable. However, if a court determines that a particular agreement is not reasonable, it can rewrite the agreement for the employer so as to make it reasonable. Then, the court can enforce it.
The guiding factors that courts in Ohio use to determine whether a non-compete agreement is reasonable are as follows:
A court’s decision as to whether a provision is or is not enforceable does not depend on any single factor. Rather, an Ohio court reviews all of the unique facts of a case and weighs the factors together.
The employer has the burden of proving that the agreement it used is reasonable. The law in this area is changing and becoming less favorable to these agreements, so an employer would want to keep this in mind when drafting and defending them.
An employer might want to use non-compete agreements that are as narrow as possible in the constraints they impose on an employee. They may want to define their legitimate interests as narrowly as possible and consider their impact on the former employee and their right to get a job and pursue a livelihood.
Among the valid interests that an employer might try to protect are:
Again, an employer should give due consideration to any undue hardship an agreement would impose on their employee. In Ohio, the standard for assessing the effect on an employee is whether it is unduly harsh. The fact that an employee may not be able to work for a period of time may not be seen by an Ohio court as unduly harsh.
Finally, courts also take into account the sophistication and position of the employee or independent contractor. In addition, an employee may agree to a provision that the court views as overly broad and aggressive that they can later challenge. A court may well find the provision unenforceable.
Employees who plan to quit their employment in order to go out and start a similar business should consult an attorney if they have signed a covenant not to compete. A person in this position would want to get an attorney’s view as to what activities might be prohibited and what is allowed.
They would want to know what the consequences might be of engaging in activities that violate any agreement. Importantly, they want to know if there are options for avoiding the constraints of their non-compete agreement. For example, it might be possible for the employee to negotiate restrictions for a price. Or, they might be able to avoid constraints by relocating their enterprise.
Courts do not usually uphold covenants not to compete for at-will employees because at-will employees can be fired or quit at any time. Therefore, at-will employees who know trade secrets are discouraged from quitting their jobs when they know they will not be able to work somewhere else, as per a signed covenant not to compete.
Such control over the economic future of the employee amounts to a form of involuntary servitude. Nevertheless, as in Texas, a recent Ohio Supreme Court decision upheld the use of covenants not to compete in at-will employment contracts.
Ohio Courts usually do not uphold covenants not to compete signed after employment has begun, as there is no consideration supporting the contract after the promise to work has already been fulfilled. However, Ohio courts are split about whether such “mid-term” covenants not to compete are enforceable.
The Federal Trade Commission (FTC) voted in April of 2024 to enact a new federal law, the Non-Compete Clause Rule or Final Rule, that places a ban on the majority of non-compete agreements, with one exception. This new law goes into effect 120 days following the publication of the Federal Register, meaning it will likely be around August of 2024.
Once the Non-Compete Clause Rule goes into effect, all Ohio employers will be required to follow the new laws. Employers in Ohio can prepare for these changes by seeking legal advice from a local lawyer or in-house counsel who can help them begin preparations to comply with this new law.
The one exception to the Non-Compete Clause Rule is non-compete agreements that were entered into with senior-level executives, as they were more likely to have been negotiated. All Ohio employers will have to notify their workers that if they signed a non-compete agreement in the past, it will not be enforceable under the new law.
The Non-Compete Clause Rule will preempt the current Ohio laws that allow non-compete agreements in certain circumstances because it is a federal law. The new law will have an effect on employers and employees in Ohio because, as discussed above, all types of non-compete agreements, except for those with senior level employees, will not be enforceable.
These changes to the law may force Ohio employers revise, or even completely redraft the employment agreements they currently use. A lawyer can provide advice regarding the proper steps for businesses in the state to take.
The Final Rule is likely to be challenged as well as undergo changes and interpretations in the future. It has a severability clause that provides that, if any provision or part of the rule is declared unenforceable or invalid, the remainder of the rule will still apply.
In addition, the Non-Compete Clause Rule may be totally invalidated at some time in the future. As there are numerous possibilities of changes associated with the rule, it is essential for employers in Ohio to seek legal advice on how to protect their businesses by preparing for all of the possibilities.
If an Ohio employer or employee is already involved in a case with a non-compete agreement dispute, it is important that they request that their attorneys remain updated on the most current changes to the rule and the effect it may have on their claim and business. By staying updated, the parties will be able to present arguments in court to cover all of the different possibilities.
Although the new Final Rule will preempt the Ohio state laws currently in effect, it is still very important to be familiar with the current laws in the state, as that is what will govern if the Final Rule is struck down or portions are invalidated. As such, it is essential to be familiar with both sets of rules, as the current rules must be followed until the Final Rule is exacted in approximately August of 2024.
Ohio companies may determine it is best practice to still include non-compete agreements in their employer contracts, even though they may not be enforceable at that time. An attorney can help a business draft new agreements or edit existing agreements so that they can both comply with the new Final Rule and be prepared for the possibility of future changes.
If you know that you have signed a non-compete agreement and want to leave your employment to pursue other opportunities, you want to consult an Ohio employment contract attorney. Or, if you have been asked to sign an agreement and are not sure whether it is wise to do so, you, too, want to consult an attorney.
LegalMatch.com can connect you to a knowledgeable attorney who can review any agreement and help you understand your rights and your options. Or if you are an employer whose former employee has violated a non-compete provision, you, too, should consult an Ohio employment contract attorney for advice as to how to proceed.
In any event, your attorney can draft or revise non-compete clauses, represent an employer or employee, and represent you in negotiations and in court if that should become necessary.
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