The Noncompete Neither Party Expected: The Judiciary’s Role in Re-Crafting Noncompetition Agreements to Protect Only Legitimate Business Interests of the Employer
By: Jim Grove, Member
When it comes to the law governing the use of noncompetition agreements that restrict the future employment options of employees, legislative changes can be slow. On the federal level, the Freedom to Compete Act, Senate Bill 2375, introduced over one year ago to limit the future use of noncompete agreements and void existing agreements for non-exempt employees, remains stuck in Committee. Similarly, President Biden’s Executive Order from July 2021, which encouraged the FTC to act to address noncompete agreements “and other clauses or agreements that may unfairly limit worker mobility,” has seen no results, perhaps in part due to the delayed confirmation of Alvaro Bedoya as the agency’s fifth commissioner.
Federal inaction only emphasizes the role of our judiciary in scrutinizing restrictive covenants to determine whether a noncompetition agreement protects an employer’s legitimate business interests or is simply a device used to prevent fair competition.
Earlier this year, the Court of Appeals for Cuyahoga County, Ohio, decided a case that illustrates both how courts should evaluate a noncompetition agreement and the power the courts have to “re-write” restrictions that – even if agreed upon by the parties – the court deems too broad or unnecessary, which often results in an outcome that neither party fully expected.
In MetroHealth Sys. v. Khandelwal, 2022-Ohio-77, the court of appeals affirmed the trial court’s wholesale re-writing of a noncompetition clause that otherwise would have prevented a burn surgeon from leaving MetroHealth and accepting employment with Akron Children’s Hospital. In June 2020, the physician resigned as the director of MetroHealth’s Burn Center and accepted a position as the director of the Burn Center at Akron Children’s. MetroHealth sought to prevent that employment by arguing that the physician’s new employment violated the geographic and temporal restrictions in his contract, and that the physician could aid his new employer in unfairly competing with MetroHealth by accessing its referral sources and confidential business information.
The employment agreement signed by the physician included a post-employment restriction against rendering professional services for two years within 35 miles of MetroHealth, which included Akron Children’s. The court began by evaluating whether the restrictions in the agreement were necessary to protect a legitimate business interest of MetroHealth, and ultimately concluded that the restriction went beyond what was necessary to protect the physician’s prior employer. First, the court noted that burn victims ordinarily go to the center closest to them such that the physician’s new employment would likely not be an inducement to attract patients from his former practice.
Next, the court evaluated the degree to which restricting his medical practice would create an undue hardship for the doctor. The court noted the limited opportunities for a burn surgeon in northeast Ohio, the difficulty of getting credentialed if he were required to wait out the two-year restrictive period, and the disruption a relocation would cause to his wife (a trauma surgeon at Fairview Hospital) and family.
The court then evaluated the likely effect that sidelining a qualified burn surgeon would have on the general public. The court noted that the doctor’s two separate burn and surgical critical care fellowships made him uniquely qualified to offer medical services in northeast Ohio. It ultimately concluded that the public would be injured by depriving the community of his services. That perceived harm was balanced against MetroHealth’s claim that it would be irreparably injured if the doctor were allowed to practice at Akron Children’s.
In fashioning a remedy, the court distinguished between the doctor’s practice of medicine (which it allowed immediately) and assuming the role of director of Akron Children’s burn center (which it prevented for one year). The court protected MetroHealth’s interests by fashioning an order that prevented the physician from using or transmitting any confidential information of which he was aware (after concluding that the doctor no longer possessed any physical information), and as noted above took the further step of enjoining the physician from serving as the Burn Center director for Akron Children’s for one full year.
The decision is noteworthy for several reasons. First, it reveals the depth of inquiry required to evaluate the enforceability of a restrictive covenant. The information that underlies the court’s decision was elicited in three days of testimony involving both lay and expert witnesses.
Second, it illustrates that even when a restrictive covenant is too broad, it is not simply void. The court retains the power to craft the restrictions that it deems necessary to protect an employer’s legitimate business interests – restrictions that may very well leave both parties unhappy. Here, the court modified both the scope and duration of the noncompete when it allowed the physician to resume his medical practice for his new employer immediately but only reduced the restriction for assuming the administrative directorship position by one year.
In crafting or evaluating a noncompetition agreement, the following considerations are central to enforceability:
- Place limitations on future employment that are no more broad than reasonably necessary to protect a legitimate business interest.
- Understand what is commonplace for restrictions in your industry, both in terms of scope and duration.
- Don’t utilize restrictive covenants for every employee if the unfair competitive risk would only be experienced with the departure of employees in just a few job classifications.
- Be consistent with enforcement efforts when an employee departs for a competitor.
Given recent federal leanings, the future of restrictive covenants in employment agreements remains uncertain. Frequently, such restrictions are over-utilized in an employer’s attempt to address competition. However, when courts apply the thoughtful and reasoned analysis demonstrated in the Khandelwal case, employers and employees can take some comfort in knowing that all interests can be fairly protected by our judiciary.