A severance agreement executed in connection with a Stark Truss employee’s resignation included a one-year non-competition clause. It allowed the company unfettered discretion to decide if his new employer was a competitor and, if so, to terminate his severance. The ex-employee took another job and sued Stark Truss in an Ohio court, seeking a declaration that he was entitled to 100% of his severance. The trial court’s judgment for Stark Truss was affirmed on appeal. Saunier v. Stark Truss Co., Case No. 2015CA00202 (Ohio App., May 23, 2016).

The parties. Stark Truss is an Ohio manufacturer and distributor of wood and steel components used in building construction. Saunier, a 35-year employee, was the company’s asset manager. Immediately after his separation from Stark Truss, Saunier accepted a similar position, nearby, with Carter Lumber.

Stark Truss’ “sole discretion”. Under the severance agreement, Start Truss had “sole discretion” to denominate Saunier’s subsequent employer a “Competitor.” The definition of “Competitor” was a business located within 100 miles of Stark Truss and “substantially similar” to that company. Saunier was required to provide the company with detailed information concerning his new employment. If Saunier affiliated with a “Competitor” within one year from his separation date, he forfeited further severance payments. Stark Truss determined that Carter Lumber was a “Competitor.”

Ruling on appeal. The Court of Appeals noted that both parties were represented by counsel in negotiating the Severance Agreement. Consistent with several Ohio judicial decisions involving a “sole discretion” contract provision in other contexts, the appellate tribunal determined that the clause was unambiguous and was valid.

The court did not address the issue of whether Stark Truss’ “sole discretion” was without limitations. Perhaps the judges concluded that the company’s determination was within the bounds of sound judgment and, therefore, it was reasonable. Nor did the judges say whether the same ruling would have been issued to a “sole discretion” provision in a traditional employment contract non-compete rather than a severance agreement.

Takeaways. The Saunier appellate court held that, under the circumstances there, an employer may reserve to itself the unilateral right to decide whether an employee has violated a non-compete. Is such “sole discretion” unqualified? Probably not.

There are very few reported decisions mentioning, much less adjudicating, the limits of a “sole discretion” contract provision in a non-compete context.

  • One opinion that refers to a “sole discretion” provision within a non-compete agreement is SkyHawke Technologies LLC v. Unemployment Commission, 27 A.3d 1050, 1052-53 (Pa. Commonwealth Court 2011). However, the court did not address the provision’s validity. There, an individual had a contract to provide services to a company. He was permitted to furnish similar services to others, but he could be fired if the company determined, in its “sole discretion,” that his performance of those similar services was not in its best interests. The company apparently made such a determination and terminated the contract. The litigation concerned (a) the individual’s claim that he had been an employee and was entitled to unemployment compensation, and (b) the company’s counter that he had been an independent contractor to whom no such compensation was owed. The court ruled in favor of the company but without significant discussion of the “sole discretion” provision.
  • A case holding that “sole discretion” sometimes is unlimited is Sunshine Gas. Distributors, Inc. v. Biscayne Enterprises, Inc., 39 So.3d 978 (Fla. App. 2014). Each party to a lease had “sole discretion” to decide whether or not to renew. The jurists stated that imposing a duty of “good faith and fair dealing” with respect to a contract containing what they called a “binary choice” would frustrate, rather than protect, the parties’ interests. 39 So.3d at 980 n.1.
  • However, an older Florida Appellate Court decision, Cox v. CSX Intermodal, Inc., 732 So.2d 1092, 1097-98 (1979), explained when a “good faith and fair dealing” requirement should be imputed with respect to an exercise of “sole discretion.” In the jurists’ view, if a “broad range of authority is reposed in one party” to a contract, “the reasonable expectations” of the parties may need to be protected from an arbitrary discretionary decision. So, if the parties seem to have anticipated that community standards of honesty, decency and reasonableness would be applied, “good faith and fair dealing” is required. Although the Cox lawsuit did not involve a non-compete, the same principles might well be applied to an employer exercising “sole discretion” to decide whether an ex- employee is engaging in prohibited competition.