Is a non-competition agreement enforceable? This is a question often asked by employers in many industries, when they contemplate requiring a non-competition agreement as a condition of employment. The answer depends on the facts and circumstances of each individual situation.
By way of background, in order to determine whether a non-competition agreement is reasonable and therefore enforceable, Ohio courts typically balance three factors:
- whether the agreement’s restrictions are necessary to protect the employer’s legitimate interests;
- whether the agreement’s restrictions impose an undue hardship on the employee; and
- whether the agreement’s restrictions would injure the public.
With these factors as the guideposts, the Ohio Tenth District Court of Appeals, located in Columbus, Ohio, recently rendered an employerfriendly decision on an employee-hair stylist’s non-competition agreement. (Charles Penzone, Inc. v. Koster, Slip Opinion No. 2008-Ohio-327, decided January 31, 2008.)
In Penzone, hair stylist Susan Koster signed several non-competition agreements during her 11-year employment with Charles Penzone, Inc. The last one that she signed stated that for eight months after her employment ended with Penzone, she would not “render any hair care treatment, hair care styling…or related services…to any persons who are or were customers of [Penzone] and with whom [Koster] had personal contact during the time of [her] employment, without regard to where those customers or [Koster’s] post-employment competition may be situated.” The non-competition agreement also contained a separate provision that stated that she would not compete against Penzone within a nine-mile geographical area. However, this provision was not an issue in Penzone, since Koster’s new work location was outside the geographical limitation.
Within less than one year following Koster’s departure from Penzone, Koster provided services to at least 94 clients with whom she had contact in her final year at Penzone. As a result, Penzone filed a lawsuit against Koster to enforce the non-competition agreement.
Although the trial court initially granted a temporary restraining order prohibiting Koster from servicing Penzone clients, the trial court subsequently held a hearing on the preliminary injunction, denied the requested injunction, and dissolved the temporary restraining order. The trial court found that the agreement was not enforceable because it did not satisfy the balancing test described above. The court concluded the following:
- Koster did not interfere with Penzone’s business interests and clientele since she did not solicit these clients (rather, the clients contacted her);
- Penzone imposed an undue burden on Koster, because she would be responsible for scrutinizing every client that walked in the door to determine if they were a former client at Penzone; and
- the non-competition agreement harmed the public because members of the public were prohibited from seeking services from their preferred hair stylist.
In addition, the trial court found that the eight-month restriction ran from the time Koster left Penzone for eight consecutive months, and it was not tolled while Koster was serving former Penzone clients.
The appellate court disagreed with practically all of the trial court’s conclusions, and reversed the trial court decision and remanded the case back to the trial court. The appellate court made the following determinations:
- Koster did interfere with Penzone’s business interests in violation of the agreement, because the agreement explicitly limited her right to “render” services to former Penzone clients and did not merely limit her right to “solicit” these clients;
- it was not an undue burden to “scrutinize every potential client” to determine if they were a former Penzone client with whom she had previous contact; and
- there was no sufficient harm to the public, because “the hardship to the public is analyzed by whether hair styling services are available, not whether the services of a particular hair stylist are available.”
Further, the appellate court found that Koster could not include the time before the temporary restraining order as compliance with the eight-month restriction, because “an injunction must account for periods of noncompliance in order to make judicial enforcement effective.”
Penzone provides employers another case to help bolster their argument when attempting to enforce a non-competition agreement. However, it also demonstrates that two courts can view the same facts differently in the non-competition context, as the trial court and appellate court did here. This case illustrates that non-competition agreements must be carefully drafted, taking into careful consideration the application of the three factors described above, in order for the employer to have strong arguments to successfully enforce the agreement in court.