Ohio has long recognized the enforceability of non-compete agreements. Broadly speaking, a court can do one of three things with an unenforceable non-compete agreement: (1) the court can apply the “red pencil” doctrine and invalidate the entire agreement; (2) the court can apply the “blue pencil” doctrine and strike the unenforceable provisions; or (3) the court can modify the non-compete agreement to make it enforceable.
In 1975, the Ohio Supreme Court adopted a rule of “reasonableness” when determining whether to enforce a non-compete agreement, holding in Raimonde v. Van Vlerah that a non-compete agreement that “imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer’s legitimate interests.” Notably, the Raimonde Court rejected the “blue pencil” test and instead empowered courts to modify a non-compete agreement so that it (1) is no greater than is required for protecting the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public. In applying Raimonde’s rule of reasonableness over the years, Ohio courts have more often than not modified or revised non-compete agreements that did not meet the three factors above. This practice has given Ohio employers comfort that an otherwise overbroad non-compete would not get tossed out altogether but would be modified and enforced to the extent permitted by law. That comfort appears to be on shaky ground after a recent decision issued by the First District Court of Appeals (Hamilton County) in which the court applied the red pencil test to invalidate an overbroad non-competition agreement entirely.
In Kross Acquisition Co., LLC v. Groundworks Ohio, LLC, Kross Acquisition Co., LLC (“Kross”), a basement waterproofing contractor, sought to enforce a two-year non-compete agreement that prohibited a former salesperson, Roger Kief, from competing with Kross in Ohio and Kentucky. Kief had left Kross to work in a “virtually identical sales position” for competitor Groundworks Ohio, LLC.
In evaluating the enforceability of the non-compete agreement, the court analyzed the geographic restrictions and observed that Kross’s service area only covered roughly half of Kentucky, a small portion of Indiana, and a portion of southwestern Ohio. What’s more, Kross acknowledged at the summary judgment hearing and during oral argument that both the geographic and temporal limitations exceeded those necessary to protect its legitimate business interests.
In reaching its decision to invalidate, rather than modify, the non-compete agreement, the trial court concluded that Raimonde’s holding that a non-compete provision that “imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer’s legitimate interests” is permissive, not mandatory, despite the Raimonde court’s use of the word “will.” The Court of Appeals agreed. Moreover, in holding that whether or not to modify an invalid non-compete is within the trial court’s discretion, the Court of Appeals relied on decisions from Ohio’s Eighth (Cuyahoga County), Tenth (Franklin County), and Eleventh (Ashtabula, Geauga, Lake, Portage, and Trumbull counties) districts, signaling a possible trend in the application of Raimonde’s rule of reasonableness.
Given its holding that modification was within the trial court’s discretion, the appellate court reviewed the trial court’s decision not to modify the non-compete agreement under an abuse of discretion standard. It relied upon three facts in ruling that the trial court did not abuse its discretion by voiding the non-compete agreement entirely. First, the court noted the parties’ disagreement on a reasonable geographic restriction; while Kief felt that a reasonable limitation included only the areas where he had visited clients, Kross argued that it needed to protect its entire service area. Second, the court noted Kross’ inability to identify a reasonable temporal limitation to any level of certainty. Kross’s co-owner testified in his deposition that an 18-month restriction would be just as effective as a two-year restriction and equivocated as to whether a one-year restriction would be just as effective. Finally, the court criticized the agreement’s broad scope, which prohibited Kief from working “directly or indirectly” for any competing company in virtually any role. The court found that such broad limitations did not bear a sufficiently direct relationship to the interests Kross sought to protect. The court concluded that “[w]ith so many factors and considerations necessary to rewrite the [non-compete agreement] to comport with Raimonde’s rule of reasonableness,” the lower court did not abuse its discretion in refusing to rewrite the offending provisions of the agreement.
While many Ohio employers may have relied on the safety net that courts would modify—and not invalidate—an overbroad non-compete agreement, this decision serves as a reminder for employers to review their non-competition agreements and other restrictive covenants to ensure they are narrowly tailored to protect the employer’s legitimate interests.
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