The economic carnage unleashed by the COVID-19 virus has disrupted virtually every industry in the United States. At last count, more than 38 million workers had lost their jobs and made claims for unemployment benefits. And while states have begun easing restrictions on the ability of many businesses to reopen, it is reasonable to expect there will be further turnover, leading to the departure of many employees to competitors. Feeling more vulnerable because of the downturn, employers will inevitably look to enforce restrictive covenants, including non-competes and non-solicitation agreements, against those former employees. How will courts tend to handle requests to enforce restrictive covenants, especially non-competes, in this difficult economy? One guide may be looking at how they handled similar requests during the last economic downturn in 2008 in the state of Ohio.
It is hard to forget the 2008 recession, which hit the legal industry especially hard. The near-collapse of the financial and banking markets sparked a recession which many judged, at least at that time, to be the most severe since the Great Depression. My home state of Ohio was not spared as it staggered from an overwhelming number of foreclosures and other disruptions to its economy.
Ohio has always been somewhat of a bellwether for the rest of the country. As the Almanac of American Politics has noted in the past, Ohio’s political geography mirrors that of the rest of the nation. Rural counties throughout the state, and particularly in the southern part of Ohio and surrounding Cincinnati, tend to be more conservative and Republican. To the industrial north, and particularly around Cleveland, Toledo, Akron and Canton, Ohio is more liberal and a stronghold for the Democratic Party. The center of the state, Columbus, tends to be more moderate, although as Columbus has grown, it has become steadily more Democratic. Ohioans tend to operate in the middle of the road and while we may not set national trends, we tend to represent an equilibrium of the forces that embroil other regions of the country. Perhaps for these reasons, and not surprisingly, Ohio has been a battleground state for the past four presidential elections, ultimately deciding the blue v. red state divide of the rest of the country.
So where I am I going with this? In my rough judgment, Ohio can serve as a “canary in the coalmine” for the use of non-competes in the rest of the country. Ohio is a reformation state, meaning Ohio courts have the discretion to modify a non-compete so that they can balance the legitimate business interests of the employer against the employee’s right to earn a livelihood, so that they can arrive at what they believe is a fair outcome. Unlike states that have hard-and-fast rules on non-competes — like those banning non-competes (i.e., California) or so-called “redline” states (i.e., Virginia) that require courts to discard restrictive covenants if one provision is unreasonable — reformation states like Ohio provide judges with tremendous power to rewrite the covenant based on the circumstances before them. This discretion serves in practice as a sort of Rorschach test for judges, as pro-employee/pro-employer biases can frequently play out.
Employers and employees continued to litigate the enforceability of restrictive covenants throughout the 2008 recession. So how did Ohio courts address these claims? Based on my own experience, and more importantly, authority issued by appellate courts throughout the state in 2008, Ohio courts trended against the full enforcement of non-competes and other restrictive covenants.
Prior to the near-collapse of the financial markets in 2008, no decision better represented the pro-employer tilt of many Ohio courts than the Penzone, Inc. v. Koster, 2008-Ohio-327, decision. That case, decided by the 10th District Court of Appeals in Columbus on January 31, 2008, upheld a restrictive covenant against a hair stylist. However, after the collapse of Bear Stearns in March 2008 and Lehman Brothers in September 2008, as if on cue, decisions issued by other Ohio courts rolled back the enforcement of non-competes and other restrictive covenants as the economy began to founder. For example, on July 3, 2008, the 8th Appellate District in Cleveland declined to enforce a non-compete on the grounds that it had not been tolled during settlement negotiations, arguably in contradiction of earlier Ohio authority. (See Cynergies Consulting, Inc. v. Wheeler, 2008 WL 2623960 (Ohio App. 8 Dist. July 3, 2008)). On October 10, 2008, the 6th Appellate District in Toledo reversed a trial court’s enforcement of a two-year non-compete against an accountant, overlooking the former employee’s multiple breaches of the agreement, and converted it to one-year non-solicitation agreement. In that case, Murray v. Accounting & Tax Services, Inc., 178 Ohio App.3d 342, the court took note of the need for the employee, a longtime tax preparer with no other marketable skills, to be able to work as an accountant because she would be unduly prejudiced by a two-year non-compete. And on December 23, 2018, the Tenth District Court of Appeals — the same court that had issued the Penzone decision 11 months earlier against a hair stylist — walked back the use of the inevitable disclosure doctrine, reversing the trial court’s broad enforcement of a non-disclosure agreement, and suggesting in dicta that Ohio courts should only enforce the inevitable disclosure doctrine in cases where there was a non-compete. (That case, Hydrofarm, Inc. v. Orendorff, 2008-Ohio-6819, can be found here.)
My experience, admittedly anecdotal, mirrored this trend. Trial courts that had previously been willing to enforce broad non-competes became more skeptical and open to modifying those agreements on terms that were more favorable to employees. In short, Ohio courts took note of the economic realities facing employees who needed to find work and were more forgiving of conduct that had triggered injunctions in the past.
So fast forwarding to 2020, will courts be more skeptical of enforcing restrictive covenants? Based on the Ohio experience in 2008, I expect that the answer to be “yes.” Efforts by employers to enforce non-competes were already facing headwinds due to academic and media disfavor, as well as from legislation directed at protecting low wage workers from non-compete overreaching. The pace of any recovery may also have some impact; if a recession drags on, courts will likely be responsive to claims of financial hardship by employees. This will be particularly true for employees who were laid off or terminated, cases which are always difficult for any employer. For these reasons, employers should tread carefully, try to exhaust settlement before resorting to litigation, and take note that they may face an unsympathetic judicial ear if an employee is struggling to find work.