The contracts are popular with employers including Cheryl & Co. and a competitor of Condado Tacos, but employees who sign them may face issues later.
Do noncompete agreements turn employees into indentured servants, as attorney Fred Gittes contends? Or do the contracts, as attorney Vince Nardone believes, protect businesses from ex-employees who might steal customers and company secrets?
Two recent high-profile federal lawsuits have put the agreements in the spotlight in Ohio, pitting a Columbus cookie entrepreneur against the company she founded and a local taco restaurant chain owner against former Cleveland business partners.
In the cookie case, Cheryl & Co., which manufactures and sells more than 51 million cookies a year, has sued founder Cheryl Krueger for operating C. Krueger’s, which opened a Short North storefront last year to sell cookies there and online. Krueger sold her original company in 2005, worked there until 2009 and agreed not to compete with Cheryl & Co. for five years after that.
Lawyers for both sides refused to comment on the case, but according to documents in U.S. District Court in Columbus, Cheryl & Co. says Krueger is using its recipes to make “lookalike cookies” and stole several executives from its team in violation of their noncompetes. In a counterclaim, Krueger argues that she uses different cookie recipes, that two former Cheryl executives she hired had no noncompetes, and that other claims in the lawsuit are baseless.
In the taco case, the owners of the Cleveland-based Mexican restaurant chain Barrio have sued Joe Kahn, owner of the Condado Tacos chain, claiming Kahn stole intellectual property and copied Barrio’s décor and taco-ordering concept after he left Barrio in 2014.
Kahn’s noncompete expired in 2016, says his attorney, Brad Barmen. While it prevented him from opening a similar restaurant 2 miles from Barrio, it did not restrict Kahn from opening restaurants in other locations. Kahn now has Condado locations in Columbus, Pittsburgh, Cincinnati, Indianapolis and Cleveland. “This case is sour grapes on the part of Joe’s former partner and nothing more,” Barmen says.
Barrio attorney Samuel Lauricia III did not respond to a request from Columbus CEO for comment on the case, which is being litigated in U.S. District Court in Cleveland.
Protecting Business Interests
Noncompete agreements have been around for decades, says Gittes, whose Gittes Law Group has represented many employees who have fought them over the years. “For years noncompetes weren’t a big issue, but in the last 25 years they’ve become increasingly common. They give companies more leverage. If you want the job, you have to sign it. And the employer can fire someone and that employee can’t take a job in the same field somewhere else,” Gittes says.
A study done by the Obama administration in 2016 estimated that 18 percent of American workers—about 30 million—had a noncompete agreement, and that 37 percent of workers had been under a noncompete at some point during their career. Among workers who made less than $40,000 a year, 14 percent were under a noncompete.
Most noncompetes restrict a former employee from working for a competing company for a specific period of time within a certain geographical area.
“Employers don’t want to have them leave and compete against them,” says Nardone, a Columbus attorney who represents employers. Some noncompetes also include a nonsolicitation clause, restricting former employees from soliciting a company’s customers, he says.
A dentist who works for a small dental company, for example, could be restricted from setting up an office near his former employer for a period of years and from encouraging his former patients to switch offices. “You have to be protecting a business interest,” Nardone says. “You don’t need noncompetes for all businesses.”
When Jimmy John’s sandwich chain forced its sandwich makers to sign agreements not to work for a competitor for two years, for example, a New York court ruled the agreement was invalid. Most states allow noncompete agreements (California does not, except in a few situations) and some restrict them in various ways, such as requiring employers to present the agreement before someone accepts a job. Last year, the state of Massachusetts banned noncompete agreements for certain hourly workers. In 2015, Congress considered but didn’t ultimately pass a bill that would have had a similar effect.
The agreements are legal in Ohio, but “one of the key problems with Ohio law is there’s no black and white rule for noncompetes,” says attorney Jeff Vardaro, who works with Gittes. Currently, Ohio law doesn’t restrict the length of a time a noncompete can be in effect, its geographical reach or what type of businesses can have noncompete agreements.
Nardone says Ohio law regarding noncompetes “is right down the middle” and doesn’t need to have more protections for employees. On the other hand, he says, businesses need to be reasonable in their restrictions in a noncompete agreement. He suggests the noncompete time frame for working for a competitor, for example, be tied to the length of time an employee works for a company. “If you work there for six months, you could have a six-month noncompete,” he says. “If you only worked there for a week, a noncompete shouldn’t be valid.”
Employees Usually Lose
Vardaro has represented a number of employees who have tried to get out of noncompete agreements so they could take another job, and he’s found that even if employees win in court, they lose overall. Often their new employer fires them when they learn of the existence of a noncompete.
“It’s not an exaggeration to say that almost everyone I’ve represented in a noncompete lawsuit really got screwed,” attorney Vardaro says. “I’ve never heard of anyone who didn’t at least have to pay a bunch of money that they couldn’t afford to an attorney to get out of it.”
Judges usually don’t require employers to pay an employee’s attorney fees and they generally won’t throw out a noncompete agreement. Instead they’ll “blue pencil” it—change it to an agreement the judge thinks is more reasonable, Vardaro says. If the noncompete is for three years, a judge might cut it to two. If it forbids employment with any competitor within central Ohio, the judge might change it to any competitor within a 5-mile radius.
Vardaro says he’s been involved with a few cases in which the judge threw out a noncompete agreement. In one case, it had expired by the time the employee left the company, and in another case, the company had listed the wrong competing company in the agreement. “But by then the employee had to pay thousands to get to that point in court,” he says.
Nardone advises employers to have noncompete agreements if they need to protect their business interests and business secrets. Besides restricting employees from working for rival employers within a geographical area, the agreement should include a statement that the employee agrees the noncompete’s stipulations are reasonable. And employers should give employees plenty of time to have an attorney review the agreement so they can’t argue they signed it under duress, Nardone says.
As for employees, Vardaro suggests they try to avoid signing a noncompete agreement if possible when starting a job. If they have one and they’re leaving a job, he advises being professional and aboveboard with their employer about their new job. “It’s much more likely to turn into a lawsuit if you don’t give your employer a heads up that you’re leaving,” he says. “If you can talk it out before you take a job with a competitor, it’s always much better.”