Violating a Noncompete Agreement Costs Ohio Firm Millions

By Staff Report

May. 31, 2006

A sunroom manufacturer must pay $1 million in punitive damages for interfering with the noncompete contract of a competitor’s former employee–part of a $8.6 million judgment a jury in Akron, Ohio, ordered Four Seasons Solar Products to pay to Patio Enclosures Inc.

The Ohio Supreme Court refused to hear Four Seasons’ appeal in late May. The employee, Joe Cheney, had already been ordered to stop working for Four Seasons.

Successful claims of violating a noncompete contract generally do not include punitive damages, but end with an injunction barring the employee from the new job.

“The overarching goal in every case is to stop the employee from hurting the employer,” says Alan Dalinka, an attorney with DLA Piper Rudnick’s Chicago office who has litigated noncompete agreements across the nation.

“In a contract dispute it’s very rare that punitive damages are awarded,” says Stephen Lichtenstein, chairman of the law, taxation and financial planning department at Bentley College in Waltham, Massachusetts.

But the size of the punitive damage award levied against Four Seasons indicates that “in today’s day and age, when there’s a heightened scrutiny of corporate ethics, cases of this sort might have more jury appeal,” says Aretta Bernard, who litigated the case with her partner Ron Kopp of Roetzel & Andress.

Punitive damages for misappropriation of trade secrets are more common. The Akron jury assessed Four Seasons $5 million in punitive damages and $2.6 million in compensatory damages for stealing Patio Enclosures’ business plan for company-owned retail outlets.

An appeals court filing shows that the breakdown of the awards in the trial also includes $20,000 in actual damages in addition to $1 million in punitive damages for tortious interference with (the noncompete) contract. Roetzel & Andress says that in addition, Four Seasons will have to pay “significant sums” for prejudgment and postjudgment interest and attorney fees.

But even though courts may be reluctant to award damages for violating a noncompete contract–California prohibits such contracts–the existence of such a contract may help a company pursue a trade secrets claim, Dalinka says.

“Even if the agreement not to compete may not be enforceable, the act of asking somebody to sign it shows under the Trade Secrets Act that you are taking steps to protect the information,” Dalinka says.

Most states, including Ohio, base their trade secret laws on the federal Uniform Trade Secrets Act, which defines trade secrets and requires that businesses make “efforts that are reasonable under the circumstances to maintain (their) secrecy.”

Noncompete contracts may be unreasonable–and unenforceable–if written too broadly, as everyone is presumed to have the right to work.

“It is a restraint of trade,” Lichtenstein says. “It’s a legal restraint of trade because you’re only restrained in a certain geographical area for a period of time.” Noncompete agreements are common when someone sells or buys a business.

But even in states that recognize noncompete employment contracts, “sometimes those agreements are enforceable and sometimes they are not,” says Arnold Pedowitz, a Manhattan attorney and co-editor of the book Covenants Not to Compete: A State by State Survey.

“Just because an employee has signed an agreement that is clear does not mean that a court will uphold it. In New York, a court will uphold it only if the employee is trading upon secrets or confidential information, or if he is a unique employee … like a Howard Stern,” Pedowitz says.

In the Patio Enclosures case, Cheney had signed a contract promising confidentiality and not to compete.

“Here we seem to have a new company that encouraged a guy to break his noncompete, and compelled him to use his confidential knowledge. The new company was a bad actor,” Pedowitz says.

The Court of Appeals for Ohio’s 9th Judicial Circuit ruled unanimously that Four Seasons “pilfered confidential, trade secret information from (Cheney), all the while holding a job offer in the balance … (and) required (him) to use, and rewarded him with a bonus incentive plan for using, the information he had learned at (Patio Enclosures).”

Cheney had promised not to compete with Patio Enclosures for two years and within 50 miles of one of its outlets, standard language for a noncompete contract. He informed Four Seasons of the contract, but the company hired him anyway.

Patio Enclosures did not sue Four Seasons until it found out the extent of the company’s machinations in the course of suing Cheney.

“The verdict was the result of some very bad facts and some bad decisions by the hierarchy of the company,” Bernard said.

“I give advice to companies around the country,” Pedowitz said, “and when they ask me for advice now, I will refer to this [$8.6 million] judgment. (Companies) have to speak with competent counsel before they get involved in hiring away another company’s employee.”

Robert Kahn

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