Memorandum - is noncompete clause enforceable

Supreme Court of Ohio. RAIMONDE, Appellant,

v. VAN VLERAH, Appellee.

April 2, 1975.

Employer brought action against former employee for enforcement of a covenant not to compete in the practice of veterinary medicine. The Court of Common Pleas granted an injunction, the Court of Appeals, Defiance County, reversed, and employer appealed. The Supreme Court, Paul W. Brown, J., held that a covenant not to compete which imposed unreasonable restrictions upon an employee would be enforced to the extent necessary to protect the employer's legitimate interests and such covenant was reasonable if the restraint was no greater than was required for protection of the employer, did not impose undue hardships upon the employee and was not injurious to the public.

Judgment of Court of Appeals reversed, with instructions to remand cause to Court of Common Pleas.

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**544 Syllabus by the Court

*21 1. A covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent **545 necessary to protect an employer's legitimate interests. (Paragraphs two and three of the syllabus in Extine v. Williamson Midwest, 176 Ohio St. 403, 200 N.E.2d 297, overruled.)

2. A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.

***

Appellant, James T. Raimonde, and appellee. Donald Van Vlerah, are doctors of veterinary medicine. Appellant has practiced his profession in Defiance County since 1961, and appellee since 1972.

On January 3, 1972, appellee entered appellant's employment at a salary of $1,000 per month. On January 26, 1972, the parties signed a written contract, which provided, in part:

‘1. The employer hereby employs the employee as a *22 practicing doctor of veterinary medicine for a period of one (1) year from the date hereof, unless either party gives a three-months written notice to the other party of his intention to terminate the contract.

* * *

‘5. The employee further agrees that upon the termination of his employment with the employer, either at the conclusion of this contract or by any other means of termination of employment, he will not accept similar employment or practice his profession in or within thirty (30) miles of the city of Defiance, Ohio, for a period of three (3) years from such termination of employment.’

On August 24, 1972, appellant provided appellee with a three-month written notice of termination, as provided in the paragraph numbered 1 of the contract. On November 24, 1972, appellee's employment with appellant terminated. Thereafter, appellee began to practice veterinary medicine in Defiance in express violation of his contract with appellant.

On January 11, 1973, appellant filed a complaint in the Court of Common Pleas, to enjoin appellee from practicing veterinary medicine in violation of the contract. The complaint sought an order ‘restraining the defendant from practicing his profession in or within thirty miles of the city of Defiance, Ohio for a period of three years from his termination of his employment under the employment contract * * *.’ The trial court upheld the validity of the contract and issued an injunction, but limited enforcement to an 18-mile radius of Defiance. Relief was granted for three years from the date of the judgment entry, September 18, 1973. Appellee posted bond, and continued to practice veterinary medicine pending appeal.

The Court of Appeals reversed, holding the contract an unreasonable restraint of trade, and rendered final judgment dismissing the complaint. The court also held that appellant was entitled to no more relief than requested in the complaint, i. e., three years from termination of the contract.

*23 The cause is now before this court pursuant to the allowance of a motion to certify the record. Weaner, Hutchinson, Zimmerman & Bacon, Karl H. Weaner and Roger V. Bacon, Defiance, for appellant.

Hoeffel, Funkhouser & Short, John H. Hanna and Thomas J. Short, Napoleon, for appellee.

**546 PAUL W. BROWN, Justice.

Appellant seeks to enjoin the appellee from practicing veterinary medicine in violation of a contract between the parties. The Court of Appeals, relying upon Extine v. Williamson Midwest (1964), 176 Ohio St. 403, 200 N.E.2d 297, refused to enforce the contract and denied relief. We reverse.

I

In Briggs v. Butler (1942), 140 Ohio St. 499, 45 N.E.2d 757, and in Extine, this court applied the so-called ‘blue pencil’ test to construe two employment contracts. The ‘blue pencil’ test provides that if unreasonable provisions exist in such a contract, they may be stricken, if devisible, but not amended or modified. It also provides that if restrictions are unreasonable and indivisible, the entire contract fails.

In Briggs, an employee signed a contract with The Welcome Wagon Service Company, promising not to engage in similar employment for five years following termination, either in Toledo, Ohio, or anywhere else in the United States or Canada where the employer did business. The Court of Common Pleas applied the ‘blue pencil’ test, and struck all territorial restrictions beyond Toledo. This court affirmed. In Extine, an employee signed a contract providing that, for two years following termination of employment, he would not engage in the same line of business as his employer, on his own or in concert with other former employees, nor attempt to direct business from his employer, especially customers with whom he had dealt. This court, finding the prohibition on engaging in the same line of business of contain no limitation as to space, applied *24 the ‘blue pencil’ test, and severed the offending portion from the contract.

We applied the ‘blue pencil’ test in Extine, however, with reluctance. We recognized that a growing minority of courts had abandoned the rule, and were holding all employment contracts valid if modification made them reasonable. We now recognize that application of the ‘blue pencil’ test has produced both arbitrary and inconsistent results, and believe it is time to reexamine the doctrine.

Originally, all agreements in restraint of trade without consideration therefor were held presumptively void. Mitchel v. Reynolds (1711), 1 P.Wms. 181, 24 Eng.Rep. 347.Working men entered skilled trades only by serving apprentice- ships. Mobility was minimal. Restrictive covenants either destroyed a man's means of livelihood, or bound him to his master for life. Later, as the character of the work-a-day world became more flexible, courts sought a means to lift the blanket prohibition on employment restrictions. One result was the ‘blue pencil’ test, which promised simplicity and clarity, and allowed courts to claim they were not actually ‘rewriting’ private contracts.

In practice, however, the test has not worked well. Because it precludes modification or amendment of contracts, the entire contract fails if offending provisions cannot be stricken. Because divisible provisions sometimes contain integral parts of the agreement, ‘blue penciling’ those provisions may render the contract useless. Because employers seek to ensure that provisions are not unreasonable, and therefore severed, employees may gain the benefit of overly-lenient employment restrictions.

Thus, many courts have abandoned the ‘blue pencil’ *25 test in favor of a rule of ‘reasonableness,’**547 which permits courts to determine, on the basis of all available evidence, what restrictions would be reasonable between the parties. Essentially, this test differs from the ‘blue pencil’ test only in the manner of modification allowed. It permits courts to fashion a contract reasonable between the parties, in accord with their intention at the time of contracting, and enables them to evaluate all the factors comprising ‘reasonableness' in the context of employee covenants.

***

Among the factors properly to be considered are: ‘(t)he absence or presence of limitations as to time and space, * * * whether the employee represents the sole contact with the customer; whether the employee is possessed with confidential information or trade secrets; whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; whether the covenant seeks to stifle the inherent skill and experience of the employee; whether the benefit to the employer is disproportional to the detriment to the employee; whether the covenant operates as a bar to the employee's sole means of support; whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment; and whether the forbidden employment is merely incidental to the main employment.’ Extine, supra, at 406, of 176 Ohio St., at 299 of 200 N.E.2d. See Arthur Murray Dance Studios of Cleveland v. Witter (1952), 62 Ohio Law Abst. 17, 105 N.E.2d 685.

Appellee argues that adoption of a rule of reasonableness would allow employers to dictate restraints without fear, knowing that judges will rewrite contracts if they are taken to court. Such a contention is without merit. Most employers who enter contracts do so in good faith, and seek only to protect legitimate interests. In fact, relatively few employment contracts reach the courts.

‘[1][2] In determining the validity of a covenant or agreement in restraint of trade, each case must be decided on its own facts * * *.’ Extine, supra, at 403, of 176 Ohio St., at 297 of 200 N.E.2d. We hold that a covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the *26 extent necessary to protect the employer's legitimate interests. A covenant restraining an employee from competing with his former

employer upon termination of employment is reasonable if it is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public. Courts are empowered to modify or amend employment agreements to achieve such results.

II

Appellant's complaint sought relief ‘for a period of three years from his (appellee's) termination of his employment under the employment contract.”The trial court enjoined appellee for three years from the date of the court's entry. The Court of Appeals reversed.

***

In framing its judgment entry, the Court of Common Pleas restricted enforcement of the covenant to a radius of 18 miles, and enjoined appellee for three years from the date of said entry. The record, however, does not indicate how such determination was made. Because this court holds, for the first time, that a trial court may enforce a covenant ‘to the extent necessary to protect an employer's legitimate interests,’ we direct that this cause be remanded to the Court of Common Pleas, so that court may ascertain if its initial finding conforms **549 with the test established today. That court is now specifically empowered to construct a reasonable covenant between the parties, and to grant injunctive relief, if appropriate, for the period of time to which appellant may be entitled.

***

The judgment of the Court of Appeals is reversed, with instructions to remand the cause to the Court of Common Pleas.

Judgment reversed.

END OF DOCUMENT