Midstream Noncompetes May Not Be Enforceable When Employer Recoups The Consideration For The Agreement

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Many jurisdictions, including Ohio, require employers to provide consideration beyond continued employment to employees who sign non-compete agreements after their employment begins.  The court’s decision in Polyone Corp. v. Barnett [pdf], decided in April under Ohio law, suggests that courts may not enforce a non-compete agreement that an employee signs after she has begun employment if the employer subsequently takes away the consideration provided to the employee as inducement to sign the agreement.  While not a final order, the Polyone decision suggests that courts will not enforce these midstream non-compete agreements when the employer has recouped the consideration it originally provided the employee for entering into the agreement. 

In Polyone, the former employee signed non-compete and confidentiality agreements after fifteen years of continued employment with the employer.  The non-compete agreement obligated the former employee not to work within a defined restricted territory for one year after her employment.  As consideration, the employer allowed the former employee to participate in the employer’s long-term incentive plan related to her promotion to Marketing Director.  The long-term incentive plan specifically stated that participation in the plan constituted consideration for the former employee’s entering into the non-compete agreement. 

The former employee signed the non-compete agreement and began participation in the employer’s long-term incentive plan on April 21, 2007.  In August 2010, the employer removed the former employee from her Marketing Director position, rendering her ineligible to participate in the employer’s long-term incentive plan.  Following her demotion, the former employee resigned and immediately began working for a competitor. 

In response to the employer’s Motion for TRO, the former employee argued that she had agreed to sign the non-compete agreement in exchange for participation in the employer’s long-term incentive plan.  The court responded positively to this argument and noted in its order that “[s]ince it is undisputed that [the employer] unilaterally removed [the former employee] from the long-term incentive plan, it is far from certain whether the Court would enforce a non-compete agreement for which the consideration has been removed.” 

To better ensure that a midstream non-compete agreement is enforceable, employers should consider providing an employee with consideration that the employer cannot later recoup.  For example, instead of or in addition to granting participation in a long-term incentive plan as consideration for the non-compete agreement, an employer could provide an employee with a cash bonus.  Providing concrete consideration, such as a cash payment, that will not be taken away in the future should help employers avoid a risk similar to that in the Polyone case.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.