Case Law Update: Ohio; Regulatory Update: NLRB Finds Non-Compete in Shareholder Agreement Lawful

Case Law Update

Cretor Construction Equipment LLC v. Gibson, No. 1:24-cv-322 (S.D. Ohio July 1, 2024). 

Read the full opinion here.

Categories: TRO; Preliminary Injunction; Reasonableness of Covenants; Business Interest

Tags: Ohio law applied; TRO denied; No legitimate business interest; Preliminary injunction denied

Types of restrictions in case: Non-compete, Customer non-solicitation; Non-disclosure

Summary:

• Litigation Strategy Alert! This is one of the most thoughtful decisions addressing the nuances of restrictive covenant law that we have encountered in some time. Despite concluding that the temporal, geographic, and behavioral prohibitions imposed on the employee were reasonable on their face, the court denied the plaintiff’s motion for a preliminary injunction, because an examination of the industry, the employee’s personal history, and his duties for the plaintiff all revealed to the court that the plaintiff lacked a protectable interest justifying a non-compete. Specifically, the court held the information the plaintiff claimed to be confidential was not truly confidential in the industry, and the customer goodwill that the employee brought to the plaintiff belonged with the employee.

• The plaintiff (“Cretor”) is a construction company specializing in concrete pumping for commercial clients. Cretor sought a temporary restraining order and preliminary injunction to stop its former employee, (“Gibson”) from breaching his non-compete agreement by working for a direct competitor in the same geographic area that Gibson worked for Cretor.

• The court denied Cretor’s motion for a preliminary injunction, finding that Cretor had failed to demonstrate a likelihood of success on the merits of its breach of contract claim and that the balance of the equities favored Gibson.

  • While the court found that the non-compete provision at issue was reasonably limited in time and geographic scope (at least to the one-year, 100-mile radius that Cretor proposed to enforce it), the court determined that Cretor had failed to show that the covenant was necessary to protect a legitimate business interest.

    • Gibson had been in the concrete-pumping industry for over twenty years, but spent only the last two and a half years at Cretor.

    • The court found compelling the fact that there was no dispute between the parties that Gibson had already-strong relationships with his customers when he went to Cretor and the strength of those relationships was the very reason that Cretor had hired him.

      • The court noted that Cretor provided no evidence supporting any argument that Gibson strengthened his relationships with his pre-existing customers in a meaningful way while at Cretor.

    • The court also noted that Cretor failed to establish that it had given Gibson access to confidential information or any new skills or training, or otherwise invested in him in reliance on the non-compete.

      • At the hearing, Cretor suggested that Gibson was disclosing Cretor’s confidential information consisting of customer identities, upcoming jobs, and pricing information to his new employer. But the court found that Gibson credibly testified that the customer identities for concrete-pumping services in the area were well-known and that pricing information consists of information that competitors and their customers freely share in the local industry.

  • While the court found Cretor had met its burden to show irreparable harm, it determined that the harm to Gibson would be far greater if the court were to grant injunctive relief. Enforcing the non-compete would leave Gibson with no apparent means to support himself or his family, and it would deprive him entirely of the benefit of his reputation and contacts in the local market.

Legislative Update

No legislative update.

Regulatory Update

NLRB Issues Advice Memorandum Finding Non-Compete in Shareholder Agreement Lawful

• The National Labor Relations Board Division of Advice issued a memorandum concluding that a non-compete provision in an employee’s Shareholder Agreement was not the type that the General Counsel was concerned about when she issued Memorandum GC 23-08 regarding non-compete agreements that violate the National Labor Relations Act. Read the entire memorandum here.

• The Charging Party had opted into a voluntary shareholder program offered to employees who had worked for the employer for a certain amount of time. The shareholder program required the individual to sign a Shareholder Agreement, which contained three-year non-competition, non-solicitation, and non-disclosure clauses, in exchange for the ability to purchase shares in the company and receive profit distributions based on company performance.

  • The Division of Advice found that the non-compete did not violate that NLRA.

  • The General Counsel’s memorandum focused on the potential of non-compete agreements to chill Section 7 rights when an employer requires “their employees to sign non-compete agreements to obtain or keep their jobs, or as part of severance agreements.” The former are considered work rules under the Stericycle standard, while the latter are analyzed pursuant to McLaren Macomb.

  • The Division of Advice found the following factors relevant:

    • “Here, the Charging Party was not required to become a shareholder in order to keep [redacted] job and the shareholder program was not operated as part of the employee’s compensation package. There is no evidence that all eligible employees participated in the program or were encouraged to do so by the Employer. In fact, there is evidence that at least one individual chose to sell [redacted] shares back to the Employer and the non-compete and other restrictive covenants in [redacted] Shareholder Agreement were voided. Additionally, an employee choosing whether to participate in the Employer’s shareholder program is not facing a ‘particularly vulnerable time,’ such as employees offered voluntary severance agreements. Cf. McLaren Macomb, 372 NLRB No. 58, slip op. at 10 n.51 (in distinguishing severance agreements from work rules, the Board noted that severance agreements are coercive in part because an employee is offered the agreement when they are already facing job loss). Here, the employee still has their job, their full panoply of Section 7 rights including access to other employment opportunities, and the ability to become a shareholder in the future should they change their mind. In light of these circumstances, we find that the Shareholder Agreement is not coercive in the manner contemplated by GC 23-08. Given our conclusions herein, we would not find the non-solicitation or non-disclosure agreements contained in the Shareholder Agreement unlawful.”

  • However, the Division of Advice noted in a footnote that this decision was based solely on the facts of this case, and the General Counsel “may find other employee shareholder agreements to violate the Act[.]”