As the Federal Trade Commission’s Non-Compete Rule is appealed through the federal courts, a ruling from a court in Cleveland, Ohio, exemplifies how certain courts have recently approached non-compete and non-solicitation agreements. In short, Ohio’s metropolitan courts continue to find ways to permit employees (and in this unique circumstance, owners) to compete with their former companies. Hence, consulting with skilled and devoted counsel is key to navigating restrictive covenants.
A Financial Advisor with Restrictive Covenants
In Wendy Eldridge v. Marcum Wealth, LLC, et al., the Cuyahoga County Court of Common Pleas issued a preliminary injunction in favor of Wendy Eldridge against her former employer, Marcum Wealth, LLC. Ms. Eldridge was a Managing Director and Partner in retirement plan management at Marcum Wealth with an ownership interest in the company. The company’s operating agreement had clauses that restricted her from working with competitors or soliciting Marcum’s clients (i.e., non-compete and non-solicit clauses).
Company Failed to Provide Information and Mistreats Female Colleague
In April 2023, after a few years of what she alleges to be gender discrimination and refusal to provide company information, Ms. Eldridge resigned. She claimed that Marcum refused to share information as required by the company’s operating agreement, allowed her to be berated by male colleagues, failed to buy back her shares at a fair price as required by their operating agreement, and stopped providing her compensation as of August 1, 2023. Despite her resignation, the non-compete and non-solicit clauses contained in Marcum’s operating agreement were still in effect for two years from the buyback of her shares, which had not occurred.
Former Employee Sues to Avoid Non-Solicit Clause
So, in January 2024, Ms. Eldridge filed a lawsuit, arguing that the non-compete and non-solicit clauses of Marcum’s operating agreement were unenforceable due to Marcum’s breach of the operating agreement and also because the clauses did not serve a legitimate business purpose. She sought a preliminary injunction to prevent Marcum from enforcing these related, but distinct, clauses. At the preliminary injunction hearing, Marcum waived enforcement of the non-competition clause, but still wanted to enforce the non-solicit clause.
Employee Gets Favorable, though Legally Interesting, Ruling from Judge
Fourteen months after resigning, in August 2024, the Court agreed with Ms. Eldridge, ruling that Marcum could not enforce the non-solicit clause because Marcum breached the operating agreement by failing to provide her with information as required under the operating agreement, and therefore, Ms. Eldridge was excused from being bound by the non-solicit clause of that agreement. Notably absent from the Court’s decision was any consideration of the FTC’s rule or whether the clauses served a legitimate business purpose (one of the hallmarks of whether non-compete and non-solicit agreements are enforceable). The Court did consider and find that Marcum had several months to transition Ms. Eldridge’s clients to other financial advisors, so Marcum would not be unjustifiably harmed.
Analysis: Whether You are a Company or a Person, Restrictive Covenants Require Thoughtful and Devoted Legal Counsel.
This case highlights that certain courts will not enforce non-compete and non-solicit clauses if the employer has breached the underlying agreement. It also highlights how long it can take to get judicial relief: over a year in this situation where the former employee failed to seek a temporary restraining order.
Employers should be aware that while non-compete and non-solicitation agreements are enforceable, they must adhere to their own contractual obligations and be reasonable in with any restrictions. Employees should understand the terms of their agreements and consider these factors, as well as the cost and time it takes to obtain judicial relief, when resigning from employment. Both should consult experienced and ardent legal counsel to navigate where and how to address restrictive covenants with courts.
