How to Power Up Your Non-Compete Agreements
Are you tying your employees’ non-competition agreements in with stock plans? If you are not, you might want to.
Root Learning, a consulting firm headquartered in Sylvania, Ohio, created a stock investment plan in 2000 which was used to reward excellent performance by its employees. Twice, William Hinsch, an employee of Root, was awarded stock options through this plan. However, these awards came with certain restrictions: non-competition, non-solicitation and non-disclosure. In the event that any one of these restrictions was violated, Hinsch stood to lose the stock he acquired through these options.
Several years later, when Hinsch left the company, his stock was valued at almost a million dollars. Unfortunately for Hinsch, though, he began to perform services for one of Root’s
competitors. Because of this, Root cancelled Hinsch’s stock account and he lost his shares.
Hinsch sued Root in Common Pleas court and lost. He appealed it and, recently, in the case Hinsch v. Root Learning, Inc. (6th District Court of Appeals, Case No. L-12-1192, 2013-Ohio-3371), the Ohio appellate court upheld the decision. The appellate court held that the contract between Hinsch and Root which provided for Hinsch to receive payments relating to his stock once he left the company was undisputed. The court also noted that the agreement restricted Hinsch’s ability to compete with Root. Despite the fact that Hinsch tried to distinguish what he did, saying that he “neutered his work,” the fact remained that Hinsch violated his contractual obligations. Because of this, the appellate court affirmed the judgment in favor of Root and Hinsch lost out on his payday.
The import of this case is not Hinsch’s significant monetary loss. Rather, it is about a company who wisely utilized financial incentives to put very large teeth into its non-compete agreements. All too often, the consequences for breaking such agreements relate directly to the employee’s ability to work in his or her chosen field or lost profits. In this case, though, the possibility of financial reward dramatically increased the stakes for Hinsch. Because Root prevailed in this case, it should serve as a worthwhile lesson for other businesses that can use both the carrot and the stick when dealing with valued employees.