Ohio Decision Highlights Importance of Business Protection Agreements with Independent Contractors
Just as the distinction between an individual’s status as independent contractor versus employee can have serious ramifications for wage, tax, and other legal issues, the same can be true for claims relating to unfair competition. As a recent decision from the Court of Appeals of Ohio highlights, employers must be especially diligent in protecting against unfair competition when engaging independent contractors to carry out their business.
In Key Realty, LTD. v. Hall, 2021-Ohio-1868, plaintiff Key Realty engaged defendant Michael Hall as an independent contractor to manage some of the firm’s real estate brokers. By the time he left in 2019, Hall had multiple managers and brokers reporting to him, who supervised about 380 real estate agents.
In 2012, Key Realty had Hall sign a Non-Competition, Non-Solicitation, and Confidentiality Agreement (“Agreement”). The Agreement stated the parties made it “in consideration of the mutual promises contained herein, and for other good and valuable consideration, including ________.” Yet the parties never filled in the blank space.
Before departing Key Realty, Hall formed a new real estate brokerage named Red 1. When he left, Hall shut Key Realty out of the Facebook group he used to communicate with Key Realty’s agents. He also terminated Key Realty’s access to the Google drive and email accounts he used while working for Key Realty, “blocking access to any documents that he created while performing work for Key Realty.” Key Realty presented evidence that it lost around 200 agents in the Columbus area after Hall’s departure.
Ownership of Social Media Accounts and Digital Property
Hall claimed that because he was an independent contractor operating through a separately owned LLC, the Facebook account, Google drive, and email accounts he used while in service of Key Realty belonged to him. The trial court granted summary judgment to the defendants on Key Realty’s claims for conversion and unauthorized use of computer property. Although at first affirmed on appeal, the appellate court later reversed Key Realty’s motion for reconsideration.
On reconsideration, the appellate court determined that the language of the Agreement created a genuine issue of material fact over ownership, because it specified that “all books, records, files, forms, reports, accounts and documents relating in any manner to [Key Realty’s] business or customers,” were the exclusive property of Key Realty.
While Hall may prevail on this issue at trial, there is no doubt the language of the Agreement is critical for Key Realty. Had Key Realty failed to enter into the Agreement with Hall, or to include this property ownership provision, its defenses to Hall’s claim of ownership over the valuable digital accounts and property Hall developed while engaged by Key Realty would have been significantly weakened. Hall may not have been able to claim ownership had he been an employee, rather than an independent contractor, making the Agreement even more important for Key Realty.
Consideration for the Agreement
The initial appellate court found the Agreement unenforceable because the parties left a line blank where they should have listed the consideration. The court also reasoned that, while continued employment can constitute consideration for restrictive covenants, continued status as an independent contractor could not.
On reconsideration, the appellate court found that Hall’s continued engagement with no specific end-date created something equivalent to “employment-at-will,” even though the relationship was an employer-independent contractor. Because the parties continued their at-will relationship for six years after executing the Agreement, this served as sufficient consideration.
The blank space where the parties should have identified the consideration did not alter this result, because the Agreement elsewhere stated that, in exchange for the restrictive covenants, Hall would “gain valuable information and insights on the lines of business in which [Key Realty] is engaged; access to [Key Realty’s] confidential and proprietary information; and exposure to its existing and potential business opportunities.” This, according to the appellate court on reconsideration, was a “bargained-for benefit and detriment, fully satisfying the general definition of consideration in Ohio.”
Although the Key Realty court ultimately reversed summary judgment for the defendants on reconsideration, Key Realty must still grapple with these issues on its way to trial. This case serves as an excellent reminder for employers to think carefully about the distinction between independent contractors and employees when seeking to protect their business interests. A well-written, clear contract is the best way to confirm whether the employer or independent contractor owns the work product generated during the engagement. As always, parties to restrictive covenants and other agreements should make any variables in a contract (such as consideration) explicit before signing. Continued engagement of an independent contractor, standing alone, likely would not constitute sufficient consideration in all jurisdictions.