This past May, we reported that the Ohio Supreme Court ruled in Acordia of Ohio, L.L.C. v. Fishel that following a merger, the surviving company may not be able to enforce employees’ non-compete agreements, where the agreements failed to contain an assignment clause, and the time period of the employees’ non-competes began to run as of the date of the merger. The Court reconsidered its decision, and issued a new decision today. Upon quick review, the bottom line seems to be that the Court has decided that it mis-read earlier precedent regarding corporate mergers. Here is part of the summary from the Office of Public Information:
Justice Lanzinger wrote, "Upon further consideration, we now recognize that the lead opinion's reading of Morris [v. Investors Life Insurance Co.] was incomplete. While Morris does state that the absorbed company ceases to exist as a separate business entity, the opinion does not state that the absorbed company is completely erased from existence. Instead, the absorbed company becomes a part of the resulting company following merger. The merged company has the ability to enforce noncompete agreements as if the resulting company had stepped into the shoes of the absorbed company. It follows that omission of any 'successors or assigns" language in the employees' noncompete agreements in this case does not prevent the L.L.C. from enforcing the noncompete agreements."
While we now hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into each original contracting company's shoes, we agree with Justice Cupp's assertion in his dissent in Acordia I that even though the agreements transfer to the L.L.C. by operation of law, the transfer does not 'foreclose appropriate relief to the parties to the noncompete agreement under traditional principles of law that regulate and govern noncompete agreements.' ... In other words, the employees still may challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in this case created additional obligations or duties so that the agreements should not be enforced on their original terms."
The language in Acordia I stating that the L.L.C. could not enforce the employees' noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements must contain 'successors and assigns' language in order for the L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of this case. We accordingly reverse the judgment of the court of appeals and remand this cause to the trial court so that it may determine the reasonableness of the noncompete agreements."
If you are involved in merger and acquisition due diligence, this removes one potential problem from your checklist. But the issue of whether a non-compete agreement is reasonable "under the circumstances" still needs to be considered.