Employer Law Report : Employment and Labor Relations Lawyer & Attorney : Porter Wright's Employer Law Report : Employment Litigation, Non-Compete, Trade Secrets

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.

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The Ohio Supreme Court ruled 4-3 on May 24, 2012, that following a merger the surviving company may not be able to enforce employees’ non-compete agreements where the agreements fail to contain an assignment clause and the time period of the employees’ non-competes began to run as of the date of the merger.

In Acordia of Ohio, L.L.C. v. Fishel et al., the Ohio Supreme Court ruled that a merger causes the original corporate party to non-compete agreements to cease to exist, while the surviving company takes ownership of the agreements. But where the non-compete agreement fails to contain an assignment clause, the surviving company may not enforce the non-compete agreement as if it “stepped into the shoes” of the company that had originally contracted with the employees. Although the employees’ non-compete agreements transferred automatically by operation of law to the surviving company, the Ohio Supreme Court held that the non-compete agreements at issue provided only that the employees would avoid competition following their termination from the specific company identified in the non-compete agreements. Because the non-compete agreements did not state they could be assigned or would carry over to a successor, the Ohio Supreme Court ruled that the named parties intended the agreements to operate only between themselves — the employees and the specific employer. According to the Acordia decision, the termination of the employees’ employment with the original company was triggered by the merger, which commenced the running of the non-compete periods. These periods expired on their own terms after two years of employment with the successor — Acordia — and thereby made the non-compete agreements unenforceable by Acordia when the employees later joined a competitor.

The dissenting opinion in Acordia noted that the lead opinion runs counter to Ohio’s century-old precedent that in a merger, the consolidated party steps into the shoes of the constituent companies and that by operation of law, and in the absence of explicit contract language to the contrary, the surviving entity is vested with all the assets and obligations of the constituent entities. Those assets and liabilities historically have included agreements such as non-compete agreements and the ability to enforce them as if the surviving entity were a signatory to them.

Recommendations
It is too early to know the reach and impact of this ruling, but we can foresee that Acordia’s analysis might be applied by Ohio courts to contracts other than non-compete agreements. Therefore, at a minimum, Acordia serves as a reminder to contracting parties to be mindful of the importance of considering the portfolio of contracts in place at a company involved in a merger.

Clients are cautioned to examine all of their agreements governed by Ohio law with respect to provisions that may be viewed as triggering a termination or dealing with an assignment by operation of law in the context of a merger to assure that the Acordia decision is followed. In order to assure that an agreement is fully transferred by a merger and that a surviving company may enforce the agreement on the same terms as the original corporate party, we recommend clients assure agreements do not restrict the “company” only to the original corporate party but that the term specifically includes the original corporate party’s “successors and assigns.”

Specifically with respect to non-compete agreements, we recommend clients review the language to assure it includes an appropriate assignment clause so that the commencement of a non-compete period is not triggered by a merger in which the original party to the agreement is not the surviving entity.

Acquiring companies’ due diligence investigations on potential Ohio target companies will need to include a review of all business agreements to determine if Ohio law governs and to assure that the surviving entity in a merger is assuming full rights and responsibilities for all obligations of the constituent entity, including enforcement of such agreements on the same terms as the original corporate party.

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Yesterday the Ohio Supreme Court agreed to hear an appeal that addresses the extent to which a corporate merger may impact the surviving company's ability to enforce restrictive covenants that its predecessor companies entered into with their employees.

In Acordia of Ohio LLC v. Fishel et al., several Acordia employees (called the "Fishel team") left the company in 2005 and began working with a competitor, Neace-Lukens. These employees had previously signed noncompete agreements with Acordia's predecessor companies, prohibiting them from competing with the predecessors for two years after termination. They did not sign new agreements with the surviving company. When Acordia tried to enforce the restrictive covenants against the departing employees, the Hamilton County Court of Appeals decided that the two-year noncompetition clock in those agreements had already expired. The court concluded that the restrictions under the employees' noncompete agreements were triggered when Acordia's predecessors merged, saying: "Because the predecessor companies ceased to exist following the respective mergers, the Fishel team's employment with those companies was necessarily terminated at the time of the applicable merger. By their own terms, the agreements' restrictions were triggered by the relevant mergers and acquisitions."

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