Ohio Supreme Court Ruling Changes Enforceability of Non-compete Agreements After Corporate Merger
June 19, 2012
Ohio law follows a long-standing rule that a successor entity in a corporate merger “steps into the shoes” of its predecessor. But employee noncompete agreements no longer fit snugly into the successor’s new “shoes” after the Ohio Supreme Court’s recent Acordia of Ohio, L.L.C. v. Fishel decision. Slip Op. No. 2012-Ohio-2297. The Ohio Revised Code states that after a corporate merger, “the surviving or new entity possesses all assets and property … and every interest in the assets and property … of each constituent entity.” See O.R.C. § 1701.82. But the Ohio Supreme Court decided in Acordia’s 4-3 split decision whether noncompete agreements’ silence on transferability is governed by this statute alone or by the statute plus the agreements’ plain language. The majority opinion laid down a rule favoring the statute plus agreement language: “[I]n accordance with [the statute], the surviving company possesses all assets and property … [but] the surviving company obtains the same bargain agreed to by the preceding company, nothing more.” When the court said the “same” bargain, the court meant precisely the same agreement, word for word. The court held that Acordia’s noncompete agreements’ language of “the company” referred only to the predecessor corporation and did not extend to the successor; the merger transferred the agreements but did not alter their language.
The Appellant, Acordia LLC, formed from a series of mergers spanning 1993-2002, all involving insurance securities sales companies. Appellees were former Acordia LLC’s employees who left in 2005 to work for competitor Neace Lukens. The employees used their Acordia LLC contacts to transfer Acordia accounts to Neace Lukens: $1 million worth in six months. All the employees had signed noncompete agreements at various times between 1993-2000 with Acordia’s predecessors—Acordia Inc, Acordia Cincinnati, and Frederick Rauh & Co—agreeing not to compete with “the company” for two years after ending employment. In December 2001, Acordia Inc merged with Acordia LLC; the employees continued to work for Acordia LLC until August 2005 when they left for Neace Lukens. None of the employees signed non-competition agreements with the newly merged entity- Acordia LLC.
According to the Ohio Supreme Court’s majority opinion, the employees’ Acordia Inc noncompete agreements ended at some point during their Acordia LLC employment, and the agreements only pertained to “the company”—Acordia Inc—that no longer existed. The court created a narrow “shoe” in holding that the merger did not change the agreements’ language or scope to include successors. The court suggested that successors could protect their proprietary information by either (1) including language that agreements transfer to “successors” or “assigns” or (2) requiring employees to sign new noncompete agreements post-merger as a condition of retaining their at-will employment.
Three justices who dissented pointed out the Court’s ruling runs against the greater weight of other state’s authorities and criticized the majority for applying common law contract principles over the Ohio statute.
After Acordia, an Ohio successor in a corporate merger can no longer rely on the predecessor’s noncompete agreement “shoes.” Now, successors should consider taking these steps: (1) make sure that the Merger Agreement or similar document clearly assigns the non-compete contracts to the new entity; (2) change the non-compete agreements to reflect that the agreement is enforceable in the event of sale, merger, reverse merger, or similar transaction; (3) enter into new non-compete agreements with employees after a merger; and (4) have all agreements reviewed by counsel.
If you have questions about your corporation’s noncompete agreements or other employment issues, please contact Jeffrey M. Embleton, Amy L. Kullik, James A. Budzik or Ann E. Knuth in our Labor and Employment Group.
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