Ohio Supreme Court Enforces Technicality in Non-Compete Agreement That Has Ramifications Outside of Employment Law

This morning, a divided Ohio Supreme Court refused to enforce a non-compete agreement against former employees of the plaintiff employer’s predecessor company because the predecessor had ceased its existence many years before and there was no successorship language in the non-compete agreement permitting the plaintiff employer to step into the legal shoes of the predecessor company for enforcement purposes of the two-year non-competition period “as if the surviving company were a party to the original agreements.” Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-2297. Although the plaintiff company required these employees to complete new job applications, it did not require them to sign new non-compete agreements as a condition of their employment. The plaintiff company merely assumed that because ownership of the non-compete agreements transferred to the surviving company when it merged with the predecessor company that it would also step into the legal shoes of that employer for purposes of triggering the two-year non-compete period. Instead, the Court’s majority construed the agreement and Ohio’s corporation law to provide that the two-year non-compete period began to run when the employees ceased to work for the named predecessor company, which was when the predecessor company merged with the surviving company and ceased to legally exist. Although the merger made the agreements the property of the surviving company, it did not convert the surviving company into the predecessor company. Therefore, the two-year non-compete period had expired long before the employees went to work for a competitor.

According to the Court’s opinion, the employees of Company A signed non-compete agreement between 1993 and 2000 that provided that they could not compete for two years after they ceased working for Company A. “It is significant that this agreement of noncompetition does not contain language that extends to other employers, such as the company’s ‘successors or assigns.’” Company A then merged with Company B, which then merged with Plaintiff-employer, Company C, in 2001. Company C required the employees to complete job applications, but did not require them to sign new non-compete agreements with it. The employees remained employed by Company C until 2005, when they went to work for a competitor and recruited several of their prior customers. Company C then sued for breach of the non-competition agreements that the employees had signed with their predecessor employer before 2000.

The trial court refused to enjoin the employees under the agreements or Ohio’s trade secret law. The Court of Appeals agreed that the employees had not intended to make the agreements assignable to successor employers because there was no successor language in the agreement. The Court of Appeals also found (and the Court’s majority agreed) that the agreements had been made only with Company A, which ceased to legally exist when it merged with Company B under Revised Code § 1701.82(A)(1).

We have previously explained that when a merger between two companies occurs, one of those companies ceases to exist: “[A] merger involves the absorption of one company by another, the latter retaining its own name and identity, and acquiring the assets, liabilities, franchises and powers of the former. Of necessity, the absorbed company ceases to exist as a separate business entity.” Morris v. Invest. Life Ins. Co., 27 Ohio St.2d 26, 31, 272 N.E.2d 105 (1971). After the [Company C] absorbed [Company B]., the companies with which the employees agreed to avoid competition had ceased to exist. Because the noncompete agreements do not state that they can be assigned or will carry over to successors, the named parties intended the agreements to operate only between themselves— the employees and the specific employer.

During oral argument, the employees made a persuasive argument that they had signed a two-year non-compete with a small insurance broker, when then ultimately ended up merging with a national company (i.e., Wells Fargo), which converted their small non-compete area (i.e., Cincinnati) into a nationwide injunction. They argued such a result should not be imposed on them without clear language of such intent. The Court’s majority was not willing to go that far. Instead, they acknowledged that by operation of Revised Code § 1701.82, the surviving companies “possesses all assets and property of every description, and every interest in the assets and property, wherever located, and the rights, privileges, immunities, powers, franchises, and authority, of a public as well as of a private nature, of each constituent entity,” including the non-competition agreements at issue. Therefore, the surviving company possessed the right to enforce the non-compete agreements for two years after the merger, even if they did not step into the shoes of the predecessor company and legally become the predecessor company.

While the employment agreements transferred to the [Company C] by operation of law pursuant to R.C. 1701.82, the wording within those agreements prevents [Company C] from enforcing a noncompetition period as if it were the original company with which the employees agreed not to compete. [Company C] acquired only the ability to prevent the employees from competing two years after their employment terminated with the specific company named in the agreements.

. . .

When contracts pass to the surviving company following merger, the surviving company obtains the same bargain agreed to by the preceding company, nothing more. Our decision today honors the noncompete agreement obtained by the employees’ original employers. [Company C] argues that as the surviving company, it needs these agreements because they protect the goodwill and proprietary information obtained in the merger; however, extending these agreements would run counter to their plain language, which specifies that they apply only to “the Company” with which the employees agreed to avoid competing, not the company’s successors. [Company C] could have protected its goodwill and proprietary information by requiring that the employees sign a new noncompete agreement as a condition of their continued at-will employment, similar to the way in which [it] required them to complete a number of employment forms as a condition of continued employment when it acquired [Company B].

Because the two-year non-compete period ran from the date when Company A ceased to exist upon merging with Company B, the employees did not violate the non-compete when they went to work for a competitor more than five years later.

The Court’s dissent found that the surviving company did legally step into the shoes of the predecessor employer and become that predecessor company for purposes of enforcing the agreement. They point to prior decisions finding obligations of the predecessor company were enforceable against the surviving entity in a merger unless the contract expressly stated otherwise. Indeed in a prior non-compete case, the Court found the agreements entered into by a sole proprietorship were still enforceable by the corporation formed by incorporating the proprietorship because it was still the same business, albeit in a different form. One of the dissenters was sympathetic to the claims of the employees that the scope of the non-compete significantly changed with the mergers and wondered if they were still reasonable under the circumstances, even if the agreements did transfer by operation of law.

In short, the lesson of this case is that a surviving company should require the employees of the former company to sign new employment and non-compete agreements in order to ensure their enforceability.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.