Ohio Supreme Court Reconsiders Its Acordia Non-Compete Ruling and Finds Successor Company Can Enforce Non-Compete Against Predecessor’s Employee’s Without Successorship Language in Agreement

This morning, in an unusual move, the Ohio Supreme Court reversed itself on a high-profile non-competition opinion it issued less than four months ago.  Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-4648.  As previously discussed here, the Court refused in the prior decision to enforce a non-competition clause against the plaintiff’s former employees because, among other things, they signed the agreement with the plaintiff’s predecessor company (which merged into the plaintiff company) and the agreement contained no successorship/assignment language.  While the agreement transferred to the plaintiff company upon the merger by operation of law, the Court found the plaintiff company could only enforce the agreement for the two year non-competition period in the agreement (which began to run upon the merger) and could not enforce it against employees who resigned five years after the merger.  However, upon a request for reconsideration by the plaintiff company (and a few amicus briefs), the Court clarified that the prior and current opinion only applied to non-competition agreements (rather than other corporate contracts) and agreed that it had misread prior court precedent to improperly limit the enforceability of the agreement.  Therefore, the Court held that the successorship/assignment language was unnecessary to enforce the non-competition clause.

The Court admitted that it had erroneously believed that the merged company ceased to exist entirely upon the merger and this erasure started the two-year non-competition period.  It now realizes that the merged company is instead absorbed into the surviving entity.  In particular:

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.

Based on the foregoing clarification, we note that any language in the lead opinion in Acordia I stating that the L.L.C. was unable to enforce the employees’ noncompete agreements as if it had stepped into the original contracting company’s shoes or that the agreements were required to contain “successors and assigns” language for the L.L.C. to have the power to enforce the agreements was erroneous.

Nonetheless, as mentioned in my prior description of the oral argument in this case, the Court remains sympathetic with the employees’ objection to the enforcement of a non-compete with a giant company (with a large non-competition area) when it only signed a non-compete with a small company (with a much smaller non-competition area of only one county).  The employees argued that their original intent should be considered, while the plaintiff company argued that the same result would have occurred if the original company had simply grown into a larger entity instead of being purchased by one.   The Court’s majority directed the lower courts to consider the employees’ objection to the enlarged scope of the non-compete area.

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.

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.

Ohio Supreme Court Entertains Oral Arguments on Termination of Non-Compete Agreement Upon Merger

On Tuesday, the Ohio Supreme Court entertained oral argument on a non-compete case that had been appealed by the employer from the Hamilton County Court of Appeals. Acordia of Ohio, L.L.C. v. Fishel, 2010-Ohio-6235. In that case, most of the defendant employees had signed non-compete agreements with a small insurance company which was acquired years later in a merger with an Accordia entity. The Accordia entity was eventually merged years later into a larger Accordia entity, Accordia of Ohio LLC, which ultimately merged with Wells Fargo. The employees years later resigned en masse and went to work for a competitor of Accordia. Accordia filed suit seeking a preliminary injunction based on the non-compete agreements which the employees had signed with the predecessor company more than ten years before and for theft of trade secrets. The court refused to grant an injunction and ultimately entered summary judgment in favor of the employees on the grounds that the non-compete agreements had expired years earlier.
In particular, the court found that the terms of the non-compete agreements provided that the two-year non-compete period began to run upon the employee's termination of employment with the predecessor employer. The court also found that the employee's employment with the predecessor was terminated by operation of law when the predecessor employer merged with Accordia and ceased to exist. Nonetheless, upon the merger, Accordia succeeded to the predecessor's enforcement rights under the non-compete agreement. Therefore, if the employees had gone to work for a competitor within two years of the merger, Accordia would have had the right to enforce the non-compete restriction because it had stepped into the predecessor's shoes. As it was, the employees waited approximately ten years – long after the non-compete agreement and two-year non-compete period had expired – to compete against Accordia.
On appeal, the employer argued that the appellate court erred in holding that the non-compete enforcement rights survived the merger, but not the employees' employment. The employer argued that the employees remained employed at will following the merger (even though Justice McGee Brown raised factual issue about I-9 forms and employment applications). Therefore, the employer argued, there was no break or termination in employment in fact, in law or under the non-compete agreement. Second, the non-compete agreements were assets acquired by Accordia and should have been enforced as though Accordia were the predecessor employer because it acquired all of the predecessor's rights under all contracts – whether those contracts were with customers or with employees. Some justices were sympathetic to the argument that Accordia should have had equal rights under both customer and employee contracts to step into the shoes of the employer.
There was also some discussion about the intent of the parties when the employees had entered into a non-compete agreement with a small insurance agency, which ultimately was acquired by Wells Fargo – with a national presence. Would it be fair to the employees' reasonable expectations to enforce a non-compete against them which might preclude competition anywhere in the United States when they originally signed thinking they were only giving up their rights to compete in one Ohio county. The employer pointed out that the same result could have arisen if the small insurance company had grown and acquired other companies, instead of visa versa.
The employees continued to argue that the terms of the non-compete specifically provided that the non-compete period began to run when their employment with the predecessor was terminated. It did not contain a successor clause (i.e., defining "company" under the contract to include both the predecessor and any successor). However, the employees did not make a compelling argument why their contracts should be treated differently than customer contracts. They also continued to argue that Accordia assumed the predecessor's rights to enforce the non-compete agreements if the employees had begun to compete within two years of the termination of their employment with the predecessor.
Of course, all of this could have been avoided if Accordia had simply entered into new non-compete agreements with each of the employees following the merger or required the former non-compete agreements to be amended prior to the merger to avoid this issue.
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.