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.