The Ohio Supreme Court Breaks with Other States and Limits the Reach of Successor Companies Seeking To Enforce Their Predecessors' Non-compete Agreements

Companies routinely require employees to sign non-compete agreements as a condition of employment.  A non-compete agreement, also called a covenant not to compete, is typically a contract between an employer and an employee under which the employee agrees not to enter into competition with the employer for a specific duration of time after termination of the employment relationship.  Generally, the policy compelling employers to enter into such agreements with employees is to advance the employers' self-interests by restricting potential competition, protecting proprietary information, or some combination thereof.  The terms of such contracts vary, and must conform to certain criteria in order to be enforceable under Ohio law.[i]

Assuming an employee and employer enter into an enforceable non-compete agreement, what happens to the non-compete agreement after the employer merges with another company?  The Ohio Supreme Court addressed this issue on May 24, 2012 in Acordia of Ohio, L.L.C. v. Fishel, Slip. Opinion No. 2012-Ohio-2297.  Does the non-compete agreement transfer after the merger to the successor company in accordance with Ohio Rev. Code § 1701.82?  Yes, according to Acordia.[ii] But does the successor company necessarily have the right to enforce the non-compete agreement as if the successor company stepped into the shoes of the company that originally contracted with the employee?  Acordia's lead opinion says no.[iii]

Pursuant to the lead opinion authored by Justice Lanzinger, "[w]hen contracts pass to the surviving company following merger, the surviving company obtains the same bargain agreed to by the preceding company, nothing more."[iv] What does this mean for a successor company that wishes to enforce an Ohio non-compete agreement, originally between its predecessor and an employee, that fails to expressly prohibit the employee from competing with successors and assigns?  It means that, to the extent that the non-compete agreement restricts competition for a finite duration, the successor company may sue for breach of contract; however, severance of the employment relationship with the predecessor company (and not the severance of the employment relationship with the successor company) starts the non-compete clock.[v]

In Acordia, several employees "entered into non-compete agreements by which they agreed to forgo competition with Acordia, Inc. for two years after termination of their employment there."[vi] The non-compete agreements, however, did not contain language prohibiting the employees from competing with Acordia, Inc.'s "successors or assigns."[vii] After being purchased by Wells Fargo, Acordia, Inc. underwent in 2001 a merger with Acordia of Ohio, L.L.C. ("Acordia of Ohio").[viii] The employees worked for Acordia of Ohio for several years before they terminated their employment relationships in 2005 to work for a competitor, Neace Lukens Insurance Agency, L.L.C.[ix] Within six months, the employees had lured 19 of Acordia of Ohio's customers to Neace Lukens, depriving Acordia of Ohio of about one million dollars in revenue.[x] Acordia of Ohio sued the employees for breach of the non-compete agreements, and unsuccessfully sought injunctive relief and money damages.[xi] The employees were granted summary judgment, and Ohio's First District Court of Appeals affirmed the trial court’s decision.[xii]

The Ohio Supreme Court affirmed, as well.[xiii] The Court reasoned that:

[A]lthough the employees' non-compete agreements transferred automatically by operation of law to [Acordia of Ohio] following the merger, the merger did not alter the language of the agreements, and the non-compete agreements provided only that the employees would avoid competition during the two years following their termination from "the company" as defined by their respective non-compete agreements.[xiv]

The triggering event for the employees' termination from "the company" was the merger between Acordia, Inc. and Acordia of Ohio, because "the company" with which the employees agreed not to compete, Acordia, Inc., ceased to exist at that point.[xv] "In other words, the employees were unable to compete with [Acordia of Ohio] for the two years following their termination from the 'company' with which they each had signed their respective non-compete agreements."[xvi] Accordingly, "[b]ecause the employees' non-compete periods had all expired before their resignations from [Acordia of Ohio] and subsequent employment with Neace Lukens, [Acordia of Ohio] had no legal right to enforce the non-compete agreements against the employees."[xvii] The Court suggested that Acordia of Ohio could have more fully protected itself "by requiring that the employees sign a new non-compete agreement as a condition of their continued at-will employment."[xviii]

Justice O'Donnell suggests in his dissenting opinion that the approach adopted in Acordia's lead opinion breaks with the approach followed in several other states.  Specifically, he states that:

[O]ther courts construing similar statutes have rejected the conclusion reached by the lead opinion.  For example, in Corporate Express Office Prods., Inc. v. Phillips,[xix] the Supreme Court of Florida held that a surviving entity in a "merger assumes the right to enforce a non-compete agreement entered into with an employee of the merged corporation by operation of law, and no assignment is necessary . . . because in a merger, the two corporations in essence unite into a single corporate existence."  And in AON Consulting, Inc. v. Midlands Fin. Benefits, Inc.,[xx] the Supreme Court of Nebraska reached the same result when it construed a Maryland statute, concluding that a surviving entity could enforce a non-compete agreement acquired in a merger because it was an asset that passed by operation of law, and no assignment was necessary.  See also Natl. Instrument, L.L.C. v. Braithwaite[xxi] (identifying cases in which courts construed merger statutes that vested in surviving entities the assets of a constituent entity without further act or deed, and which held that surviving entities could enforce non-compete agreements because they were business assets that passed by operation of law and not by assignment).[xxii]

The dissenting opinion validly asserts that the above-cited cases hold that successor companies have the right to enforce their predecessors' non-compete agreements without the need for an express assignment; however, this issue was not disputed in the lead opinion.  The lead opinion accepts that the right to enforce employment contracts automatically transfers to the successor company post-merger in accordance with Ohio Rev. Code § 1701.82.[xxiii] The lead opinion rejects, however, the notion that severance with the successor company triggers the ticking of the non-compete clock absent language prohibiting the employee from competing with successors.[xxiv] To support that Ohio has broken from the approach followed by other states, the dissenting opinion should have relied upon the following language from Natl. Instrument:  "[a] successor employer may enforce a covenant not to compete between its predecessor and an employee if there has been no change in the employee's duties and obligations as a result of the merger, and/or the employee fails to object to the merger and continues to accept the benefits of employment with the successor."[xxv] Ultimately, though, the caselaw relied upon by Justice O’Donnell suggests that courts in Florida, Maryland, and other states would have allowed Acordia of Ohio to enforce its predecessor's non-compete agreements as if it had stepped into Acordia, Inc.'s shoes.

Regardless of the reasoning and possible criticisms of the lead opinion in Acordia, the case teaches a valuable lesson: non-compete agreements need to contemplate the possibility of merger and other changes to an employer's legal status.  Businesses can protect themselves with clauses in non-compete agreements prohibiting employees from competing with successors and assigns.  Absent such clauses in non-compete agreements between predecessor companies and employees, successor companies may want to consider requiring employees to sign new non-compete agreements as a condition of their continued at-will employment.

[i] Raimonde v. Van Vlerah, 325 N.E.2d 544 (Ohio 1975).

[ii] Acordia, 2012-Ohio-2297, ¶10 ("[Ohio Rev. Code §] 1701.82 provides that a company's assets transfer to the new company after a merger. . . . Because the statute specifies that the new company takes over all the previous company's assets and property postmerger, it is clear that employee contracts transfer to the resulting company.").

[iii] Id. at ¶1 ("We hold that in this case, the language of the agreement dictates that the surviving company cannot enforce the agreement after the merger as if it had stepped into the shoes of the original company.").  Chief Justice O'Connor and Justice McGee Brown concurred in the lead opinion, and Justice Pfeifer concurred in judgment only.  Accordingly, the lead opinion was not supported by a majority of the Court.

[iv] Id. at ¶15 (emphasis added).

[v] Id. at ¶18 (holding that the triggering event for "severance of the employer-employee relationship" occurs "when the company with which the employee agreed not to compete cease[s] to exist, an event triggered by merger").

[vi] Id. at ¶2.

[vii] Id.

[viii] Id.

[ix] Id. at ¶5.

[x] Id.

[xi] Id. at ¶6.

[xii] Id. at ¶¶6-7.

[xiii] Id. at ¶19.

[xiv] Id. at ¶16.

[xv] Id. at ¶18.

[xvi] Id. at ¶17.

[xvii] Id. at ¶18.

[xviii] Id. at ¶15.

[xix] 847 So.2d 406, 414 (Fla. 2003).

[xx] 748 N.W.2d 626 (Neb. 2008).

[xxi] No. 24-C-06-004840, 2006 Md. Cir. Ct. LEXIS 12, a *9-16 (June 5, 2006).

[xxii] Acordia, 2012-Ohio-229, ¶32 (citations in original).

[xxiii] Acordia, 2012-Ohio-2297, ¶10 ("Because the statute specifies that the new company takes over all the previous company's assets and property post-merger, it is clear that employee contracts transfer to the resulting company."); Id. at ¶¶12-13 ("While the employment agreements transferred to [Acordia of Ohio] by operation of law pursuant to [Ohio Rev. Code] § 1701.82, the wording within those agreements prevents [Acordia of Ohio] from enforcing a non-competition period as if it were the original company with which the employees agreed not to compete.  [Acordia of Ohio] acquired only the ability to prevent the employees from competing two years after their employment terminated with the specific company named in the agreements.  We hold that non-compete agreements that are transferred as a matter of law by a merger between companies are enforceable according to their terms.") (emphasis added).

[xxiv] Id.

[xxv] 2006 Md. Cir. Ct. LEXIS 2, at *13 (citing Munchak Corp. v. Cunningham, 457 F.2d 721, 725-726;  Hexacomb Corp. v. GTW Enterprises, Inc., 875 F. Supp. 457, 465 (N.D. Ill. 1993)).  In Hexacomb, the court (applying Illinois law but citing Ohio law) held that "[b]ecause [the employee] continued to accept the same job and responsibilities, he also accepted the same obligations" and in doing so the employee "effected a novation" to the original contract.  875 F. Supp. at 465 (citing Safier's Inc. v. Bialer, 93 N.E.2d 734, 736-7 (Cuyahoga Cty. 1950)).

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Jade Smarda |