Buyer Beware

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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Recently, the Ohio Supreme Court issued a decision that highlighted the fact that companies cannot assume that the forms and agreements of a prior company will provide the same protections for a successor company. In Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-2297 (May 24, 2012), Acordia, a successor company, attempted to stand in the shoes of its predecessors and enforce noncompetition agreements entered into between the predecessors and some acquired employees who left and began to work for a direct competitor. Acordia lost 19 customers and $1 million as a result of the employees’ defection to the competitor.

The court held that although the agreements transferred as a matter of law by the merger between the two companies, they were enforceable only according to their specific terms. The agreements at issue lacked any assignment language and defined the parties as only the employee and the specific predecessor company executing the agreement with the employee. As a result, Acordia (as the successor) was not permitted to step into the shoes of the predecessor companies. The court found that under merger law the predecessor companies ceased to exist after the series of mergers that culminated in the merger with Acordia. Thus, the mergers terminated the employees’ employment with the predecessors and triggered the two-year noncompete periods. Because the employees left Acordia more than two years after any of the relevant mergers triggered the employees’ respective noncompete periods, Acordia could not enforce the agreements against any of them.

What Employers Can Learn from This Decision

There are specific lessons to be learned from this decision:

  1. First, when conducting due diligence for corporate mergers and acquisitions, employers should review the terms of the restrictive covenants for any employees being acquired to ensure that the agreements can be assigned to the successor entity.
  2. Second, there may be different noncompete versions for employees hired at different points in time. An acquisition provides an excellent opportunity to create uniformity among the multiple variations. In Acordia, the court noted that during one acquisition the acquired employees executed several new-hire documents (e.g., applications, background check authorizations, etc.). This would have been the time to ask the employees to execute new noncompete agreements to secure an enforceable agreement if the employee left the new company.
  3. Third, company growth or market changes should prompt review of noncompete agreements to ensure any time or geographic restrictions within the agreements have not become unreasonable thereby invalidating the agreements.
  4. Fourth, new employee agreements should anticipate and plan for corporate mergers and acquisitions by including a provision stating that the agreement is between the employee and the present company, including its successors, heirs, and assigns.
  5. Finally, the potential value of enforceable restrictive covenants should not be underestimated. Here, the ruling that the noncompete restrictions of the agreements at issue were not enforceable by the entity seeking to enforce them cost that entity at least $1 million.

Michelle R. Arendt is a shareholder in the Cleveland office of Ogletree Deakins. LerVal M. Elva is an associate in the Cleveland office of Ogletree Deakins.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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