On Second Thought — The Ohio Supreme Court Reverses Course and Holds that a Merger Does Not Trigger the Beginning of a Noncompetition Period

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In October, the Ohio Supreme Court reconsidered and reversed, in part, its May 24, 2012, decision in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (Acordia I), which sharply restricted the ability of employers to enforce noncompete agreements after a merger if the agreements did not contain specific language permitting successors or assigns.

In Acordia I, Acordia of Ohio, L.L.C. brought suit against four former employees who entered into noncompete agreements with its predecessor, Acordia, Inc. According to the terms of the noncompete agreements, the employees agreed to forego competing with Acordia, Inc. for two years following the termination of their employment with "the company. " The agreements failed to address whether they would be enforceable by successors or assigns. More than two years after Acordia, Inc. merged with Acordia of Ohio, the employees resigned and began working for a competitor. Acordia of Ohio sued, seeking to enforce the noncompete agreements as if it had stepped into the shoes of Acordia, Inc.

In the original decision by the Ohio Supreme Court, the employees prevailed. The Court held that while the noncompete agreements transferred automatically following a merger, the merger did not alter the language of the agreements to include surviving entities like Acordia of Ohio. Because the agreements lacked specific language allowing for a successor or assign, Acordia of Ohio had only acquired the right to enjoin each employee from competing for two years after his/her employment terminated with Acordia, Inc.

Relying on the Court's previous decision of Morris v. Invest. Life Ins. Co., 27 Ohio St. 2d 26, 31 (1971), the Court in Acordia I held the termination of the employer-employee relationship occurred when Acordia, Inc. ceased to exist after the merger. Thus, the Court held the noncompetition period began to run as of the date of the merger and expired two years later.

Acordia of Ohio sought reconsideration with the assistance of the Ohio Chamber of Commerce and other businesses.

In the Court's 6-1 decision on reconsideration (Acordia II), the Court stated it was clarifying an "incomplete" reading of Morris to hold that a company does not cease to exist after a merger; rather, it is merely absorbed and becomes part of the resulting company. Based on this new interpretation, the Court clarified that acquired noncompete agreements may be enforced "as if [the new employer] stepped into the shoes" of the original contracting company regardless of whether the agreements have successors and assigns language. As a result, a merger does not trigger the beginning of the noncompetition period.

However, the Court in Acordia II preserved an employee's right to challenge noncompete agreements based on the reasonableness of its scope. The Court held that even though noncompete agreements transfer by operation of law, the transfer does not "foreclose appropriate relief to the parties to the noncompete agreement under traditional principles of law that regulate and govern noncompete agreements." In other words, a noncompete agreement will only be enforced if its restraint is no greater than what is required to protect the employer and does not impose undue hardship on the employee or the public.

While the Ohio Supreme Court has corrected its decision so that noncompete agreements may again be enforced without successors and assigns language, it is prudent for employers to review their noncompete agreements to make sure that they are reasonable under the current circumstances. Likewise, employers should consider having employees sign new noncompete agreements as part of a merger in order to limit a challenge to the reasonableness of an agreement that was originally signed with a different company.

If you have any questions about the material presented in this Alert, please contact David A. Whitcomb (dwhitcomb@bakerlaw.com or 614.462.4728) or any member of the BakerHostetler Noncompete and Trade Secrets Team.

Authorship Credit: David A. Whitcomb and Kathleen M. Portman

Topics:  Non-Compete Agreements

Published In: Civil Procedure Updates, General Business Updates, Labor & Employment Updates, Mergers & Acquisitions Updates

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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