[authors: Thomas Metzger and Melanie Houghton]
In a rare procedural move, the Ohio Supreme Court reconsidered and reversed its May 24, 2012 decision in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 ("Fishel I"). At issue was the enforceability of restrictive covenants in employee noncompete agreements subsequent to a merger. In Fishel I, affirming the decisions of the lower courts, the Ohio Supreme Court held that all assets and property, including employment contracts and agreements, transferred through operation of law to the resulting company post-merger. The merged company, however, was precluded from enforcing its predecessor's noncompete agreements because the agreements did not contain language that extends to others, such as the company's "successors or assigns," and the noncompete agreements had expired as to all the employees involved.
On October 11, 2012, the Ohio Supreme Court reversed its position in a 6-1 ruling (Pfeifer dissenting), holding that the surviving company could enforce the agreements as if it had stepped into the shoes of the original contracting company. See Acordia of Ohio, L.L.C. v. Fishel, 2012 Ohio LEXIS 2454 ("Fishel II").
Background and Procedural History
In 2005, Acordia of Ohio, L.L.C. ("Acordia") filed an action seeking damages and injunctive relief against several former employees and competitors, asserting various causes of action, including violation of noncompete agreements and misappropriation of trade secrets. Acordia was the product of several mergers and the noncompete agreements at issue were signed with Acordia's predecessor companies. The trial court denied Acordia's requests for relief, holding that the noncompete agreements at issue were not assignable to successors. The First District Court of Appeals agreed.
In a 4-3 ruling, the Ohio Supreme Court in Fishel I upheld the decision of the Court of Appeals. The court reasoned that the employees' employment with the predecessors terminated when those companies "ceased to exist" after the mergers. Additionally, because the language in the agreements did not specifically extend noncompete rights to successor companies, the court determined that the noncompete periods began to run as of the date of the merger. Consequently, when the employees left Acordia to work for a competitor years after the merger, the noncompete periods had expired.
After the court's decision in Fishel I, Acordia and amici curiae moved for reconsideration, arguing that the court's decision improperly rewrote the Ohio merger statutes and abandoned decades of legal precedent governing corporate continuity. In a 6-1 ruling (Pfeifer dissenting), the court granted the motion for reconsideration.
The Court's Holding in Fishel II
In Fishel II, the Ohio Supreme Court reversed its position in part, holding that a company is not "erased from existence" following a merger. Instead, the absorbed company becomes part of the resulting company, meaning that the surviving company has the ability to enforce noncompete agreements "as if the resulting company had stepped into the shoes of the absorbed company." Therefore, according to the court, the omission of any "successors or assigns" language in the employees' noncompete agreements does not prevent Acordia from enforcing them.
Implications for Employers
The Ohio Supreme Court's decision in Fishel II is clearly favorable for employers, but it is not without limitations. The court was careful to state that its holding was based on the unique context of noncompete agreements and should not be construed as addressing the effect of a merger on any other company contracts. Accordingly, employers should continue to carefully draft agreements to include "successors and assigns" language where appropriate.
Employers should note that this case arose in the context of a merger. There are many other types of business combinations and reorganizations, many of which do not involve the successor company "stepping into the shoes" of the predecessor companies. If a company buys assets from another company, obligations associated with those assets typically do not automatically transfer. So if an employer wishes to assume contracts including noncompetition agreement, it generally would have to specifically assume those agreements, which may not be possible without the inclusion of successors and assigns language in the original agreement. Utilizing successors and assigns language will likely be critically important in asset sale situations.
The court also emphasized that its decision did not foreclose appropriate relief to parties to a noncompete agreement under traditional principles of law that regulate and govern noncompete agreements. In other words, employees are free to "challenge the continued validity of noncompete agreements based on whether the agreements are reasonable and whether any mergers created additional obligations or duties so that the agreements should not be enforced on their original terms." Employers should therefore continue to carefully draft noncompete agreements to ensure compliance with Ohio law, and consult counsel appropriately.
Thomas Metzger is a Shareholder, and Melanie Houghton is an Associate, in Littler Mendelson's Columbus office. If you would like further information, please contact your Littler attorney at 1.888.Littler or email@example.com, Mr. Metzger at firstname.lastname@example.org, or Ms. Houghton at email@example.com.