The Supreme Court of Ohio reconsidered and reversed in part its May 24, 2012 decision in Acordia of Ohio L.L.C. v. Fishel (Acordia I) that a surviving company in a merger may not be able to enforce employees’ noncompete agreements if the agreements failed to contain an assignment clause. The court issued a partial correction of the lead opinion in Acordia I because the opinion was based on a misreading of precedential case law regarding the survivorship of a company post-merger.
Acordia sued four former employees after they left to work for a competitor and succeeded at soliciting away US$1 million in business. The noncompete agreements Acordia sought to enforce referred to “the company” defined by the name of a predecessor company and did not reference any successor company.
In Acordia of Ohio L.L.C. v. Fishel (Acordia II) the court reaffirmed the long-standing rule that employee noncompete agreements transfer by operation of law to the surviving company after merger. Reversing their decision in Acordia I, the court held that Acordia may enforce the employee noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of the case. An assignment clause was not needed for the surviving company to have the power to enforce the noncompete agreements, because an absorbed company in a merger becomes a part of the resulting company following a merger.
Acordia II is consistent with Ohio’s previous precedent that a surviving company in a merger steps into the shoes of the company merged out of existence and that by operation of law, and in the absence of explicit contract language to the contrary, the surviving company is vested with all agreements, including noncompete agreements.
While the decision in Acordia II re-establishes the right to enforce noncompetes following a merger, companies should still review their existing noncompete agreements with key employees to make sure the agreements provide for enforcement by successor employers in the event the company sells the business to another company as the structure of the transaction is often unknown. The successors and assigns language must be broad enough to contemplate various forms of transfer other than a merger (e.g., asset sale, stock sale, etc.) to provide for automatic continuation or survival of the agreement. Further, companies that are acquiring another business will want to review the target’s employee noncompete agreements to ensure they contain sufficient language or otherwise require the execution of new noncompetes as part of the transaction.
For more information on essential provisions to enforce noncompete agreements or the court’s decision, please contact your principal Squire Sanders lawyer or one of the individuals listed in this publication.