Ohio Supreme Court Addresses Non-Competition Agreements in Merged Companies
Kegler Brown E-mployment Alert June 21, 2012
The Ohio Supreme Court has issued an opinion in a case involving an employer’s ability to enforce non-competition agreements where the “employer” acquired the rights by virtues of a merger.
In Acordia of Ohio, LLC. v. Fishel et al., 2012-Ohio-2297, the Ohio Supreme Court issued a ruling that could have a significant impact on the enforcement of non-competition agreements as they relate to mergers. In Acordia, as a condition of their employment, the defendant former employees entered into non-competition agreements with various companies that eventually became known as Acordia of Ohio, Inc. due to a merger. Under the agreements, the employees agreed to forgo competition with Acordia, Inc. for two years following their termination. Specifically, one of the non-competition agreements provides: "For a period of two years following termination of employment with the company for any reason, I will not ... solicit, write, accept or ... perform any services relating to insurance business... (emphasis added)." Following the merger, the defendants left Acordia of Ohio, Inc. and began employment at another insurance company, where they used their contacts to transfer lucrative clients from Acordia.
The Supreme Court of Ohio held that while non-compete agreements do transfer automatically to the new company following a merger as a matter of law, the merger does not alter the plain language of the agreement; therefore, if the non-compete agreement fails to include a provision for the continuation of the agreement upon any acquisition of the original company by another company, the agreement is not enforceable by the new company created by the merger. As a result, the non-compete agreements at issue in this case were found to be unenforceable by the new company created by the merger.
The Court found that because the agreements specify that they apply only to “the Company,” the agreement cannot apply to the company’s successors without extending the agreement in a way that would run counter to the plain language of the original agreement.
The significance of this case is that non-competition agreements may not be enforceable for the surviving company of a merger absent specific language in the agreement indicating that the agreement is assignable and enforceable by any successor companies. Seemingly, this issue could be resolved by simply adding a provision within a non-compete agreement stating that the agreement extends to any new company created in the case of a merger.
Regardless, non-competition agreements are still enforceable, but this holding does create vulnerability of such agreements if a company is undergoing a merger of any kind. In order to guarantee protection, the Supreme Court clearly stipulates that the company must require its employees to sign a new non-compete agreement as a condition of their continued employment.
For more information on this or related topics, contact Brendan Feheley at (614) 462-5482 or Ken Cookson at (614) 462-5445.