Businesses frequently utilize non-competition agreements to retain key employees, protect confidential information, and preserve valuable clients. Ohio courts will typically uphold a non-competition agreement to the extent it protects an employer’s legitimate business interests, contains reasonable parameters, does not impose undue hardship on the employee, and is not injurious to the public. Not surprisingly, compliance with or the reasonableness of non-competition agreements is the source of frequent litigation. In a recent decision by the Ohio Supreme Court, Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St.3d 356, 2012 Ohio 4648, 978 N.E.2d 823 (“Acordia II”), the Court held that non-competition agreements survive a subsequent merger by the contracting employer. In doing so, the Court reversed its earlier position in Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St.3d 345, 2012 Ohio 2297, 978 N.E.2d 814 (“Acordia I”).
In Acordia I, four employees challenged the enforceability of a non-competition agreement where their employer had subsequently undergone several mergers. Pointing to an absence of language permitting the non-competition agreement to extend to “successors and assigns”, the employees argued that the covenants were strictly limited to the original contracting company. The trial court and the First District Court of Appeals agreed with the employees. In May of 2012, the Ohio Supreme Court affirmed the appellate ruling, and held that the successor entity could not enforce the employees’ non-competition agreements as if it had stepped into the original contracting company’s shoes because the agreements failed to contain the appropriate language permitting a successor company to enforce the non-competition agreements.
However, upon a motion for reconsideration, the Ohio Supreme Court subsequently reversed its position in Acordia II. It noted that non-competition agreements transfer automatically to the surviving company by operation of law. Specifically, the surviving company possesses all assets and property and every interest in the assets and property of each constituent entity, including employment contracts and agreements. Since an absorbed company becomes a part of the resulting company following merger, the merged company has the ability to enforce non-competition agreements as if the resulting company had stepped into the shoes of the absorbed company. Therefore, the Ohio Supreme Court reasoned that the omission of any “successors or assigns” language in the non-competition agreements does not prevent the surviving entity from enforcing such agreements.
With this ruling, the Ohio Supreme Court clarified that covenants not to compete, like other agreements, automatically transfer upon a merger. In doing so, the Court explained that Acordia I was an “erroneous” ruling. Ultimately, notwithstanding Acordia II, employees still may challenge the continued validity of a non-competition agreement based on the reasonableness of its restrictions.
If you have any questions concerning Acordia of Ohio, L.L.C. v. Fishel, or would like further information on non-competition agreements, please contact a member of our Employment Practices Practice Group.