Oral Argument Preview: Does a Corporate Merger Trigger a Termination of Employment and Start the Running of a Non-Competition Agreement Employees Signed with a Predecessor Corporation that is Merged out of Existence? Acordia of Ohio, LLC v. Fishel, et al.

Further Update: On July 25, 2012, the Court, by a vote of 6-1, granted reconsideration in this case.  On October 11, 2012, the Court issued its new merit decision, reversing the earlier one.  Read the analysis of Acordia II here.

Update: The merit decision in this case was handed down May 24, 2012.  Read the analysis of the decision here. 

On November 15, the Supreme Court of Ohio will hear oral argument in the case of Acordia of Ohio, LLC v. Fishel et al., 2011-0163. The issue in this case is whether a corporation that is the surviving entity of a statutory merger may enforce a noncompete agreement signed between a constituent corporation and that corporation’s former employees before the merger.

Full disclosure-I am a paid consultant for the appellants in this case.

Acordia is an insurance company.  Between 1993 and 2000, four employees of Acordia—Fishel, Freytag, Taber and Diefenbach—entered into non-compete agreements with Acordia. The agreements stated that the employees would not solicit Acordia’s customers or disclose customers’ names for two years after each employee left Acordia. These employees worked directly with Acordia’s customers in their capacity as account executives and customer service representatives and had access to customer lists, corporate strategies and other information that Acordia considered to be trade secrets. They were continuously employed with Acordia until they resigned and went to work for Neace-Lukens, a competitor, in 2005. At Neace-Lukens, the employees allegedly solicited Acordia customers.

Throughout the employees’ continuous tenure with Acordia, the company had changed its name and corporate form multiple times through various mergers. Acordia argues that these name changes, mergers and restructuring never affected the employees’ job duties and that their responsibilities remained virtually unchanged throughout their employment.

 Acordia filed for monetary damages and a preliminary injunction in Hamilton County. The trial court denied the preliminary injunction, finding that  Acordia could not enforce the non-compete agreements as a successor corporation in a merger.  The First District Court of Appeals affirmed this in the first appeal of this case.  The trial court then granted summary judgment to the employees on all of Acordia’s remaining claims, and Acordia appealed for the second time.

In the second appeal, the First District examined the language of each employee’s noncompete agreement and determined that the noncompete agreements specifically identified the predecessor corporations as the employer. Therefore, because those predecessor corporations ceased to exist once each merger occurred, that effectuated a termination of employment, thus triggering the employees’ noncompete agreements with the predecessor corporations.  Even though the employees were still employed by the successor entity, the appeals court found that after two years the covenants had expired. Thus, all the agreements had expired by the time that all the employees left Acordia.

 Acordia appealed to the Ohio Supreme Court, arguing the following proposition of law:

“Pursuant to Ohio’s merger statutes, agreements between employees and employers that contain restrictive covenants are assets of the constituent company that transfer automatically by operation of law in a statutory merger from the constituent company to the surviving company and are enforceable by the surviving company according to the agreements’ original terms as if the surviving company were a party to the original agreements.”

 Ohio Revised Code 1701.82(A)(3) provides that noncompete agreements transfer in mergers or consolidations. It states that “When a merger or consolidation becomes effective *** the surviving or new entity possesses all assets and property of every description, and every interest in the assets and property, wherever located, and the rights, privileges, immunities, powers *** of each constituent entity.”

 Acordia argues that a noncompete agreement is one of the many assets listed by the statute which vest in the successor corporation. It argues that the court of appeals was wrong in finding that a merger constitutes a termination of employment. Because the employees continuously received salary and benefits, serviced the same customers, and performed the same duties under the same supervisors, the defendants’ employment with Acordia was continuous and was not terminated by the various name changes, mergers and restructuring that Acordia underwent during this period. The noncompete agreements remained in full force and effect, as if the successor entities were a party to the original agreements, until the employees resigned.

 In response, the former employees agree that the noncompete agreements did transfer to Acordia, but argue that the two-year clock started ticking once each merger became effective. Employment with a particular company terminates when that company is merged out of existence. The employees argue that because of this, Acordia’s proposition of law is internally inconsistent—the proposition states that Acordia acquired the noncompete agreements on their original terms, but then seeks to enforce the agreements as if Acordia–rather than the predessor corporations–was itself a party to the original agreements.  The employees argue that to reach this conclusion, the Court would have to alter the language of the noncompete agreements to strike the names of the predecessor corporations, replacing them with Acordia’s current corporate moniker, and that doing so would grant Acordia more rights than the corporate merger statute gives it.

In support of Acordia, numerous amici have filed briefs, including the Ohio Chamber of Commerce, PNC Financial Services, the Ohio Chemistry Technology Council, and USI Holdings. These amici argue that the lower court improperly created an exception to the statutory rights of corporations surviving mergers, and that this exception will create enormous problems for corporations as they try to determine the consequences of mergers. The Ohio Employment Lawyers’ Association filed an amicus brief in support of the appellees, arguing that a merger that extinguishes a company’s existence terminates the employees’ employment with that company, triggering the running of any non-compete agreement.

Student Contributor: Greg Kendall

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