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 heard 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 non-compete agreement signed between a constituent corporation and that corporation’s former employees before the merger, as if it were a party to the original agreement.
Full disclosure-I am a paid consultant for the appellant in this case.
Between 1993 and 2000, four employees of Acordia (and in one case, its predecssor, Frederick Rauh & Co) entered into non-compete agreements stating that they would not solicit Acordia’s customers or disclose customers’ names for two years after each employee left Acordia. The company went through numerous name changes, mergers, and restructurings, the last of which was purchased by Wells Fargo. The four employees were continuously employed by each successor entity. By the terms of the non-compete agreements, each of the employees agreed he or she would not solicit certain customers “for a period of two years following the termination of employment with the company for any reason.” The four employees left Wells Fargo in 2005, and immediately solicited the business of its customers. Acordia unsuccessfully sought an injunction to stop this. On appeal of the issue of the enforcement of the non-compete agreements, the First District Court of Appeals held that while the non-compete agreements passed in the mergers, they triggered a termination of employment, and had fully expired for each of the employees by the time they left in 2005. Read the oral argument preview post here.
At the Supreme Court of Ohio, counsel for Acordia argued that the Court of Appeals decision upset firmly established merger law in Ohio. The first principle of a merger is continuity. Assets and liabilities transfer in a merger, and the employment relationship is one such asset. The non-compete agreements passed to each successor entity as if it had been a party to the original agreement. Each successor entity received a two year, non-expiring non-compete agreement which did not start to run until 2005, when the four employees left Wells Fargo. The court of appeals was incorrect in finding that a merger effectuated a termination of employment.
Counsel for the employees argued that this is a very simple case of contract interpretation, and the Court must apply the contracts as written. While he agreed that the non-compete agreements passed in the merger, he argued that since “the company” was specifically defined in each non-compete agreement, when that company was merged out of existence, employment with that particular company terminated, and the two years started to run when the employees began work with the new company. By 2005, when the four employees left, all the non-competes had run.
What’s on Their Minds?
It looked like two different perspectives here—some justices were concentrating on the effects of Ohio’s corporate merger statutes; others on the contract language, particularly the definition of “company” and the absence of successor language in the non-compete agreements.
What is the Status of the Employees with the new Corporation after a Merger?
Are the employees just chattel, asked Justice Pfeifer, clearly hostile to the appellant’s position. Can the new CEO just tell the folks who aren’t rainmakers, sorry, we just don’t need you any more?
Chief Justice O’Connor asked if the new company had to keep the old employees, or could it terminate them.
Justice Pfeifer asked if the company had to keep at-will employees. Or were those employees strictly at the whim of the new employer?
Justice Lanzinger noted that non-compete agreements are a severe restriction on a person’s right to work—where did that play in the mix here?
Justice Stratton asked whether the new company should just terminate all the employees unless they agree to sign new non-compete agreements. Should companies refuse to buy the assets of another company unless the employees all quit or sign new agreements?
Chief Justice O’Connor commented that at-will employment doesn’t guarantee continued employment—couldn’t a company condition continued employment on signing a new non-compete agreement?
Where’s the Continuity?
Justice McGee Brown asked why Wells Fargo required all the employees to re-apply when it bought Acordia if all this was a continuing scenario.
Justice Cupp asked whether a merged company continues to exist in the continuing company.
When Do the Non-Competes Start to Run?
Justice O’Donnell asked if appellant’s counsel was arguing that the period of the non-compete agreements started to run only in 2005 when all four employees called up and quit (yes, he was). And what is the impact of a decision in 2011 (or more likely 2012) on that decision. Was there a point in ruling on this now?
But Wait A Minute, Aren’t You Getting Much More Than You Bargained For?
Justice Lanzinger asked whether Acordia wasn’t getting an extra two years beyond anything it bargained for. And what about the fact that the parties contracted with a specific defined company? Did that have no significance?
Justice McGee Brown was clearly troubled by the fact that the employees signed up with a much smaller entity, but were being restricted in a much larger way. Where was the fairness in that?
Later Justice Lanzinger asked if this was a case of first impression, of merger and non-compete agreements in the same case.
Let’s Not Confuse Enforceability and Enforcement Here
Justice Cupp asked both counsel if two different concepts were being conflated here. The first issues is do the assets and obligations of a company pass through a merger. The second is whether the terms one of those assets that passes—a non-compete agreement—are reasonable, and that issue wasn’t before the court, was it? When deciding the merger question, the enforceability issue shouldn’t be before the court.
But Chief Justice O’Connor rejoined that in order to reach the reasonableness issue, both parties had to agree the covenant was still valid. If there isn’t agreement on that point, there’s no point in arguing about the breadth of it. She also wondered if the employees had left the new company within two years and had begun competing, who had the enforcement right? How could a company that had merged out of existence be injured?
Just Apply the Contracts as Written
Justice Stratton was clearly most hostile to the appellees’ position, engaging in a series of questions with counsel about the selectivity of what he was saying passed in the merger. He just wanted certain portions—those favorable to the employees—to pass? In this scenario, each new company was getting only two years worth of service, because after that all the employees could leave and take their book of business with them? Wasn’t that just applying the contracts as written?
The Absence of “Successors and Assigns” Language
Justice Stratton asked appellees’ counsel if the failure to include the language “or your successor” after word ”company” was fatal in this case. Unless you put “successor” language into the non-compete agreement, that agreement will pass in the merger, but will terminate two years following the merger. She commented this would be a very narrow holding in the case.
Justice McGee Brown picked up on this, commenting that in her view that is what the court of appeals had held—the non-compete agreements did pass in the merger, but when the specific named company that was a party to the non-compete ceased to exist, the two year time period was triggered.
But Justice Cupp then said, looking at it that way, the non-compete hadn’t really transferred.
How it Looks from the Bleachers
Because of my role as a consultant in this case, I’m not going to try and call this one. But I’ve asked Greg Kendall, the student contributor who worked on this case, to do this section. Here’s how it looks to Greg:
Only two justices clearly came out on one side, with Justice Pfeifer appearing to side with appellees and Justice Stratton seeming more amenable to appellant’s position. The justices will have a lot of existential questions to deal with, including (1) does merger terminate employment, (2) what actually happens to a predecessor corporation when it does not survive a merger, and (3) what kind of asset is a noncompete clause in the merger context? The outcome will depend on how the justices conceptualize the various legal fictions being dealt with here, and the Court may to look to guidance from other states, such as Nebraska and Florida, whose decisions on similar matters were discussed in the briefs.