Merit Decision. Does a Non-Competition Agreement Pass to a Successor Company in a Merger As If It Were a Party to the Original Agreement? Acordia LLC v. Fishel

Update: On July 25, 2012, the Court, by a vote of 6-1, granted reconsideration in this case. No additional briefing has been ordered at this time. Read more about this ruling here. On October 11, 2012, the Court issued its new merit decision, reversing the earlier one.  Read the analysis of Acordia II here.

On May 24, 2012 the Supreme Court of Ohio issued a merit decision in Acordia of Ohio, LLC v. Fishel, 2012-Ohio-2297. By a vote of 4-3, in a plurality opinion with Justice Pfeifer concurring in judgment only, the Court held that a non-compete agreement signed by employees of a company that changes form or is merged out of existence passes by operation of law to the new company, but because of the language in this particular agreement, the non-compete agreements had expired as to all the employees involved in this case. Thus, the successor company could not enforce the agreement after the merger as if it had stepped into the shoes of the original company.

Between 1993 and 2000 four employees of Acordia or a predecessor company  entered into non-compete agreements stating they would not solicit Acordia’s customers or disclose customer’s 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 the First District Court of Appeals held that while the non-compete agreements passed in the mergers, the change of ownership started the non-compete time running, and thus they all had expired when the four employees left the company in 2005.

Writing the lead opinion, Justice Lanzinger essentially agreed with the court of appeals. She described the pivotal issue in the case as “whether the noncompete agreements apply only to the original contracting employer, or whether after the merger, the LLC may enforce the noncompete agreements as if it had stepped into the shoes of those original contracting employees. “

Under R.C. 1701.82, a company’s assets transfer to the new company after a merger, and the Court found that the non-competes did pass to each new company after each change of business form.  But the majority found that Acordia, the current company, could not enforce the non-competes for two reasons, both having to do with the specific language of these agreements.  First, the non-competes did not say they applied to successors and assigns.  Second, each agreement was with a specific named company, so any successor company could only enforce the agreements for two years after the employees’ termination with that specific company.

“Our analysis of Ohio law and the noncompete agreements leads to the conclusion that although the employees’ noncompete agreements transferred automatically by operation of law to the LLC following the merger, the merger did not alter the language of the agreements, and the noncompete agreements provided only that the employees would avoid competition during the two years following their termination from “the company” as defined by their respective noncompete agreements, ” Lanzinger wrote.  Thus, according to this analysis, none of the departing employees violated their noncompete agreements.

Justice O’Donnell wrote a heated dissent, joined by Justices Cupp and Stratton. He would accept the proposition of law proposed by Acordia, that a noncompete is an asset of the company, which in a merger passes by operation of law to the surviving entity and is enforceable by the new entity as if it were a signatory to the original agreement. He sees R.C. 1701.82 and 1705.39 as controlling on this point, and notes it has long been black letter law that contracts are subordinate to statutes. He criticizes the majority opinion for departing from “century-old precedent holding that a successor entity steps into the shoes of an acquired entity and any predecessor entities, and thereby acquires the right to enforce agreements in its capacity as successor entity.”

Justice Cupp also wrote separately, joined by Justice Stratton.  While he agrees that the agreements passed by operation of law to Acordia, he thinks there remains an open question still to be determined whether the non-compete agreements are enforceable post merger. That would need to be determined on remand under the court’s jurisprudence on the reasonableness of non-competition agreements.

There is no syllabus in this case, probably because according to the majority, it does not create any new law.

Concluding Observations

Because as previously disclosed, I was a paid consultant in this case (our side lost), I made no prediction about the outcome of this case.  I did say this, though- “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.

It is extremely interesting how significantly this decision mirrored what was on the Justices’ minds at oral argument. Justice Lanzinger asked whether Acordia wasn’t getting an extra two years beyond what it had bargained for, and whether there was any significance to the fact that the employees subject to the non-compete agreements had contracted with a specific defined company.  That latter question served as one of the bases of her majority opinion. And Justice Cupp asked both counsel if the concepts of enforcement and enforceability were being conflated—the first question must be whether the assets of a company pass through a merger.  If yes, were the terms of the agreement reasonable and enforceable, an issue that wasn’t before the Court. That line of questions formed the basis of his separate dissent.

Going forward, there is definitely a best practices lesson for those in this field.  Best put “or to any successors and assigns” language into any non-competition agreements.  Or, in any merger or change of corporate form, employees kept on by the existing company may be asked to sign new competition agreements if they want to keep their jobs.

 

 

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