On May 24, 2012, the Supreme Court of Ohio handed down the merit decision in Acordia of Ohio L.L.C v. Fischel. The high 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 these particular agreements, the non-compete agreements had expired as to all the employees involved in this case. Thus, the successor company could not enforce the agreements after the merger as if it had stepped into the shoes of the original company.
But then, on July 25 2012, the Court granted reconsideration in the case. The Court handed down its new decision October 11, 2012, reversing the original decision. In this post I shall refer to Acordia of Ohio L.L.C. as Acordia.
Let’s take a look at the new decision, which was written by Justice Lanzinger, who also wrote the original one.
What Remained the Same
The Court reaffirmed the part of its original decision that held that pursuant to R.C. 1701.82(A)(3), all assets and property, including employment contracts and non-competition agreements, pass by operation of law to the successor company in a merger.
A Narrow Holding
The Court emphasized that the issue in this case is a narrow one. It is limited to “considerations unique to noncompete agreements in the context of a merger, and apply only to this narrow vein of cases.” The Court cautioned against trying to apply its holding more broadly. It is probably significant that neither this case nor the earlier one has a syllabus.
The Mea Culpas
As I have previously disclosed, I was a paid appellate consultant on this case for Acordia. (although I did not work on the motion for reconsideration, and did not think there was much chance for it to be granted. That’s my mea culpa.)
It’s not often that supreme courts admit to mistakes. And kudos to Justice Lanzinger for admitting the Court had misinterpreted language from a 1971 decision stating that a merged company ceases to exist as a separate business entity following the merger, which led the Acordia I plurality to the conclusion that the failure to include “successors and assigns” language limited the non-compete agreements at issue to the original signatories—the employee and the specific, named employer.
The New Holding
The new interpretation, and the basis for the reversal, is the holding that the absorbed company, while ceasing to exist as a separate business entity, becomes a part of the resulting company following the merger. The merged company can enforce the noncompete agreements as if it had stepped into the shoes of the absorbed company. Essentially, the Court now accepts the proposition of law advanced originally by Acordia, particularly the part that reads that the non-compete agreements “are enforceable by the surviving company according to the agreements’ original terms as if the surviving company were a party to the original agreements.” So, the failure to include any “successors and assigns” language in the particular non-compete agreements in this case did not prevent Acordia from enforcing them. By a vote of 6-1, the Court now held that Acordia could enforce the noncompete agreements “as if it had stepped into each original contracting company’s shoes.”
Reasonableness Yet to be Determined
Under a different body of precedent, covenants not to compete must be reasonable to be enforceable.
Here’s pertinent syllabus law from Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E.2d 544 (1975) on this:
1. A covenant not to compete which imposes unreasonable restrictions upon an employee will be enforced to the extent necessary to protect an employer’s legitimate interests. (Paragraphs two and three of the syllabus in Extine v. Williamson Midwest, 176 Ohio St. 403, 200 N.E.2d 297 overruled.)
2. A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.
In Acordia I, Justice Cupp had agreed with the lead opinion that the agreements passed by operation of law to Acordia, but dissented because he thought the case should have been remanded to determine whether the non-compete agreements were reasonable. In its reconsidered opinion, the Court, by a vote of 4-3 in this portion of the opinion, voted to remand the case for a determination of the reasonableness of the non-compete agreements. Justices O’Donnell and Stratton would not have addressed the question of reasonableness at all, since it wasn’t before the Court in this appeal. Justice Pfeifer, who dissented entirely, would find the non-competes unreasonable as a matter of law on the existing record.
Justice O’Donnell’s Separate Concurrence
Justice O’Donnell concurred separately, joined by Justice Stratton. There’s a bit of “I told you so” to his concurrence, but fairly so, since the majority in this case pretty much adopted his dissent from Acordia I. In that dissent, he was ready to accept as legally correct Acordia’s proposed proposition of law, 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 re-emphasized some points from his earlier dissent—one being that the Court has long held that contracts are subordinate to statutes, so it is R.C. 1701.82(A)(3), not the contract terms, that determines the effect of the merger on the non-compete agreements. He also emphasized that in 1991, in Rogers v. Runfola & Assoc., Inc., 57 Ohio St.3d 5, 7, 565 N.E.2d 540 (1991) the Court had rejected an argument that a change in corporate structure invalidated noncompete agreements originally entered into by the constituent entity. Finally, he noted, as he had in Acordia I, that his (and now the majority’s) interpretation was in line with similar holdings by the supreme courts of Florida and Nebraska.
But as I indicated earlier in the post, Justice O’Donnell does not think the trial court needs to determine the reasonableness of the non-compete in this case because that issue wasn’t before the high court. Justice Stratton joined him on this point. For her, this is a change of position—although she originally joined Justice O’Donell’s dissent in Acordia I, she also joined Justice Cupp in his dissent in Acordia I in which he thought the case had to be remanded to determine the reasonableness of the non-competes. She thought so then, but apparently doesn’t now.
Justice Pfeifer’s Dissent
This is vintage Justice Pfeifer:
“This case has been properly decided three separate times. The trial court had it right, the court of appeals had it right, and this court had it right the first time. I did not vote to accept jurisdiction, did not vote to reconsider the case, and remain convinced that this court should not have accepted jurisdiction or granted reconsideration. Even though I believe that this case is being incorrectly decided, the good news is that, on remand, the lower courts are likely to reach the same sensible conclusions that they reached when they first encountered this case. ”
He then went on to rail against non-competes, explaining why they have long been disfavored in the law, likening them to “indentured servitude” and adding that “in most respects, noncompete agreements are inimical to the free enterprise system.”
Despite the clear win for Acordia on the law here, the trial court still must determine the reasonableness of the non-competes. We’ll report back when we learn more.