- On Second Thought...: Ohio Supreme Court Corrects Itself on Enforceability of Non-Competes Transferred in Merger
- October 26, 2012 | Authors: Clifford R. Atlas; Daniel L. Bell
- Law Firms: Jackson Lewis LLP - New York Office ; Jackson Lewis LLP - Cleveland Office
Reconsidering and reversing its own decision, the Ohio Supreme Court now has decided an acquiring company in a merger could enforce employee non-compete agreements as if it had stepped into the shoes of the acquired company despite the absence of clear contract language to that effect. The Court, on May 24, 2012, in Acordia of Ohio L.L.C. v. Fischel (“Acordia I”), had answered that the agreements could not be enforced by the merged entity post-merger. Then, after agreeing on July 25th to take another look at the case, the Court on October 11th reversed its position, explaining it misread an earlier court decision regarding corporate mergers. Slip Opinion No. 2012-Ohio-4648 (“Acordia II”).
It held that in a typical corporate merger where one company is wholly absorbed by an acquirer (as opposed to a more limited asset purchase), the acquirer steps into the shoes of the absorbed company with respect to all contractual obligations, including the absorbed entity’s non-compete agreements. The absorbed company ultimately becomes part of the acquirer, and its rights live on in the merged entity, by operation of law.
In Acordia II, the Court held, by a vote of 6-1, that Acordia, the acquiring company, could enforce the non-compete agreements “as if it had stepped into each original contracting company’s shoes.” Significantly, the Court said, “The language in Acordia I stating that the [acquirer] could not enforce the employees’ noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements must contain 'successors and assigns' language in order for the [acquirer] to enforce the agreements was erroneous.” Acordia II brings Ohio in line with the majority of courts that have addressed whether non-compete agreements are enforceable by the acquirer, likewise finding the acquirer may enforce the agreements of the acquired company.
Notwithstanding Acordia’s clear victory on the legal successorship issue, the Court remanded the case to the trial court to determine the “reasonableness” of the non-competes. Ohio, like most states, will enforce a non-compete agreement to the extent necessary to protect the employer’s legitimate business interests. Therefore, while Acordia II eliminated one source of concern when engaging in merger and acquisition due diligence, the non-compete agreements must still be properly drafted to be valid and enforceable.
Employers also should be careful not to conclude that the ruling in Acordia II applies in an asset purchase transaction, where the rules are different and “successors and assigns” language in the non-compete agreement likely will be a critical consideration.
In short, business acquisitions present unique challenges in designing non-compete agreements and other strategies that will protect the value of the purchase. We encourage employers to consult with employment counsel about all proposed business transactions.