Non-Compete Agreements in Ohio

June 8, 2012
Legal Updates

The Ohio Supreme Court recently issued its ruling in Acordia of Ohio v. Fishel, a decision that will have an impact on how non-compete agreements are construed and should be drafted in Ohio going forward.  The case involved a series of corporate mergers and the effect of those mergers on a non-compete agreement between an employee and a company which was merged into another company.  The pivotal question was whether the non-compete agreement applied only to the original contracting employer or whether, after the merger, the surviving company had the right to enforce the non-compete agreement as if it had stepped into the shoes of the original contracting employer.  The Court concluded that the surviving company did not step into the shoes of the original employer, based on the specific language of the non-compete agreement at issue.  The Court held that the language of a non-compete agreement is controlling and the non-compete agreement in Acordia would not be extended to the acquiring company after the merger where the terms of the agreement fail to specifically assign its rights to the acquiring company. 

In Acordia, an employee entered into a non-compete agreement with Frederick Rauh & Company ("Rauh"), by which he agreed to forgo competition with Rauh for a period of two years following the termination of his employment with Rauh.  The non-compete agreement did not contain language extending the employee's  obligation to the company's corporate "successors or assigns," however.  After a series of mergers, Rauh eventually became known as Acordia of Ohio, Inc. ("Acordia").  The employee challenged the validity of the non-compete agreement, arguing that the actual language of the non-compete provision was limited to Rauh and did not extend to future companies, such as Acordia.  The employee eventually left Acordia to join a competitor, years after Rauh was merged out of existence, and argued that his non-compete agreement expired two years after Rauh was merged out of existence.  The trial court and the First District Court of Appeals agreed.

The Supreme Court upheld the First District in a 4-3 ruling, finding that while the non-compete agreement transferred by operation of law to the acquiring company after the merger, the agreement was  enforceable against the employee only according to the terms of the original agreement.  Thus, because the non-compete agreement was between the employee and Rauh, and did not specifically include Rauh's successors or assigns, the employee was contractually bound to honor his non-compete agreement for the two years after Rauh ceased to exist as a result of the merger, but no longer.  As a result, the employee's non-compete agreement expired before he left Acordia to join a competitor.

So what does this mean for companies that use non-compete agreements with their employees?  To ensure that a non-compete agreement survives after a merger or other corporate reorganization, Ohio employers' non-compete agreements should broadly define the "Company" (i.e., the employer) to include affiliates, successors and assigns.  Further, companies should include a separate paragraph in the agreement incorporating traditional successors and assigns language.