Successors and Assigns of Noncompete Agreements in Ohio
The Ohio Supreme Court has recently changed direction and permitted the potential enforcement of a noncompete agreement where the agreement had passed to a successor company. Specifically, the Ohio Supreme Court recently reconsidered its July 25, 2012 ruling in Acordia of Ohio v. Fishel ("Acordia I"), a decision that impacted how noncompete 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 noncompete agreement.
The pivotal question was whether the noncompete agreement applied only to the original contracting employer or whether, after the merger, the surviving company had the right to enforce the noncompete agreement as if it had stepped into the shoes of the original contracting employer. In Acordia I, the Ohio Supreme Court concluded that the surviving company did not step into the shoes of the original employer, based on the specific language of the noncompete agreement at issue. The Court held that the language of the noncompete agreement is controlling and the noncompete agreement will not be extended to the acquiring company after the merger if the terms of the agreement fail to specifically assign its rights to the acquiring company.
A few days ago, the Ohio Supreme Court reconsidered the case. The Court clarified Acordia I and held that in a corporate merger, the surviving company does have the ability to enforce noncompete agreements as if it had stepped into the shoes of the original contracting employer. As such, the omission of any "successors or assigns" language in the employees' noncompete agreements did not prevent the newly merged company from enforcing those noncompete agreements.
In Acordia I, four employees entered into noncompete agreements with Frederick Rauh & Company ("Rauh"), by which they agreed to forgo competition with Rauh for a period of two years following the termination of their employment with Rauh. The noncompete agreements did not contain language extending the employees' 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 employees challenged the validity of the noncompete agreements, arguing that the actual language of their covenants was limited to Rauh and did not extend to future companies, such as Acordia. The employees eventually left Acordia to join a competitor, years after Rauh was merged out of existence, and argued that their noncompete agreements expired two years after Rauh was merged out of existence. The trial court and the Hamilton County Court of Appeals agreed and refused to enforce the noncompete agreements on this ground.
In its Accordia I opinion, the Supreme Court upheld the Hamilton County Court of Appeals' decision in a 4-3 ruling, finding that while the noncompete agreements transferred by operation of law to the acquiring company after the merger, those agreements were enforceable against the employees only according to the terms of the original agreement. Thus, because the noncompete agreements were between the employees and Rauh, and did not specifically include Rauh's successors or assigns, the employees were contractually bound to honor their agreements for the two years after Rauh ceased to exist as a result of the merger, but no longer. As a result, the employees' noncompete agreements expired before they left Acordia to join a competitor.
Upon reconsideration however, the Ohio Supreme Court found that its reading of previous precedent regarding mergers was incomplete and, as a result, its ruling in Acordia I required correction. Specifically, the Court noted that "any language in the lead opinion in Acordia I stating that the [surviving company] was unable to enforce the employees' noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements were required to contain 'successors and assigns' language for the [surviving company] to have the power to enforce the agreements was erroneous." The Court also noted that both its new opinion and its opinion in Acordia I are limited to noncompete agreements, and nothing in either opinion should be construed as addressing the effect of a merger on any other company contracts. The Court thus reversed the Hamilton County Court of Appeals in a 6-1 ruling and sent the case back down to the trial court to determine whether the noncompete agreements were reasonable under the law.
So what does this mean for companies that use noncompete agreements with their employees? Despite the Court's recent clarification, it would still be the safest course for Ohio employers' noncompete agreements to broadly define the "Company" (i.e., the employer) to include affiliates, successors and assigns to ensure that a noncompete agreement survives after a merger or other corporate reorganization. Further, it would be wise for companies to include a separate paragraph in the agreement incorporating traditional successors and assigns language. Still, to the extent that your noncompete agreements do not have this language, this new decision provides significant support that this magic language is not required.