This post was co-authored by Inna Shelley.
Employers should have counsel review their non-compete agreements in order to ensure that a merger or other restructuring would not affect the successor company’s right to enforce the agreement. On May 24, the Ohio Supreme Court decided Accordia of Ohio, LLC v. Fischel, a case in which four employees signed non-compete agreements promising not to compete with their employer for two years after leaving the company. The non-compete agreements lacked language addressing mergers, such as that the agreement extended to the company’s successors or assigns. After a merger, the contracting company ceased to exist because it was subsumed into the successor, and the four employees continued to work for the successor entity. These employees later quit and began competing with their former employer.
However, the Ohio Supreme Court held that the new entity could not enforce the non-compete agreements past the original 2-year period specified in the agreements. This 2-year period began to run after the employees stopped working for the original company when it ceased to exist in the merger. By the time the employees left the successor company, the 2-year non-compete period had expired.
The Ohio Supreme Court held that although non-compete agreements transfer as a matter of law to the successor entity in a merger between companies, they are enforceable only according to their terms. The successor will only receive the benefit of the bargain struck by the original contracting entity and nothing more. As a result, the Court concluded that enabling the successor employer to enforce the non-compete agreements would be against the agreements’ plain language, which stated that they applied only to the original company. While the successor obtained all the rights to the new contracts, it was unable to enforce them more than two years after the “old” employer disappeared in the merger.
The majority opinion insisted that the decision was consistent with long-established Ohio merger law providing that the successor company in a merger takes over all the previous company’s assets, property, and contacts. However, the dissenting justices believed that the decision departed from century-old precedent holding that a successor entity steps into the shoes of its predecessor and acquires the right to enforce agreements in its capacity as the successor.
Employers can avoid the result in Accordia by ensuring that their non-compete agreements state that they are made between the employee and the company, plus the company’s successors and assigns. Non-compete agreements should also state that all of the company’s rights under the agreement also flow to the company’s successors and assigns and that the company’s successors and assigns may enforce the agreement. Businesses contemplating acquisitions should review their agreements with key employees to make sure that they have appropriate language; if not, the employees can be asked to sign new agreements. Continued employment is sufficient consideration in Ohio for non-compete agreements.
Businesses that have made acquisitions in the past may also wish to review the covenants, representations, and warranties contained in their merger agreements to determine if they might have claims against the seller for transferring unenforceable agreements.