Earlier this year (see June 21, 2012 Legal Update) we reported on the Ohio Supreme Court decision in the case of Acordia of Ohio, LLC v. Fishel (“Acordia I”), in which the Court addressed the transferability of non-compete agreements when one company was merged into another. In its initial decision the Supreme Court identified the “pivotal question” as whether the noncompete agreements applied only to the original contracting employer or whether after the merger, the LLC could enforce the noncompete agreements as if it had stepped into the shoes of the original contracting employers. While holding that “noncompete agreements that are transferred as a matter of law by a merger between companies are enforceable according to their terms,” the Court ruled that because the noncompete agreements did not state that they could be assigned or that they would carry over to successors, the named parties intended the agreements to operate only between themselves – the employees and the specific employer. In Acordia I the Court noted that the LLC could have protected its goodwill and proprietary information by requiring that the employees sign new noncompete agreements as a condition of their continued at-will employment, just as it had required them to complete several other forms as a condition to continued employment.
In an unusual procedural development, the Court reconsidered and “clarified” its decision in Acordia I by stating, in Acordia II, that it was erroneous to conclude that the LLC “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 LLC to have the power to enforce the agreements.” In essence the Court changed its holding and ruled that the LLC could enforce the noncompete agreements as if it had stepped into each original contracting company’s shoes. The employees would still be entitled to challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in the case created additional obligations or duties so that the agreements should not be enforced on their original terms. With that the case was sent back to the trial court to consider the reasonableness of the noncompete agreements.
While it remains advisable that company ownership should have noncompete agreements be clearly transferable to the employer’s successors and assigns, the potential adverse consequences of failing to have such language have been eliminated by the Ohio Supreme Court in Acordia II. A prospective buyer of a business with employees with noncompete agreements need not be as concerned as it would have been when Acordia I was the law to check for transferability language in the noncompete agreements, particularly with key employees, as part of the due diligence process. Furthermore, it remains prudent to have employees of a company merged out of existence sign new noncompete agreements with their new employer as a condition to continued employment.