On May 24, 2012, the Ohio Supreme Court issued its decision in the case of Acordia of Ohio, LLC v. Fishel, a case in which the Court addressed the transferability of non-compete agreements when one company is merged into another. As a condition of their employment (between 1993 and 2000) with an insurance-services company that, to simplify, is referred to in the decision as Acordia, Inc., four employees (Fishel being one of them) entered into noncompete agreements in which they agreed to forgo competition for two years after termination of their employment. These agreements did not contain noncompetition language that extended to other employers, such as the company’s successors or assigns. Wells Fargo acquired Acordia, Inc. in 2001. As part of that acquisition Wells Fargo required the four employees to complete several standard forms, including an acquisition-employment application, a U.S. Department of Justice employment-eligibility-verification form, a background investigation authorization form and a new-hire team-member acknowledgment form. Seven months later Acordia, Inc. merged with Acordia of Ohio, L.L.C. (“LLC”), after which only LLC remained. The employees continued to work for LLC until August 2005, when they began employment with Neace Lukens Insurance Agency, LLC. They then used their contacts to recruit multiple customer accounts away from LLC and within six months 19 former LLC customers had transferred $1 million in revenue to Neace Lukens.
LLC filed suit in September 2005 for injunctive relief and money damages against the employees, Neace Lukens and at least one of the owners of the agency. The complaint asserted that the employees had violated their two-year noncompete agreements and would misappropriate LLC’s trade secrets. The trial court denied LLC’s motion for preliminary injunction. The Court of Appeals affirmed, holding in part that a preliminary injunction was unwarranted because Acordia, Inc. and its employees did not intend to make the noncompetes assignable to successors such as LLC. The trial court later granted the employees’ motions for summary judgment and LLC appealed, arguing in part that the noncompete agreements signed by the employees had transferred to LLC. The Court of Appeals affirmed the lower court’s rulings holding that because Acordia, Inc. had merged out of existence more than two years before the employees left LLC, the agreements had expired by the time the employees left LLC and LLC had no right to enforce them.
The Supreme Court identified the “pivotal question” as whether the noncompete agreements apply only to the original contracting employer or whether after the merger, the LLC may 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. The Court noted that 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 Wells Fargo had required them to complete several other forms as a condition to continued employment.
The “take aways” from this case include: company ownership should have noncompete agreements be clearly transferable to the employer’s successors and assigns. Also, a prospective buyer of a business with employees with noncompete agreements should check for transferability language in the noncompete agreements, particularly with key employees, as part of the due diligence process. Either way, it’s best to have employees of the company merged out of existence sign new noncompete agreements with their new employer as a condition to continued employment.