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Put it in Reverse: Non-Compete Agreements Transferred in a Corporate Merger

Posted on Mon, Dec 03, 2012 @ 07:27 AM

by Jack B. HarrisonJack B. Harrison

In Short Order The Ohio Supreme Court Reverses Itself As To The  Enforceability of Non-Compete Agreements Transferred in A Corporate Merger

On October 11, 2012, the Ohio Supreme Court took the unusual step of reconsidering and reversing its own previous decision in the same case, Acordia of Ohio L.L.C. v. Fischel.  On May 24, 2012, in Acordia I, the Supreme Court held that an acquiring company in a merger could not enforce employee non-compete agreements as if it had stepped into the shoes of the acquired company where there was no clear contract language to that effect.  Then, after agreeing on July 25, 2012, to reconsideration in the case, the Court reversed its prior position, holding that, indeed, an acquiring company in a merger could enforce employee non-compete agreements as if it had stepped into the shoes of the acquired company even where there was no clear contract language to that effect.  The Court explained its reversal by stating that it had misread an earlier court decision regarding corporate mergers. Slip Opinion No. 2012-Ohio-4648 (“Acordia II”).

By a vote of 6-1, the Court held in Acordia II, that Acordia, the acquiring company, could enforce the non-compete agreements “as if it had stepped into each original contracting company’s shoes.” Importantly, the Court noted that “[t]he language in Acordia I stating that the [acquirer] could not enforce the employees’ noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements must contain 'successors and assigns' language in order for the [acquirer] to enforce the agreements was erroneous.”  The Court’s decision in Acordia II makes Ohio consistent with the majority of courts that have addressed whether non-compete agreements are enforceable by an acquirer.  Despite its ruling on the legal successorship issue, the Court still remanded the case to the trial court to determine the “reasonableness” of the non-compete agreements at issue.

Thus, while Acordia II did eliminate one potential issue of concern for a company when engaging in merger and acquisition due diligence, a prudent company and its counsel must also review relevant non-compete agreements to insure that they are properly drafted, so as to be viewed as reasonable, valid, and enforceable.  Additionally, companies should not conclude that the ruling in Acordia II necessarily would apply in an asset purchase transaction, where the “successors and assigns” language in the non-compete agreement itself likely will be of critical concern.

Business acquisitions can present challenges in the drafting of non-compete agreements that are designed to protect the value of the purchase.  Prudent employers should continually review such agreements with counsel, but particularly in the context of any acquisition or other business transactions.

Tags: Non-Compete Agreements, Ohio Supreme Court, Corporate Mergers