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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

Will Your Non-Competition Agreement Survive?

Posted on Wed, Jul 11, 2012 @ 10:03 AM

by Joseph S. Burns

Joseph S. BurnsIn its recent decision of Acordia of Ohio, LLC v. Fishel, Slip Opinion No. 2012-Ohio-2297, a case that involved the enforceability of a non-competition agreement between an employee and a company that had been merged into another company, the Ohio Supreme Court significantly tightened the transferability of non-competition agreements. 

The primary question before the Ohio Supreme Court was whether the surviving company, after the corporate merger, had the right to enforce a non-competition agreement against an employee who had entered into the agreement with the non-surviving company.  In concluding that the surviving company could not enforce the non-competition agreement against the employee, the court found that the non-competition agreement did not define the company as including “successors and assigns,” which, according to the court, meant that the surviving company did not step into the shoes of the original company for purposes of enforcing the non-competition agreement. 

In short the court’s ruling is that the language of a non-competition agreement is controlling, and where it fails to define the company/employer as including the company’s “successors and assigns,” the non-competition agreement may not survive after a merger or corporate reorganization.

Tags: Non-Compete Agreements

Cyber Misconduct in the Workplace

Posted on Wed, May 09, 2012 @ 08:23 AM

Jack B. HarrisonJack B. Harrison

New technology has made it increasingly easier for employees to access and take employer data for uses that are often not in the employer’s interest.  This requires increased vigilance on the part of employers to protect their businesses and assets.  Here are a few of those areas that require employers’ attention:

RESTRICTIVE COVENANT AGREEMENTS—

Increasingly, employers are being faced with situations where restrictive covenant agreements they have with employees are being breached through the use of social media by employees.  For example, disgruntled or departing employees with non-compete or non-solicitation agreements may make use of social media to communicate with a prohibited audience in an effort to avoid the specific restrictions contained in their non-compete or non-solicitation agreements. 

In a relatively recent Indiana case, Enhanced Network Solutions Group v. Hypersonic Technologies Corp., the defendant subcontractor, who had a non-solicitation agreement with the plaintiff company, used its LinkedIn account to post a position description.  An employee of the plaintiff saw the position posting and applied for the position and was hired.  Enhanced network Solutions Group sued, alleging that by posting the position to its public LinkedIn profile, Hypersonic Technologies Corp. had violated the non-solicitation agreement.  While the court ultimately found that Hypersonic’s actions were not, in fact, a violation of the non-solicitation agreement, the lawsuit itself evidences the risks that employers may face from the use of social media.

HIJACKING A SOCIAL MEDIA PERSONA—

Because companies increasingly make use of social media to publicize themselves, their products, their events, or their news, an employer’s social media presence is an asset that must be protected. 

In PhoneDog v. Kravitz, a recent California case, Kravitz, who had served as the voice of the company’s Twitter account took the company’s Twitter password with him when he departed.  He subsequently changed the account into his own name and continued to post messages.  The company sued Kravitz, asserting that the Twitter account’s password and its followers were themselves trade secrets which Kravitz had misappropriated.  The company argued that through his actions Kravitz had damaged the company’s economic relationship with Twitter followers and advertisers by taking over the Twitter account, in that it led to a decrease in traffic to the employer’s website and to its advertisers’ content. 

While this case is currently ongoing, it does serve as a reminder to employers of the need to vigilantly protect their own social media assets.

USE OF THE CLOUD—  

The advent of cloud storage has created another avenue for an enterprising employee to abscond with an employer’s proprietary and confidential information in the hopes of making use of the information in work with a future employer.  Cloud storage allows an employee to upload an employer’s proprietary and confidential data to a cloud storage account and then to download it from the cloud to a new employer. 

Earlier this year, in the case of Elliott Greenleaf & Siedzikowski v. Balaban, a law firm sued a former partner for, among other things, misappropriating data.  Elliott Greenleaf & Siedzikowski alleged that Balaban had uploaded multiple files from the firm’s computer system to a free cloud storage space, Dropbox, before departing the firm.  According to the law firm, this action allowed the former partner to continue to have access to and to transfer the firm’s data after he had in fact departed the firm. 

Prior to the advent of free cloud repositories, an employee would have had to directly access an employer’s computer network to transfer data, thus increasing the risk that she would be caught.  Now, because much cloud storage automatically transfers and synchronizes data across multiple devices, the movement of data by an employee preparing for her departure may be less noticeable. 

In developing computer use policies, employers must address cloud-based employee misconduct and must take steps to secure their electronic systems against uninvited cloud access. 

Tags: Non-Compete Agreements, Cyber Misconduct, Social Media Policy in the Workplace, Restrictive Covenant Agreements, Employees' Social Media Use, Non-Solicitation Agreements, LinkedIn, Cloud Storage, Twitter