Earlier this week, I reported that the Ohio Supreme Court was still considering the Acordia of Ohio v. Fishel case, a dispute that pits the language of a covenant not to compete against an Ohio statute whose purpose is to facilitate the transfer of assets in a merger.
Yesterday, the Ohio Supreme Court issued its ruling in a 4-3 decision holding that the language of a covenant not to compete controls and will not be extended to the new company after a merger if the covenant’s language fails to specifically assign its rights to the new company. (A PDF copy of the slip opinion can be found below).
I wrote about the Acordia case last fall. Four employees challenged their non-competes, arguing that after a series of mergers, their non-competes were no longer enforceable. They argued that the literal language of their covenants was confined to the previous employer and did not extend to future companies or use language extending the covenant to the company’s “successors and assigns.” When the employees left several years later, they argued that their non-competes had begun to run at the time of the merger and were now expired. The trial court and the Court of Appeals for the First District agreed.
The Majority Opinion: The Majority’s analysis was simple: apply the contract as written. Since the covenant did not include assignees nor provide for the assignment to a successor, the relationship terminated when the employer ceased to exist as a result of the merger, and the non-compete began to run (although technically there was no longer any employer to benefit from the non-compete). Thus, under its terms, the covenant had expired before the employees left to join a new employer
The majority was not troubled that it was treating the non-compete any differently than any other asset. Since the previous employer had elected to limit the benefit of the contract to that company alone, the new company got the same bargain that the asset (the non-compete) provided — namely, a non-compete confined to the previous company.
The Dissent: The Dissent, however, believed that the Ohio statute governing mergers, Ohio R.C. 1701.82 and 1705.39, should have controlled. Those statutes, by their operation, vested all the assets and obligations of a constituent entity in the surviving entity without reversion or impairment. The Dissent reasoned that a covenant not to compete should be treated like any other asset and should inure to the benefit of the new company.
The Takeaway? Ohio employers and companies better check their non-competes. If their agreements do not broadly define the “Company” to include successors and assigns or do not include a provision permitting the assignment of the covenant, they will be deemed to begin running in the event of a merger, acquisition or reorganization and perhaps expire before an employee joins a competitor.
Further Thoughts (May 26, 2012): One point that needs to be made, after further reflection, is that, under the logic of the Acordia decision, any kind of corporate reorganization could result in the loss of the benefit of the covenant not compete, non-solicitation agreement or non-disclosure agreement. In other words, if a business decides to change from an “S” corporation to a limited liability corporation and its agreements fail to include “successor or assign” language or fail to include a provision permitting an assignment, the time periods of those agreements would begin to run at the time of the reorganization.