The Ohio Supreme Court has decided to reverse a significant ruling it issued five months ago, and has now held that covenants not to compete are like any other agreement and automatically transfer after a merger.  In Acordia of Ohio v. Fishel, the Supreme Court held that its May 25, 2012 ruling was erroneous and that any shortcomings in the language of the covenant would not prevent its transfer to the merged company.  (A copy of the Court’s opinion can be found in the PDF below).

Background:  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. 

A 4 to 3 majority of the Ohio Supreme Court also initially agreed. Since the covenant did not include assignees nor provide for the assignment to a successor, the majority reasoned, 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 Ohio Supreme Court’s reversal:  The reaction within the Ohio business community was swift and outraged.  As reported by former Ohio Appellate Judge Marianna Bettman Brown, Acordia had “heavy fire-power” in support of its request for reconsideration, as the Ohio Chamber of Commerce and a number of other businesses filed for reconsideration as amici in support of Acordia.  In July, the Ohio Supreme Court relented, voting 6 to 1 to reconsider its ruling.

That same 6 to 1 vote held up in the reversal, with Justice Paul Pfeifer the lone dissenter.  The majority opinion written by Justice Judith Lanzinger provided few clues about what caused her, Chief Justice Maureen O’Connor and Justice Yvette McGee Brown to switch their votes.  Rather, Justice Lanzinger simply said the Court had erred because it had misread language from a previous case that “a merger involves the absorption of one company by another” and that “the absorbed company ceases to exist as a separate business entity.” 

Instead, Justice Lanzinger applied a different conceptual approach, and reasoned that the “absorbed company becomes a part of the resulting company following the merger.”  As a result, the merged entity has the ability to enforce noncompete agreements as if it “had stepped into the shoes of the absorbed company.”

The Trade Secret Litigator’s Take:  As you can tell, I am puzzled about what caused the 3 members of the Court to change their mind.  I have found myself waffling back and forth on it, so I can’t fault the three justices.  This is a tough case, as both cases presented well reasoned arguments. 

It may break down as simply as a basic value judgment: if you believe that statutes should trump private contracts, you will ultimately agree with the majority.  If you believe that non-competes should be strictly construed, you would be inclined to agree with Justice Pfeifer’s dissent. 

Acordia of Ohio Reversal.txt (28.54 kb)