The Supreme Court of Ohio recently addressed the enforceability of noncompete agreements that are inherited by a successor company through a corporate merger. In a 4-3 decision issued on May 24, 2012, in Acordia of Ohio, LLC v. Fishel, the court held that the surviving successor company from a merger does not automatically “step into the shoes” of the original company that was a party to a noncompete agreement with its employees. Instead, the terms of the agreement itself must specifically provide for a continuation of the contract in the event of a merger or acquisition of the original company by a successor. Absent such language, a successor company may enforce the agreement only as between the employee and the original company.
The situation in Acordia involved noncompete agreements signed by several insurance company employees between 1993 and 2000. Each agreement specified that the employee would not compete with “the company” for a period of two years “following termination of employment with the company.” The original insurance company, Frederick Rauh & Company, underwent a series of mergers, acquisitions and reorganizations between 1993 and 2001. As a result, the noncompete agreements signed by each employee identified a different organization as “the company.” The eventual successor company, Acordia of Ohio, LLC, was not a party to any of them. In addition, none of the agreements contained language that extended the noncompete provisions to other employers, including successors or assignees of the named company.
When employees resigned in August 2005 and began working for a competing insurance company, Acordia filed suit for breach of the two-year noncompete agreement. The case was eventually appealed to the Supreme Court of Ohio, which held that the company could not enforce the agreements. While recognizing the general rule that contracts automatically transfer to a successor company through a merger, the court determined that a transferred contract is enforceable only according to its original terms. The majority found it significant that none of the noncompete agreements at issue provided for assignment to a successor of the named company. As a result, the court concluded that the contracts operated only between the named employee and the specific company listed in the agreement, and were enforceable by Acordia only according to those terms.
Applying Ohio law, the court found that “termination of employment” occurred under the agreements “when the company with which the employee agreed not to compete ceased to exist, an event triggered by merger.” Because all of the mergers occurred more than two years before the employees resigned from Acordia in August 2005, the court concluded that the noncompete periods had expired and were unenforceable by the company.
In light of Acordia, Ohio employers considering noncompete agreements should ensure that their contracts contain express language indicating that the restrictive covenants are assigned or transferred to a successor company in the event of a merger or other reorganization. Employers may want to review their existing noncompete contracts.