The Supreme Court of Ohio yesterday issued its decision on a motion to reconsider the Court’s opinion announced May 25, 2012 regarding an important non-compete issue.
In that earlier sharply divided ruling, the Court affirmed the appellate court’s holding that non-competition agreements entered into by a corporation and then transferred by operation of law to an L.L.C. into which the corporation merged were unenforceable by the L.L.C. Arcadia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (“Arcadia I”). The well-written and well-reasoned dissent cited a 1991 Ohio case which held that non-competes entered into with a sole proprietorship were enforceable by a successor corporation where there simply had been a change in the business structure. Further, decisions in other states with facts indistinguishable from those in Acordia I hold contrary to that Ohio Supreme Court ruling. Two months after Arcadia I was announced, the Court granted Arcadia’s motion for reconsideration (“Arcadia II”).
Yesterday, by a 6-1 margin, the Supreme Court reversed the appellate court and remanded the case for a determination as to the reasonableness of the covenants not to compete (“Arcadia III”). The majority stressed in Arcadia III that Arcadia I was intended to hold that all assets transferred by constituent bodies by operation of law were enforceable by the surviving entity, except for covenants not to compete. The ruling on reconsideration simply eliminated that exception. Arcadia of Ohio, L.L.C. v. Fishel, Slip Opin. No. 2012-Ohio-4648.
Arcadia III not only clarifies the Court’s position regarding enforceability of non-competes but also relieves a lot of anxiety over the scope of Arcadia I. The petition for reconsideration expressed concern that the earlier ruling jeopardized the successor’s enforceability not only of non-competition covenants but also additional types of employment and other contracts transferred from a predecessor by operation of law. Arcadia III emphasizes that all contracts, if they are reasonable, may be enforced by the successor. The law on these points in Ohio now clearly conforms with that of many other other jurisdictions. For more details regarding this significant decision, the case history, and impact, please see John Marsh’s Trade Secret Litigator blog entry.