In May 2012, in a Client Alert titled “Ohio Supreme Court Sharply Limits Enforcement of Noncompete Agreements,” we reported on the Supreme Court of Ohio’s decision in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-2297 (“Acordia I”), in which the Court significantly limited the ability of a surviving entity to enforce noncompete agreements after a merger. On July 25, 2012, the Supreme Court agreed to reconsider its ruling in Acordia I and, on October 11, 2012, in Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-4648 (“Acordia II”), the Court reversed its earlier decision and remanded the case to the trial court. In doing so, it established the following principles:
- In a merger, although a predecessor company ceases to exist as a separate entity, it is not completely erased from existence. Instead, it becomes a part of the resulting successor company following the merger; and
- Because the predecessor company becomes part of the successor company, the successor company has the ability to enforce noncompete agreements as if it had stepped into the shoes of the predecessor company.
Acordia II, ¶7.
To understand the impact of Acordia II, it is important to first consider the outcome of Acordia I. In Acordia I, the Court held that (1) in a merger, the successor company acquires, and can enforce, noncompete agreements to which predecessor entities were parties, but (2) a predecessor entity ceases to exist after a merger, and (3) the resulting entity does not step into the shoes of the predecessor entities. Acordia I, ¶10-12. These principles led the Court to conclude that the successor entity in Acordia I could not enforce certain noncompete agreements because the noncompete periods in those agreements had expired while the employees were still employed with the successor company. According to the Court, the noncompete periods began to run upon termination of employment with the now-nonexistent predecessor – i.e., the day of the merger – even though the employees remained employed with the successor for years following the merger. Id., ¶7.
In Acordia II, the Court corrected this anomaly and held that, in a merger, the surviving entity steps into the shoes of the predecessor entity for purposes of enforcing noncompete agreements. But that isn’t the end of the story. The Court also reaffirmed the principle that noncompete agreements are subject to challenge for reasonableness, and an employee may argue that a merger results in such a significant change in circumstances that an agreement that was reasonable when applied to a predecessor may be unreasonable when applied to the successor. As the Court explained:
[T]he employees still may challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in this case created additional obligations or duties so that the agreements should not be enforced on their original terms. . .In determining the reasonableness of a noncompete agreement, we have stated that courts must determine whether the restraints and resultant hardships on the employee exceed what is reasonable to protect the employer’s legitimate business interests.
Acordia II, ¶9-10.
The Court remanded the case to the trial court to determine whether enforcing the agreement would be reasonable in that case. Id., ¶12.