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Court Holds Employee 'Noncompete' Agreements Transfer By Law With Merger, Are Enforceable According to Their Terms

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2011-0163. Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-2297.
Hamilton App. No. C-1000071, 2010-Ohio-6235.  Judgment affirmed.
O'Connor, C.J., Lanzinger, and McGee Brown, JJ., concur.
Pfeifer, J., concurs in judgment only.
Lundberg Stratton, O'Donnell, and Cupp, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-2297.pdf

Video clip View oral argument video of this case.

(May 24, 2012) The Supreme Court of Ohio ruled today that when companies merge, noncompete agreements between an acquired company and its employees transfer to the acquiring company as a matter of law, but those agreements are enforceable against the acquired employees only according to the terms of the original agreement.

Applying that analysis to a merger of Cincinnati-area insurance service companies, the court held that employees of an acquired company who had signed agreements not to compete with their original employer for two years after “termination of employment with the company,” were contractually bound to honor those agreements for two years after the acquired company ceased to exist as the result of the merger, but no longer.

The court’s 4-3 decision was authored by Justice Judith Ann Lanzinger.

As a condition of their employment with an insurance-services company that eventually became known as Acordia of Ohio, Inc. Michael Fishel, Janice Freytag, Mark Taber, and Sheila Diefenbach (the employees) entered into noncompete agreements by which they agreed to forgo competition with Acordia, Inc. or one of its predecessor companies “for a period of two years following termination of employment with the company for any reason ...”  The noncompete agreements did not contain language extending the employees’ obligation to the company’s corporate “successors or assigns.”

Wells Fargo acquired Acordia, Inc. in May 2001. As part of this acquisition, the employees were required to complete several standard forms, including an acquisition-employment application, a United States Department of Justice employment-eligibility-verification form, a background-investigation authorization form, and a new-hire team-member acknowledgment form. 

Seven months later, the company underwent a merger with Acordia of Ohio, L.L.C. (the L.L.C.).  Following the merger, only the L.L.C. remained in existence.  The employees continued to work for the L.L.C. until August 2005, when they began employment with the Neace Lukens Insurance Agency. They soon used their contacts to recruit multiple customer accounts from the L.L.C. to Neace Lukens.  Within six months, 19 customers had transferred $1 million in revenue to Neace Lukens from the L.L.C.

The L.L.C. filed suit for injunctive relief and money damages in September 2005 against the employees, Neace Lukens, and several other defendants. The complaint claimed that the employees had violated their two-year noncompete agreements. The trial court denied the L.L.C.’s motion for a preliminary injunction. The First District Court of Appeals affirmed the trial court’s decision, holding in part that a preliminary injunction was unwarranted because Acordia Inc. and the employees did not intend to make the noncompete agreements between them assignable to successors such as the L.L.C.

The trial court subsequently granted the employees’ motion for summary judgment dismissing the L.L.C.’s claims against them, and the First District affirmed.  In its decision, the court of appeals held that the employees’ noncompete agreements pertained only to the specific companies with which they had originally been employed. Because the previous iterations of Acordia, Inc. had been merged out of existence more than two years before the employees left the L.L.C. in 2005, the court of appeals concluded that the L.L.C. had no right to enforce those agreements.

The L.L.C. sought and was granted Supreme Court review of the First District’s ruling.

In today’s lead opinion, Justice Lanzinger noted that under R.C. 1701.82, when one company acquires another by way of a merger, the assets of the acquired company transfer to the acquiring company.

“Because the statute specifies that the new company takes over all the previous company’s assets and property postmerger, it is clear that employee contracts transfer to the resulting company,” wrote Justice Lanzinger.  “In this case, the employees’ contracts came under the control of the L.L.C. after it merged with Acordia, Inc. Nevertheless, although the L.L.C. assumed control of the employees’ contracts after the merger, we agree with the First District Court of Appeals that the L.L.C. may not enforce the noncompete agreements as if the L.L.C. had stepped into the shoes of the company that originally contracted with the employees.”

“We have previously explained that when a merger between two companies occurs, one of those companies ceases to exist ...  After the L.L.C. absorbed Acordia, Inc., the companies with which the employees’ agreed to avoid competition had ceased to exist. Because the noncompete agreements do not state that they can be assigned or will carry over to successors, the named parties intended the agreements to operate only between themselves—the employees and the specific employer. ... The L.L.C. acquired only the ability to prevent the employees from competing two years after their employment terminated with the specific company named in the agreements.”

“When contracts pass to the surviving company following merger, the surviving company obtains the same bargain agreed to by the preceding company, nothing more. ... The L.L.C. could have protected its goodwill and proprietary information by requiring that the employees sign a new noncompete agreement as a condition of their continued at-will employment, similar to the way in which Wells Fargo required them to complete a number of employment forms as a condition of continued employment when it acquired Acordia, Inc.”  

“In this case, the termination, or complete severance of the employer-employee relationship, occurred when the company with which the employee agreed not to compete ceased to exist, an event triggered by merger.  The triggering event for Fishel, Freytag, and Taber occurred when Acordia of Cincinnati, Inc. merged with other Ohio companies to become Acordia of Ohio, Inc. in December 1997.  Consequently, their noncompete periods expired in December 1999. The triggering event for Diefenbach occurred when Acordia of Ohio, Inc. merged with the L.L.C. in December 2001.  Her noncompete period accordingly expired in December 2003.  Because the employees’ noncompete periods all expired before their resignations from the L.L.C. and subsequent employment with Neace Lukens, the L.L.C. had no legal right to enforce the noncompete agreements against the employees.”

Justice Lanzinger’s opinion was joined by Chief Justice Maureen O’Connor and Justice Yvette McGee Brown.  Justice Paul E. Pfeifer concurred in judgment only.

Justices Evelyn Lundberg Stratton, Terrence O’Donnell and Robert R. Cupp dissented. Justices O’Donnell and Cupp entered separate dissenting opinions, both of which were joined by Justice Stratton.

In his dissent, which was also joined by Justice Cupp, Justice O’Donnell pointed to this court’s 1991 decision in Rogers v. Runfola & Assoc. and more recent decisions of the supreme courts of Nebraska and Floridaholding that when employee contracts are conveyed from a disappearing company to a survivor company by operation of law in a merger, the surviving company assumes the right to enforce those contracts as if it had been a party to the original agreements.

Justice O’Donnell wrote: “Pursuant to R.C. 1701.82 and 1705.39, the primary statutes governing mergers in Ohio, assets pass to a surviving entity by operation of law. It has been understood for more than a century that contracts are subordinate to statutes and that the latter also determine the effect of merger contracts and their mode of discharge. The agreements here automatically vested in Acordia of Ohio, L.L.C., without reversion or impairment, because they are assets that passed by operation of law, and Acordia of Ohio, L.L.C., can enforce the noncompete agreements as if it were a signatory to them. For these reasons, I would reverse the judgment of the court of appeals and hold that the surviving entity in a merger acquires the right to enforce a noncompete agreement entered into by a constituent entity by operation of law, and that neither assignment nor consent is necessary to effectuate that result.”

In his dissent, Justice Cupp agreed with Justice O’Donnell’s conclusion that the First District erred in affirming summary judgment in favor of the employees, but wrote that in his view the fact that employee noncompete agreements pass to a successor company by operation of law was not dispositive of whether the agreements in this case would be enforceable by the L.L.C.  Justice Cupp noted that several of the affected employees had signed agreements not to compete with a predecessor of Acordia Inc. when the firm referenced in that agreement was a single-office insurance agency with a relatively small client base, whereas the L.L.C. now seeking to enforce those noncompete agreements had become a regional firm with multiple offices and 5,000 to 6,000 customers in the Cincinnati area alone. 

“The changes that occurred over the years and other factors in this record would seem to be relevant to the issue of the enforceability of these agreements,” wrote Justice Cupp.  “Consequently, the issue of the enforceability of the noncompete agreements post-merger, an inquiry independent from the determination of their transfer by operation of law, remains to be explored. The judgment of the court of appeals should be reversed, and this cause should be remanded for further proceedings.”

James F. McCarthy III, 513.721.4532, for Acordia of Ohio L.L.C.

Mark E. Lutz, 513.621.3440, for Michael Fishel and other defendant employees.