Court Reconsiders, Modifies Ruling on Enforceability of Employee Noncompete Agreements
When Employee’s Agreement Was With Company Later Absorbed By Another Through Merger
In a decision announced today, the Supreme Court of Ohio reconsidered and partially revised an earlier ruling addressing the enforceability of noncompete agreements between a Cincinnati company and several former employees after the company and its assets were acquired by a successor company through a merger.
In a 6-1 decision written by Justice Judith Ann Lanzinger, the court noted that in a May 24, 2012 decision, Acordia of Ohio LLC v. Fishel (Acordia I), the lead plurality opinion concluded that when two companies merge and one ceases to exist, the surviving company does not “stand in the shoes” of the disappearing company with regard to enforcing a noncompete agreement between the acquired company and its employee unless the agreement included specific language extending the employee’s obligation not to compete not only to the original employer, but also its corporate “successors and assigns.” Based on that holding, the court in Acordia I affirmed a ruling by the First District Court of Appeals that Accordia of Ohio LLC lacked standing to enforce noncompete agreements between a company it had acquired by merger and the acquired company’s former employees.
Justice Lanzinger wrote that, in response to a motion for reconsideration filed by Acordia LLC and memoranda supporting and opposing that motion, the court had reviewed its decision in Acordia I and determined that a partial correction of the lead opinion was required because the plurality had based part of its opinion on a misreading of language in a 1971 Supreme Court of Ohio decision, Morris v. Investors Life Insurance Co.
Specifically, Justice Lanzinger wrote, “Upon further consideration, we now recognize that the lead opinion’s reading of Morris was incomplete. While Morris does state that the absorbed company ceases to exist as a separate business entity, the opinion does not state that the absorbed company is completely erased from existence. Instead, the absorbed company becomes a part of the resulting company following merger. The merged company has the ability to enforce noncompete agreements as if the resulting company had stepped into the shoes of the absorbed company. It follows that omission of any ‘successors or assigns” language in the employees’ noncompete agreements in this case does not prevent the L.L.C. from enforcing the noncompete agreements.”
“While we now hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into each original contracting company’s shoes, we agree with Justice Cupp’s assertion in his dissent in Acordia I that even though the agreements transfer to the L.L.C. by operation of law, the transfer does not ‘foreclose appropriate relief to the parties to the noncompete agreement under traditional principles of law that regulate and govern noncompete agreements.’ ... In other words, the 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.”
“The language in Acordia I stating that the L.L.C. could not enforce the employees’ noncompete agreements as if it had stepped into the original contracting company’s shoes or that the agreements must contain ‘successors and assigns’ language in order for the L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of this case. We accordingly reverse the judgment of the court of appeals and remand this cause to the trial court so that it may determine the reasonableness of the noncompete agreements.”
Justice Lanzinger’s opinion was joined by Chief Justice Maureen O’Connor and Justices Evelyn Lundberg Stratton, Robert R. Cupp and Yvette McGee Brown.
Justice Terrence O’Donnell concurred with the majority holding that the noncompete agreements were enforceable by the successor company as if the successor company were a signatory to those agreements. Justice O’Donnell wrote: “Because the surviving entity in a merger acquires the right to enforce a noncompete agreement entered into by a constituent entity by operation of law, neither assignment nor consent is necessary to effectuate that result.”
“In my view, it is not necessary to direct the trial court to determine the reasonableness of the noncompete agreements; although a trial court has the obligation to review a noncompete agreement for reasonableness, that issue has not been presented as a proposition of law, nor is it otherwise briefed or at issue before the court. Accordingly, I concur in the judgment to reverse the court of appeals and to remand this matter for further proceedings consistent with this opinion.”
Justice Paul E. Pfeifer dissented, stating that in his view “(t)his case has been properly decided three separate times. The trial court had it right, the court of appeals had it right, and this court had it right the first time. I did not vote to accept jurisdiction, did not vote to reconsider the case, and remain convinced that this court should not have accepted jurisdiction or granted reconsideration. Even though I believe that this case is being incorrectly decided, the good news is that, on remand, the lower courts are likely to reach the same sensible conclusions that they reached when they first encountered this case.
“In this case, the noncompete agreement is an undue infringement on free enterprise. The agreement unfairly protects the employer from competition from its former employees. The employer’s trade secrets and customer list are already legitimately protected; the noncompete agreement does not protect them further. ... Under the circumstances of this case, I conclude that the noncompete agreement is unreasonable and, therefore, that it should not be enforced. I would so conclude now, based on the record before us, without remanding the case.”
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2011-0163. Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-4648.
Hamilton App. No. C-1000071, 2010-Ohio-6235. On motion for reconsideration. Judgment reversed and cause remanded.
O’Connor, C.J., and Lundberg Stratton, O’Donnell, Lanzinger, Cupp, and McGee Brown, JJ., concur.
Pfeifer, J., dissents.
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