Ohio Supreme Court Reverses Acordia Decision
Corporate Transactions & Securities Update
Date: October 22, 2012
On October 11, 2012, the Ohio Supreme Court reversed its decision in Acordia of Ohio, LLC v. Fishel (Acordia I). Acordia of Ohio, LLC filed a motion asking the court to reconsider its decision in Acordia I that a corporate merger triggered the termination provisions of certain noncompete agreements entered into by one of the constituent corporations in the merger (for details, see Thompson Hine's Summer 2012 Business Law Update). The court reconsidered and determined that portions of its Acordia I opinion were erroneous and remanded the case to the trial court for a determination of whether the noncompete agreements are still enforceable following the merger.
In May 2012, upon its first review of the case, the Ohio Supreme court held that the merger of two companies terminated the existence of the acquired company, and that the language of noncompetition agreements entered into by the acquired company precluded the surviving company from enforcing the noncompetition agreements. The Acordia I decision seemed to run counter to corporate lawyers' established understanding of the operation of the Ohio merger statute.
In the most recent decision, Acordia of Ohio, L.L.C. v. Fishel, Slip Opinion No. 2012-Ohio-4648, the Ohio Supreme Court reemphasizes the continued validity of the Ohio merger statute, which provides that all assets and property (including, noted the court, employment contracts and agreements) of the constituent entities in a merger transfer by operation of law to the surviving company. According to the court, "Ohio merger law remains undisturbed, and employee and noncompete agreements transfer to the surviving company after a merger has been completed. . . ."
In reviewing its Acordia I decision, the Ohio Supreme Court concluded that the lead opinion in Acordia I misconstrued the Morris case, which formed the basis, in part, of the lead opinion in Acordia I. In the court's view, a correct reading of Morris supports the notion that a merged company becomes part of the resulting company following a merger and the surviving company has the ability to enforce noncompete agreements as if the surviving company has "stepped in to the shoes of the absorbed company."
Further, the court explains that the failure to include "successor and assigns" language in the noncompete agreements does not necessarily preclude the enforcement of the agreements by the surviving company. In fact, the court specifically notes that any language in Acordia I to the effect that the contracting company's rights to enforce the noncompete agreements did not automatically inure to the benefit of the surviving company, or that enforceability of the agreements was preconditioned on the inclusion of "successors and assigns" language in the contracts, was erroneous.
The Ohio Supreme Court's reversal in this case provides merging companies with a certain degree of comfort and certainty regarding their ability to enforce noncompete covenants with their employees. However, enforceability remains a key concern, and the court's holding should not be taken as a license for casual handling of these important contracts. In fact, the court explains that while noncompete agreements transfer by operation of law in a merger, the affected employees "may still challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable . . . " in light of the changed circumstances brought on by the merger. To maximize the likelihood of future enforceability of noncompete agreements, both generally and in a post-merger scenario, transactional and employment lawyers should continue to carefully consider the factors affecting their use and construction.