Ohio Supreme Court: Surviving Entity Inherited Expired and Unenforceable Noncompetition Agreements

*By Jason Rossiter

This morning, the Ohio Supreme Court has held, in a long-awaited decision, that noncompetition agreements that lacked assignment and successorship language did indeed transfer "by operation of law" to an LLC that was the product of a series of mergers and similar transactions. However, it was a pyrrhic victory, since the Supreme Court also held that this LLC could only enforce what it acquired "as written," and what it had acquired in this instance were worthless covenants that had expired long ago and that by their terms could only be enforced by the original signatory entity.

The case is Acordia of Ohio, LLC v. Fishel.

The noncompetition agreement in question had stated that the employees who signed them could not engage in certain acts of competition "[f]or a period of two years following termination of employment with the company for any reason." [Ed. note - emphasis is both mine and the Court's]. Each agreement defined "the company" as being simply the particular company that the employee worked with at the time. None of the agreements had language stating that successors or assignees could enforce them.

The Supreme Court held that the lack of successorship or assignment language in the documents did not preclude the agreements from transferring to the successor entity (affectionately referred to as "the L.L.C." throughout the Supreme Court's opinion) "by operation of law":

Because the statute [Ohio Rev. Code 1701.82] 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. In this case, the employees’ contracts came under the control of the L.L.C. after it merged with Acordia, Inc. 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. In this case, the employees’ contracts came under the control of the L.L.C. after it merged with Acordia, Inc.

But what, exactly, did this LLC inherit? According to the Supreme Court, not much. It inherited only the ability to enforce the agreements "as written." And in this case, that amounted to practically nothing.

As noted, the agreements contained no language that contemplated enforcement of the covenants by successors or assignees. Instead, they provided that only the signatory "company" could enforce them. The Supreme Court held that this language meant what it said. The LLC argued that, regardless, it should be able to jump "into the shoes" of the former entity and enforce the covenants based on Ohio corporation law. The Supreme Court said no, since this would "require a rewriting of the agreements":

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. Appellant’s proposed outcome would require a rewriting of the agreements. By their terms, the noncompete agreements are between only the employees and the companies that hired them.

And to twist the knife, the Supreme Court held that even if the agreements had contained language allowing successors or assignees to enforce the noncompetition covenants in addition to the signatory "company," the covenants had expired. By their terms, all of the covenants had begun to run when employment with the signatory "company" ended, and by necessity, all employment with each of these signatory "companies" had ended when the entities themselves had ceased to exist:

Because the noncompete agreements transferred to the L.L.C. upon completion of the merger, the L.L.C. obtained the right to enforce the agreements as written. In other words, the employees were unable to compete with the L.L.C. for the two years following their termination from the “company” with which they each had signed their respective noncompete agreements.

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 January Term, 2012 periods had 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. [Ed. note - emphasis is mine.]

Whoops.

The lesson here is rather obvious. If your company uses noncompetition agreements (or some similar type of post-employment restriction), best check to make sure that assignees and successors are explicitly given rights of enforcement. You may also want to check to see how your agreements "start the clock" on post-employment restrictions, lest those restrictions expire before the employee is even out the door.

*Jason Rossiter practices in all areas of labor and employment law. For more information about noncompete agreements contact Zashin & Rich at 216.696.4441.

The National Labor Relations Board Temporarily Suspends "Ambush" Representation Election Rules and A New Campaign Against "At-will" Employment

*By Patrick J. Hoban

“Three’s Company” – and necessary to issue and implement federal labor law rules – at least according to a Federal District Court judge. On Monday, May 14, 2012, the Federal District Court for the District of Columbia struck down the National Labor Relations Board’s (“NLRB” or “the Board”) new rules governing elections for employees seeking representation by a labor organization. See Chamber of Commerce of the United States of America, et al. v. National Labor Relations Board, No. 11-cv-02262 (D.D.C. May 14, 2012). Z&R posted prior alerts outlining the election rule changes: June 2011, January 2012 and April 2012. The new rules dramatically reduced the time employers had to present the case against unionization and greatly limited employers’ ability to alter the composition of the proposed bargaining unit. Despite opposition from employer-management groups and Republicans, the new election rules went into effect April 30.

At the time the election rules were approved in December 2011, the Board only had three members. The National Labor Relations Act (“NLRA”) requires a quorum of at least three board members to enact new rules. Because one Board member never responded to an email request for his vote on the final rule, while the other two members voted online, the Court held that the required three member quorum for the vote did not exist and the NLRB could not enforce the new rules. The Court, however, stated that the current Board - comprised of five members (and a 3 to 2 Democrat majority) could simply hold another vote on the rule.

Late yesterday afternoon, in response to the Court’s decision, the Board “temporarily suspended” the new election rules as of May 15, 2012. The Board stated that parties involved with the approximately 150 election petitions currently being processed under the April 30 rules have the option to continue under those rules or “re-initiate” the process under the former election rules.

Employee Handbook “At-Will” Statements “At-Risk”?
A recently issued NLRB General Counsel complaint in an unfair labor practice case suggests that the NLRB has opened a new front in its war against non-unionized employers – this time attacking employee handbook provisions confirming employees’ “at-will” employment status. On February 29, 2012, the NLRB’s Phoenix, Arizona Regional Office issued a complaint challenging several “at-will” statements contained in the employer’s employee handbook. Specifically, the complaint alleges the statements “I understand my employment is ‘at-will’” and “I acknowledge that no oral or written statements or representations regarding my employment can alter my at-will employment status, except for a written statement signed by me and company executives” were overly broad and violated the NLRA. Although details as to what motivated the complaint are vague, the complaint suggests that employees may interpret the quoted language as prohibiting union organization. The case was heard by an administrative law judge on May 3, 2012, and that judge should issue a decision in several months.

The NLRB’s apparent attack on “at-will” handbook provisions is disturbing and, if found meritorious, would render virtually every employee handbook in the country in violation of the NLRA overnight. However, given the radical nature of the NLRB’s latest attack, Z&R does not recommend that employers revise their employee handbooks at this time. Z&R will continue to watch the progress of this case and provide further updates.

*Patrick J. Hoban, an OSBA Certified Specialist in Labor and Employment Law, appears before the National Labor Relations Board and practices in all areas of labor relations. For more information about the NLRB’s election amendments, NLRB’s posting requirement, or labor & employment law, please contact Pat at pjh@zrlaw.com or 216.696.4441.