*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.
