Wednesday, May 30, 2012

Time to re-read your non-competition agreements; Ohio Supreme Court issues ruling on enforceability by successors

Acordia of Ohio, L.L.C. v. Fishel [pdf], decided last week by the Ohio Supreme Court, is a pretty straight-forward case. In this case, four ex-employees claimed that Acordia could not enforce their non-competition agreements. They argued that the under the plain language of their covenants, the agreements were limited to the predecessor employer, and that there were no allowances in the agreements for a successor entity such as Acordia, which had acquired the original employer.

The Supreme Court agreed:

The agreements defined the “Company” only as “Frederick Rauh & Company,” the predecessor employer. Because the agreements did not extend the definition of “Company” to include successor entities, Acordia could not enforce them. Simply, the agreements lacked any language that specifically assigned rights to the new company….

The noncompete agreements between the employees and their original employers specified that they applied only to the specific companies that had originally hired each employee. Because the agreements made no provision for the continuation of the agreement upon any acquisition of the original company by another company, the agreements are not enforceable by the L.L.C. according to the agreements’ original terms past the two-year noncompete period agreed to by the employees and their original employers.

In other words, if have any current non-competition agreements that operate under Ohio law, you need to review them to ensure that they allow for successor entities. Otherwise, even a simple change in corporate structure could render your agreement unenforceable.

Going forward, non-competition agreements should:

  1. Define “employer” to include the current entity, in addition to any successors and assigns.
  2. Include a specific clause in the agreement, which provides that all rights in the agreement flow to “successors and assigns,” which are entitled to enforce the agreement against the employee.

Luckily for employers, Ohio law provides that continued employment is sufficient consideration to support a non-competition agreement. In other words, you should be contacting your counsel to review all non-competition agreements for compliance with the Acordia case, and redrafting and reissuing to employees where necessary.