What happens to non-compete agreements after a business sale or acquisition? Today at Inside Counsel, David Ritter discusses an Ohio Supreme Court case titled Acordia of Ohio, L.L.C. v. Fishel. According to the court in Acordia, it depends on the terms of the non-compete agreement. Below I describe the Acordia case, ask whether the result would be the same in Oregon, and remind employers of what we need to learn from this case.
About the Acordia Case
The facts in Acordia are pretty straightforward: 4 employees signed non-compete agreements with companies that later merged into an entity called Acordia of Ohio, L.L.C. The agreements prohibited competition for a period of two years following employment with ?the company.? The non-compete agreements did not contain any terms specifying whether the agreements applied to ? successors or assigns.? The employees later went to work for competitors and litigation followed.
Not surprisingly, the legal issue became ?whether the noncompete agreements apply only to the original contracting employer or whether after the merger, the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of those original contracting employers.?
The court ruled that Acordia of Ohio, L.L.C. had acquired the non-compete agreements ?according to their terms? when it bought the involved predecessor companies. But the court also ruled that the predecessor companies ?ceased to exist? following those acquisitions. Therefore, the employees stopped working for the predecessor companies once the respective mergers were complete. By the terms of the contracts, the employees were restricted from competing for two years from the date of the acquisitions. Since Acordia of Ohio, L.L.C. failed to implement any new non-compete agreements or amend the old ones within that time period, the employees were not subject to any agreement when their employment ended.
Would the Result in Oregon Be Different?
On these facts, the result would probably be the same under Oregon law. Similar to Ohio law, Oregon law specifies that ?[w]hen a merger involving a corporation takes effect[, e]very other business entity that is a party to the merger merges into the surviving business entity, and the separate existence of every other party ceases.? ORS 60.497(1)(a). A merger would include a transfer of contractual rights and obligations. ORS 60.497(1)(b)-(c). Assuming the agreements were otherwise enforceable, I see no reason to believe that Oregon courts would amend contractual language to extend employee obligations to successor companies. Unless, of course, the agreements specified otherwise.
What Does This Mean for Oregon Businesses?
David Ritter offers sound advice. Businesses should review non-compete agreements to determine whether they ?include language that provides for an agreement?s continuation in the event of acquisition by another company.? For the small business, successor contractual rights are an important consideration in planning for an eventual acquisition. For growing companies (and their lawyers), it is important to include a review of non-competition issues as part of acquisitions and mergers.
Frankly, I?m sort of amazed that Acordia of Ohio, L.L.C. missed this when it was on-boarding the employees. As the court in Acordia said, ?The L.L.C. could have protected its goodwill and proprietary information by requiring that the employees sign a new noncompete agreement as a condition of their continued at-will employment.? Hefty tuition to the school of contract administration. That or a claim against the lawyers that handled the merger.
Source: http://www.portlandoregonemploymentlawyer.com/non-compete-agreements-in-mergers-and-acquisitions/
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