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Recent Decision Highlights Importance of “Successor Language” in Non-Compete Agreements

Corporate Services Law Update Kelly L. Turenne

Companies carrying out mergers, acquisitions or other business reorganizations should take note of whether non-compete agreements of predecessor company employees prohibit such employees from competing with successors and assigns. Without clear assignment and successor language, some state courts may not allow successor companies to enforce these agreements.

In Acordia of Ohio, LLC v. Fishel, Slip Opinion No. 2012-Ohio-2297 (May 24, 2012), the Supreme Court of Ohio held that the post-merger surviving entity could not enforce employee non-compete agreements as if the entity had stepped into the shoes of the company that originally contracted with the employees because the agreements did not contain assignment and successor clauses. While the Court found that ownership of the non-compete agreements was automatically transferred to the new company by operation of law pursuant to Ohio's merger statute, the new entity could only enforce the agreements as written. By their terms, the non-compete agreements were between only the employees and the company that hired them. The Court reasoned that because the non-compete agreements did not state that they could be assigned or would carry over to successors, the named parties intended the agreements to operate only between themselves - the employees and the specific employer. As a result, the new entity had no recourse when four employees (who had signed two-year non-compete agreements with the predecessor entity) left to work for a competitor and, within six months, recruited 19 customers and transferred $1 million in revenue to the competitor.

Notably, under the logic of the Acordia decision, any kind of corporate reorganization could result in the loss of the benefit of a non-compete agreement or other restrictive covenants. In light of the Acordia decision, companies should consider adding clauses in all non-compete agreements prohibiting employees from competing with successors and assigns. Further, as part of the due diligence process for any merger, acquisition or reorganization, companies should review whether restrictive covenants contain a successor and assigns provision. If such language is not included, successor companies may want to consider requiring employees to sign new non-compete agreements.

For more information, please contact Kelly Turenne at (414) 277-5577 / [email protected] or your local Quarles & Brady attorney.

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