Acordia of Ohio, L.L.C. v. Fishel , 133 Ohio St. 3d 356 ( 2012 )

[Cite as Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St. 3d 356, 2012-Ohio-4648.]
ACORDIA OF OHIO, L.L.C., APPELLANT, v. FISHEL ET AL., APPELLEES.
[Cite as Acordia of Ohio, L.L.C. v. Fishel,
133 Ohio St. 3d 356, 2012-Ohio-4648.]
On reconsideration—Acordia has the right to enforce noncompete agreements as
if it had stepped into the shoes of the contracting companies—Judgment
reversed, and cause remanded.
(No. 2011-0163—Submitted July 10, 2012—Decided October 11, 2012.)
APPEAL from the Court of Appeals for Hamilton County,
No. C-1000071, 2010-Ohio-6235.
ON MOTION FOR RECONSIDERATION.
__________________
LANZINGER, J.
{¶ 1} This matter is before us on a motion for reconsideration filed by
appellant, Acordia of Ohio, L.L.C. (“the L.L.C.”) and supported by amici curiae,
Ohio Chamber of Commerce, Ohio Chemistry Technology Council, USI
Holdings Corporation, USI Midwest, Inc., Hylant Group, Inc., Cintas
Corporation, and professors Sean K. Mangan and John A. Barrett Jr. A
memorandum in opposition was filed by appellees Michael Fishel, Janice Freytag,
Mark Taber, Sheila Diefenbach (collectively, “the employees”), Neace Lukens
Insurance Agency, L.L.C., Neace & Associates Insurance Agency of Ohio, Inc.,
and Joseph T. Lukens. We granted the motion for reconsideration. Acordia of
Ohio, L.L.C. v. Fishel, 132 Ohio St. 3d 1485, 2012-Ohio-3334, 971 N.E.2d 962.
{¶ 2} In Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St. 3d 345, 2012-
Ohio-2297, 978 N.E.2d 814 (“Acordia I”), this court affirmed the judgment of the
court of appeals. The lead opinion concluded that while the employees’
noncompete agreements transferred by operation of law following merger with
SUPREME COURT OF OHIO
the L.L.C., the language found in those agreements precluded the L.L.C. from
enforcing them as if it had stepped into the shoes of the original contracting
employer. Id. at ¶ 14, 19.
{¶ 3} After reviewing the memoranda presented to the court on
reconsideration, we have determined that portions of the lead opinion in Acordia I
should be clarified. We reassert that in accordance with R.C. 1701.82(A)(3), all
assets and property, including employment contracts and agreements, and every
interest in the assets and property of each constituent entity transfer through
operation of law to the resulting company postmerger. We clarify the lead
opinion by noting that certain language was, upon further consideration,
erroneous. As a result, we now reverse the judgment of the court of appeals and
remand the cause to the trial court so that it may determine whether the
noncompete agreements are enforceable against the employees.
I. Our Decision Is Limited to the Context of Noncompete Agreements
{¶ 4} At the outset, we wish to emphasize that both the lead opinion in
Acordia I and our decision today are limited in scope. In its motion for
reconsideration, the L.L.C. worries that Acordia I may affect not only
noncompetition agreements, but all other contracts transferred as a result of a
merger. This is not the case. The proposition of law we accepted for review in
this case stated:
Pursuant to Ohio’s merger statutes, agreements between
employees and employers that contain restrictive covenants are
assets of the constituent company that transfer automatically by
operation of law in a statutory merger from the constituent
company to the surviving company and are enforceable by the
surviving company according to the agreements’ original terms as
if the surviving company were a party to the original agreements.
2
January Term, 2012
Acordia of Ohio, L.L.C. v. Fishel, 128 Ohio St. 3d 1458, 2011-Ohio-1829, 945
N.E.2d 522. Our review of this case was thus limited to the narrow legal issues of
whether noncompete agreements transferred by operation of law to the surviving
company and whether the surviving company could enforce the agreements as if it
had stepped into the shoes of the original contracting company. Both the lead
opinion in Acordia I and our decision today are based upon considerations unique
to noncompete agreements in the context of a merger and apply only to this
narrow vein of cases. Nothing in either opinion should be construed as addressing
the effect of a merger on any other company contracts.
II. The Noncompete Agreements Transfer by Operation of Law
{¶ 5} The lead opinion in Acordia I clearly stated that noncompete
agreements transfer automatically to the surviving company by operation of law.
The lead opinion specifically provided, “We emphasize that in accordance with
R.C. 1701.82(A)(3), the surviving company possesses all assets and property and
every interest in the assets and property of each constituent entity, including
employment contracts and agreements.” Acordia I, 133 Ohio St. 3d 345, 2012-
Ohio-2297, 978 N.E.2d 814, at ¶ 14. We reemphasize this principle today. Ohio
merger law remains undisturbed, and employee noncompete agreements transfer
to the surviving company after a merger has been completed pursuant to R.C.
1701.82(A)(3).
III. Portions of the Lead Opinion in Acordia I Were Erroneous
{¶ 6} After reviewing the parties’ memoranda and giving further
consideration to this case, we conclude that portions of the lead opinion in
Acordia I require correction. Specifically, a portion of analysis found in Acordia
I’s lead opinion was based upon a misreading of language from a previous case
that “a merger involves the absorption of one company by another, the latter
retaining its own name and identity, and acquiring the assets, liabilities, franchises
3
SUPREME COURT OF OHIO
and powers of the former. Of necessity, the absorbed company ceases to exist as a
separate business entity.” Morris v. Invest. Life Ins. Co., 27 Ohio St. 2d 26, 31,
272 N.E.2d 105 (1971). Based on this language, the lead opinion in Acordia I
concluded that the companies with which the employees had signed noncompete
agreements ceased to exist following the merger. Acordia I at ¶ 12. The lead
opinion further reasoned that because the noncompete agreements do not state
that they can be assigned or will carry over to the contracting company’s
successors, the agreements’ specific language indicated that the contracting
parties intended that the noncompete agreements would operate only between
themselves—i.e., the employee and the specific employer. Id.
{¶ 7} Upon further consideration, we now recognize that the lead
opinion’s reading of Morris was incomplete. While Morris does state that the
absorbed company ceases to exist as a separate business entity, the opinion does
not state that the absorbed company is completely erased from existence. Instead,
the absorbed company becomes a part of the resulting company following merger.
The merged company has the ability to enforce noncompete agreements as if the
resulting company had stepped into the shoes of the absorbed company. It
follows that omission of any “successors or assigns” language in the employees’
noncompete agreements in this case does not prevent the L.L.C. from enforcing
the noncompete agreements.
{¶ 8} Based on the foregoing clarification, we note that any language in
the lead opinion in Acordia I stating that the L.L.C. was unable to enforce the
employees’ noncompete agreements as if it had stepped into the original
contracting company’s shoes or that the agreements were required to contain
“successors and assigns” language for the L.L.C. to have the power to enforce the
agreements was erroneous.
4
January Term, 2012
IV. The Reasonableness of the Noncompete Agreements
{¶ 9} While we now hold that the L.L.C. may enforce the noncompete
agreements as if it had stepped into each original contracting company’s shoes,
we agree with Justice Cupp’s assertion in his dissent in Acordia I that even though
the agreements transfer to the L.L.C. by operation of law, the transfer does not
“foreclose appropriate relief to the parties to the noncompete agreement under
traditional principles of law that regulate and govern noncompete agreements.”
Acordia I, 133 Ohio St. 3d 345, 2012-Ohio-2297, 978 N.E.2d 814, at ¶ 36 (Cupp,
J., dissenting). In other words, the employees still may challenge the continued
validity of the noncompete agreements based on whether the agreements are
reasonable and whether the numerous mergers in this case created additional
obligations or duties so that the agreements should not be enforced on their
original terms. Id. at ¶ 39 (Cupp, J. dissenting).
{¶ 10} We have held that “[a] covenant not to compete which imposes
unreasonable restrictions upon an employee will be enforced to the extent
necessary to protect an employer’s legitimate interests.” Raimonde v. Van Vlerah,
42 Ohio St. 2d 21, 325 N.E.2d 544 (1975), paragraph one of the syllabus.
Furthermore, “[a] covenant restraining an employee from competing with his
former employer upon termination of employment is reasonable if the restraint is
no greater than is required for the protection of the employer, does not impose
undue hardship on the employee, and is not injurious to the public.” Id.,
paragraph two of the syllabus. In determining the reasonableness of a
noncompete agreement, we have stated that courts must determine whether the
restraints and resultant hardships on the employee exceed what is reasonable to
protect the employer’s legitimate business interests. Rogers v. Runfola & Assoc.,
Inc., 57 Ohio St. 3d 5, 8, 565 N.E.2d 540 (1991).
{¶ 11} Therefore, while we hold today that the L.L.C. has the right to
enforce the employees’ noncompete agreements as if it had stepped into the shoes
5
SUPREME COURT OF OHIO
of the original contracting companies, we recognize that whether the noncompete
agreements are reasonable remains an open question. Because the lower courts
have not ruled on the reasonableness of the noncompete agreements, we will not
address that issue in this decision, and we now remand the case to the trial court
so that it may consider the issue.
V. Conclusion
{¶ 12} Recognizing that both the lead opinion in Acordia I and our
opinion today apply only in the limited context of employee noncompete
agreements, we reassert that employee noncompete agreements transfer by
operation of law to the surviving company after merger. The language in Acordia
I stating that the L.L.C. could not enforce the employees’ noncompete agreements
as if it had stepped into the original contracting company’s shoes or that the
agreements must contain “successors and assigns” language in order for the
L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may
enforce the noncompete agreements as if it had stepped into the shoes of the
original contracting companies, provided that the noncompete agreements are
reasonable under the circumstances of this case. We accordingly reverse the
judgment of the court of appeals and remand this cause to the trial court so that it
may determine the reasonableness of the noncompete agreements.
Judgment reversed
and cause remanded.
O’CONNOR, C.J., and LUNDBERG STRATTON, O’DONNELL, CUPP, and
MCGEE BROWN, JJ., concur.
PFEIFER, J., dissents.
__________________
O’DONNELL, J., concurring.
{¶ 13} I concur with the majority’s decision to reconsider this matter. A
noncompete agreement existing between an employee and a constituent entity is
6
January Term, 2012
an asset of that entity and, in a statutory merger, transfers by operation of law to
the surviving entity and is enforceable by the surviving entity as if it were a
signatory to the original agreement. As a result of a series of successive corporate
mergers, Acordia of Ohio, L.L.C., acquired the noncompete agreements at issue
in this case by operation of law, along with the ability to enforce them without
regard to assignment. The reasonableness of those agreements is not at issue
before this court.
{¶ 14} Accordingly, I concur in the judgment to reverse the judgment of
the court of appeals and to remand this matter for further proceedings.
A Noncompete Agreement Is an Asset that
Passes by Operation of Law
{¶ 15} R.C. 1701.82(A)(3) states, “The surviving or new entity possesses
all assets and property of every description, and every interest in the assets and
property, wherever located, and the rights, privileges, immunities, powers,
franchises, and authority * * * of each constituent entity, and * * * all obligations
belonging to or due to each constituent entity” without reversion or impairment.
R.C. 1705.39, which pertains to mergers between corporations or partnerships and
limited liability companies, confers the same vestments on the surviving entity.
{¶ 16} R.C. 1701.82(A)(1) states that a constituent entity ceases to exist
as a separate business in a merger; but that statute also provides several
exceptions to this general rule, including when “a conveyance, assignment,
transfer, deed, or other instrument or act is necessary to vest property or rights” in
a surviving entity. In those instances, “the existence of the constituent entities
and the authority of their respective officers, directors, general partners, or other
authorized representatives is continued notwithstanding the merger or
consolidation.” Id.; compare R.C. 1705.39(A)(1) (contains similar exceptions).
{¶ 17} R.C. 1701.82 and 1705.39, by their operation, vest all the assets
and obligations of a constituent entity in the surviving entity without reversion or
7
SUPREME COURT OF OHIO
impairment. When we examined the effect of R.C. 1701.82 in the context of a
stock purchase agreement entered into by a constituent entity, we held that a
properly executed contract is binding on the surviving entity “in a merger unless
the agreement explicitly sets forth that in the event of a merger, the obligations of
the constituent corporation cease to exist.” ASA Architects, Inc. v. Schlegel, 75
Ohio St. 3d 666, 665 N.E.2d 1083 (1996), syllabus. In that case, the agreement
made no provision for what would happen in the event of a merger, the surviving
entity in the merger assumed full responsibility for all obligations of the
constituent entity, and the parties did not enter into a new agreement following the
merger. Id. at 673. Based on those factors, we determined that the contractual
obligations of the constituent entity flowed, by operation of law, to the surviving
entity. Id. These same considerations are present here and compel a similar
conclusion.
{¶ 18} More than 180 years ago, we recognized that contracts are
subordinate to statutes, and the latter “may regulate them, prescribe their form,
their effect, and the mode of their discharge, and every contract is supposed to be
made with reference to those laws.” Smith v. Parsons, 1 Ohio 236, 238-239
(1823). And almost 100 years ago, we construed railroad-consolidation statutes
that contained language similar to that in R.C. 1701.82 and determined that in a
merger, “the consolidated company merely steps into the shoes of the constituent
companies.” Marfield v. Cincinnati, D. & T. Traction Co., 111 Ohio St. 139, 161-
164, 144 N.E. 689 (1924). The appellate court’s determination that the terms of
the agreements preclude Acordia of Ohio, L.L.C., from their enforcement thus
runs counter to our century-old precedent.
{¶ 19} We applied this analysis more recently, rejecting the argument that
a change in corporate structure invalidated noncompete agreements originally
entered into by the constituent entity. Rogers v. Runfola & Assoc., Inc., 57 Ohio
St.3d 5, 7, 565 N.E.2d 540 (1991). There, the employees signed noncompete
8
January Term, 2012
agreements while working for a sole proprietorship, which subsequently changed
its business structure to that of a corporation, during their tenure of employment.
Id. In determining that the noncompete agreements were valid and could be
enforced by the newly incorporated business, which had acquired all the assets
and liabilities of the sole proprietorship, we were guided in our analysis by the
fact that “[o]nly the legal structure of the business changed, not the business
itself,” id., and that the change in corporate structure did not place additional
burdens on the “duties or daily operations” of the employees. Id. at 9. This is the
same circumstance that we confront in this case.
{¶ 20} Here, Acordia of Ohio, L.L.C., acquired the noncompete
agreements from Wells Fargo, which in turn had acquired them through a series
of corporate mergers. Those mergers, which began with Frederick Rauh &
Company, did not affect the nature of the business—the sale of insurance
securities; thus, the mergers changed only the corporate structure of the business
operation. Similarly, there is no evidence or claim in this record that additional
employment duties or obligations resulted from these mergers. Thus, Rogers
supports the conclusion that Acordia of Ohio, L.L.C., is entitled to enforce the
agreements it acquired in the merger that passed to it by operation of law.
{¶ 21} Other courts construing similar statutes have reached this same
result. For example, in Corporate Express Office Prods., Inc. v. Phillips, the
Supreme Court of Florida held that a surviving entity in a “merger assumes the
right to enforce a noncompete agreement entered into with an employee of the
merged corporation by operation of law, and no assignment is necessary * * *
because in a merger, the two corporations in essence unite into a single corporate
existence.” 847 So. 2d 406, 414 (Fla.2003). And in Aon Consulting, Inc. v.
Midlands Fin. Benefits, Inc., the Supreme Court of Nebraska reached the same
result when it construed a Maryland statute, concluding that a surviving entity
could enforce a noncompete agreement acquired in a merger because it was an
9
SUPREME COURT OF OHIO
asset that passed by operation of law, and no assignment was necessary. 275 Neb.
642, 650-652, 748 N.W.2d 626 (Neb.2008). See also Natl. Instrument, L.L.C. v.
Braithwaite, Md.Cir.Ct. No. 24-C-06-004840, 2006 WL 2405831, *3 (June 5,
2006), (identifying cases in which courts construed merger statutes that vested in
surviving entities the assets of a constituent entity without further act or deed, and
which held that surviving entities could enforce noncompete agreements because
they were business assets that passed by operation of law and not by assignment).
Conclusion
{¶ 22} Pursuant to R.C. 1701.82 and 1705.39, statutes governing mergers
in Ohio, assets pass to a surviving entity by operation of law. It has been
understood for more than a century that contracts are subordinate to statutes and
that the latter also determine the effect of merger contracts and their mode of
discharge. The agreements here automatically vested in Acordia of Ohio, L.L.C.,
without reversion or impairment, because they are assets that passed by operation
of law, and Acordia of Ohio, L.L.C., can enforce the noncompete agreements as if
it were a signatory to them. Because the surviving entity in a merger acquires the
right to enforce a noncompete agreement entered into by a constituent entity by
operation of law, neither assignment nor consent is necessary to effectuate that
result.
{¶ 23} In my view, it is not necessary to direct the trial court to determine
the reasonableness of the noncompete agreements; although a trial court has the
obligation to review a noncompete agreement for reasonableness, that issue has
not been presented as a proposition of law, nor is it otherwise briefed or at issue
before the court. Accordingly, I concur in the judgment to reverse the judgment
of the court of appeals and to remand this matter for further proceedings
consistent with this opinion.
LUNDBERG STRATTON, J., concurs in the foregoing opinion.
__________________
10
January Term, 2012
PFEIFER, J., dissenting.
{¶ 24} This case has been properly decided three separate times. The trial
court had it right, the court of appeals had it right, and this court had it right the
first time. I did not vote to accept jurisdiction, did not vote to reconsider the case,
and remain convinced that this court should not have accepted jurisdiction or
granted reconsideration. Even though I believe that this case is being incorrectly
decided, the good news is that on remand, the lower courts are likely to reach the
same sensible conclusions that they reached when they first encountered this case.
{¶ 25} The common law and judicial policy have long disfavored
noncompete agreements. Starting with Dyer’s Case, Y.B. 2 Henry 5, fol. 5, pl. 26
(C.P.1414), noncompete agreements were prohibited. Since the early 18th
century, however, many jurisdictions have allowed noncompete agreements to be
enforced when they are reasonable. Mitchel v. Reynolds, 1 P.Wms. 181, 24
Eng.Rep. 347 (Q.B.1711); Harlan M. Blake, Employee Agreements Not to
Compete, 73 Harv.L.Rev. 625, 630 (1960). The Supreme Court of the United
States stated:
It is a well-settled rule of law that an agreement in general
restraint of trade is illegal and void; but an agreement which
operates merely in partial restraint of trade is good, provided it be
not unreasonable and there be a consideration to support it. In
order that it may not be unreasonable, the restraint imposed must
not be larger than is required for the necessary protection of the
party with whom the contract is made.
Oregon Steam Navigation Co. v. Winsor, 87 U.S. 64, 66-67, 20 Wall. 64, 22 L. Ed.
315 (1873).
11
SUPREME COURT OF OHIO
{¶ 26} Noncompete agreements remain in disfavor and tend to be strictly
construed against the employer. Columbia Ribbon & Carbon Mfg. Co., Inc. v. A–
1–A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 369 N.E.2d 4 (1977); Grant
v. Carotek, Inc., 737 F.2d 410, 411-412 (4th Cir.1984) (applying Virginia law).
“In Minnesota, employment noncompete agreements ‘are looked upon with
disfavor, cautiously considered, and carefully scrutinized.’ ” Kallok v. Medtronic,
Inc., 573 N.W.2d 356, 361 (Minn.1998), quoting Bennett v. Storz Broadcasting,
270 Minn. 525, 533, 134 N.W.2d 892 (1965). In certain respects, noncompete
agreements are similar to indentured servitude. See Blake at 632 (common law
disfavor of noncompete agreements was aimed at preventing employers from
violating the underlying precepts of the apprenticeship system). In most respects,
noncompete agreements are inimical to the free-enterprise system.
{¶ 27} The policy considerations that affect whether a particular
noncompete agreement is reasonable and enforceable are explained by Michael J.
Garrison and John T. Wendt:
As a matter of public policy, courts have traditionally
looked upon agreements not to compete with disfavor. Such
restrictions on employees were prohibited under the early English
common law; however, over time, the common law prohibition
against noncompete agreements loosened. The courts recognized
that such agreements can be legitimate if they serve business
interests other than the restriction of free trade. Thus, agreements
not to compete ancillary to an employment relationship have been
permitted, subject to a reasonableness requirement.
The common law reasonableness approach is an attempt to
balance the conflicting interests of employers and employees as
well as the societal interests in open and fair competition.
12
January Term, 2012
Employers have a legitimate interest in preventing unfair
competition through the misappropriation of business assets by
former employees. On the other hand, employees have a
countervailing interest in their own mobility and marketability.
Society has interests in maintaining free and fair competition and
in fostering a marketplace environment that encourages new
ventures and innovation. There is a complementary public interest
in preventing employers from using their superior bargaining
position to unduly restrict labor markets. Given these competing
interests, the common law approach allows employee noncompete
agreements but imposes significant limits on restrictive covenants
to assure that they are not overly burdensome to employees and
harmful to the marketplace.
Under the common law approach, the employer must
demonstrate a legitimate commercial reason for any agreement not
to compete to ensure that the agreement is not a naked attempt to
restrict free competition. Merely preventing competition from a
former employee is not a sufficient justification for a noncompete
agreement, even if the employee received training or acquired
knowledge of a particular trade during his employment.
Employees are entitled to use the general skills and knowledge
acquired during their employment in competition with their former
employer. An employer must demonstrate “special circumstances”
that make the agreement necessary to prevent some form of unfair
competition.
Traditionally, the courts recognized two primary interests as
legitimate justifications for a noncompete agreement: the
13
SUPREME COURT OF OHIO
employer’s interests in protecting the goodwill of the business and
in protecting its trade secrets.
(Footnotes omitted.) Garrison & Wendt, The Evolving Law of Employee
Noncompete Agreements: Recent Trends and an Alternative Policy Approach, 45
Am.Bus.L.J. 107, 114-116 (2008).
{¶ 28} In Ohio,
“[a] covenant not to compete which imposes reasonable
restrictions upon an employee will be enforced to the extent
necessary to protect an employer's legitimate interests. * * * [Such
a] covenant is reasonable if the restraint is no greater than is
required for the protection of the employer, does not impose undue
hardship on the employee, and is not injurious to the public.”
Rogers v. Runfola & Assoc., Inc., 57 Ohio St. 3d 5, 8, 565 N.E.2d 540 (1991),
quoting Raimonde v. Van Vlerah, 42 Ohio St. 2d 21, 325 N.E.2d 544, paragraphs
one and two of the syllabus.
{¶ 29} In this case, the noncompete agreement is an undue infringement
on free enterprise. The agreement unfairly protects the employer from
competition from its former employees. The employer’s trade secrets and
customer list are already legitimately protected; the noncompete agreement does
not protect them further. The principal purposes undergirding the enforcement of
a noncompete agreement, both generally and in Ohio, are not applicable. Under
the circumstances of this case, I conclude that the noncompete agreement is
unreasonable and, therefore, that it should not be enforced. I would so conclude
now, based on the record before us, without remanding the case.
14
January Term, 2012
{¶ 30} In Dyer’s Case, Y.B. 2 Henry 5, fol. 5, pl. 26, the court concluded
that the noncompete agreement “is void because the condition is against the
common law, and by God, if the plaintiff were present he should rot in gaeol till
he paid a fine to the King.” That was justice.
__________________
Katz, Teller, Brant & Hild, James F. McCarthy III, and Laura
Hinegardner, for appellant.
Denlinger, Rosenthal & Greenberg, L.P.A., and Mark E. Lutz, for
appellees.
Taft Stettinius & Hollister, L.L.P., W. Stuart Dornette, John B.
Nalbandian, and Ryan M. Bednarczuk, urging reconsideration for amici curiae
Ohio Chamber of Commerce and Ohio Chemistry Technology Council.
Beckman Weil Shepardson, L.L.C., and Peter L. Cassady, urging
reconsideration for amici curiae USI Holdings Corporation and USI Midwest, Inc.
Keating Muething & Klekamp and Robert E. Coletti, urging
reconsideration for amicus curiae Cintas Corporation.
Michelle Lafferty, urging reconsideration for amicus curiae Hylant Group,
Inc.
Manley Burke, L.P.A., and Timothy Burke, urging reconsideration for
amici curiae Sean K. Mangan and John A. Barrett Jr.
______________________
15