Unreasonable State Restrictions on Business Transactions; The Enforceability of Non-Compete Agreements Post-Merger or Acquisition

• Author: William Vorys
• Position: Capital University Law School, J.D. Candidate, May 2015; Elon University, B.A. in Political Science, Minor in History, May 2009. I would like to thank my family and friends for their support and encouragement through the writing process, and Professor Fenner Stewart for his guidance in completing this Article.
• Pages: 721-750

UNREASONABLE STATE RESTRICTIONS ON BUSINESS TRANSACTIONS: THE ENFORCEABILITY OF NON-COMPETE AGREEMENTS POST-MERGER OR ACQUISITION WILLIAM VORYS * I. I NTRODUCTION Within the last decade, the effect of a merger or acquisition on an employee non-compete agreement 1 has become a hot topic in state courts as well as state legislatures. 2 The central question within the growing controversy is whether, after a merger or acquisition, such agreements are and should be enforceable by the successor employer. In the contemporary business world where mergers and acquisitions are quite common, the ability of a new entity to enforce agreements entered into between an employee and the original employer is of ever-increasing relevance. 3 Split decisions in state employment litigation, as well as the push in many legislative bodies to introduce rules restricting the use of such agreements after a merger or acquisition, highlight the growing tension surrounding non-compete enforcement. 4 Copyright © 2015, William Vorys. *Capital University Law School, J.D. Candidate, May 2015; Elon University, B.A. in Political Science, Minor in History, May 2009. I would like to thank my family and friends for their support and encouragement through the writing process, and Professor Fenner Stewart for his guidance in completing this Article. 1 A non-competition agreement is defined by Black’s Law Dictionary as “a promise, [usually] in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.” BLACK’S LAW DICTIONARY 420 (9th ed. 2009). This Article focuses on a non-competition agreement in the context of an employment contract; it is important to distinguish, from the outset, this context from a sale-of-business scenario, as state law treats the latter transaction differently. 2 James Frazier III, Employee Non-Compete Agreements in Mergers and Acquisitions, NAT’L L. REV. (Aug. 12, 2013), http://www.natlawreview.com/article/employee-non-compete-agreements-mergers-and-acquisitions. 3 William M. Corrigan, Jr. & Michael B. Kass, Non-Compete Agreements and Unfair Competition—An Updated Overview , 62 J. MO. B. 81, 87 (2006). 4 See Frazier III, supra note 2. 722 CAPITAL UNIVERSITY LAW REVIEW [43:721 An introductory example, which will be discussed in more detail later in this Article, 5 is the Ohio Supreme Court decision in Acordia of Ohio v. Fishel II . 6 Initially, in Acordia of Ohio v. Fishel I , 7 the Ohio Supreme Court concluded that a surviving company (after a merger or acquisition) does not completely “step[] into the shoes” of the original employer and therefore cannot enforce a non-compete agreement entered into by its employee and the former employer (merged or dissolved) unless the agreement includes “successors and assigns” 8 language. 9 Upon reconsideration of that case, the same court reversed its decision and concluded that a surviving company does “step[] into the shoes” of the original employer, and can enforce such agreements even absent such successors and assigns language. 10 Nevertheless, Justice Pfeifer issued a dissenting opinion after reconsideration, in which he argued against enforcement and cited the growing policy across the states of generally disfavoring non-compete agreements. 11 Justice Pfeifer’s policy argument is not completely unfounded. State lawmakers’ increased attention to non-compete agreements and the desire in many legislative bodies to add restrictions on such arrangements highlight a growing effort across the country to expand employee freedom, especially after witnessing the tough economic times of the great recession. 12 However, this Article will demonstrate that little evidence exists to conclusively establish the economic benefits of increased regulation. 13 In fact, evidence may support policies that allow an entity to fully protect itself during a merger or acquisition; this would undoubtedly include preserving the value of the coveted non-compete asset during business transactions. 14 5 See infra Part III.A. 6 133 Ohio St.3d 356, 2012-Ohio-4648, 978 N.E.2d 823. 7 133 Ohio St.3d 345, 2012-Ohio-2297, 978 N.E.2d 814. 8 Acordia II at ¶¶ 6–10. 9 Acordia I at ¶¶ 9–13. To be clear, the absence of successors and assigns language meant the agreements did not explicitly state they could be assigned or would carry over to successors. Id. Therefore, the court concluded the named parties only intended the agreement to operate between themselves, and not any future entity. Id. 10 Acordia II at ¶¶ 6–10. 11 Id. at ¶¶ 20–30 (Pfeifer, J., dissenting). 12 Marshall Tanick, Noncompete Contracts: Fair of Abusive? , STARTRIBUNE, April 22, 2013, at D6. 13 See infra Part IV. 14 See infra Part V. 2015] ENFORCEABILITY OF NON-COMPETE AGREEMENTS 723 This Comment will first provide a general overview of the enforceability of non-compete agreements across the fifty states, as such disputes are generally settled by state law. 15 Subsequently, it will focus on current trends across the United States with respect to non-compete enforcement post-merger or acquisition. 16 Beyond the aforementioned controversy in Ohio, other states such as Kentucky, 17 Florida, 18 Delaware, 19 and Nevada 20 have litigated this issue. While most state courts have generally held that such agreements are enforceable even absent specific contractual language, the variations between these state decisions and dissenting opinions issued within such cases demonstrate that the trend may be shifting toward the alternative. 21 This Comment will then analyze the various policy arguments opponents of non-compete agreements make in advocating for increased regulation. 22 It will subsequently discuss the other side of the debate, explaining the policy implications of adding restrictions and obstacles to employers as they attempt to expand and grow, especially in the context of the current economic climate. 23 Finally, this Comment will briefly discuss the most important considerations an employer must keep in mind when 15 See infra Part II. This Article focuses on Ohio law with respect to enforceability as most states have laws mirroring those in Ohio and it is the state in which the author resides. See infra note 29 and accompanying text. Moreover, a complete analysis of all aspects of non-compete agreement enforceability is well beyond the scope of this article. The analysis included in this Comment will focus only on the most important and fundamental principles surrounding the enforceability of such agreements. 16 See infra Part III. 17 See infra Part III.B. 18 See infra Part III.C. 19 See infra Part III.D. 20 See infra Part III.E. 21 See infra Part III. Some states, including Florida, have not given an affirmative answer as to the enforceability of non-compete agreements post-merger or acquisition; in these states, the “issue remains unsettled.” See Margaret DiBianca, Enforceability of Noncompete Agreements Post-Merger , LEXISNEXIS LEGAL NEWSROOM: LAB. & EMP. L. BLOG (Oct. 10, 2012, 10:12 AM), http://www.lexisnexis.com/legalnewsroom/labor-employment/b/labor-employment-top-blogs/archive/2012/10/10/enforceability-of-noncompete-agreements-post-merger.aspx. 22 See infra Part IV. 23 See infra Part V. 724 CAPITAL UNIVERSITY LAW REVIEW [43:721 drafting its employment contracts, focusing on the anticipation of a potential merger or acquisition. 24 In sum, this Article will demonstrate that, based on the weight of current state law, the surviving entity of a merger or acquisition should be entitled (automatically) to enforce the non-compete agreements of the absorbed entity even absent “successor or assigns” language within such agreements. 25 Moreover, this Article will ultimately explain why public policy supports the protection of corporate rights throughout any business expansion; employers should not be required to take additional steps prior to a merger or acquisition to ensure enforceability, absent an express state statutory provision to the contrary. 26 II. T HE E NFORCEABILITY OF N ON -C OMPETE A GREEMENTS . State law governs the enforceability of non-compete agreements. 27 Generally, state courts agree that enforceability turns on the “reasonableness” of the agreement. 28 Therefore, a discussion of the nuances behind the “reasonableness” model, using Ohio as an example, is useful to gain a better understanding of how state courts handle non-compete disputes 29 24 See infra Part VI. There are undoubtedly a plethora of considerations employers must keep in mind when drafting non-compete agreements, most of which are outside the scope of this article. See generally Kyle B. Sill, Drafting Effective Noncompete Clauses and Other Restrictive Covenants: Considerations Across the United States , 14 FLA. COASTAL L. REV. 365 (2013). This Comment will focus only on those considerations essential to avoiding legal issues after a merger or acquisition. 25 See infra Part VII. 26 See id. 27 Wolters Kluwer Law & Business, HUMAN RES. COMPLIANCE LIBRARY ¶ 86,630 (CCH, Inc., 2014), available at 2013 WL 6716130. As such, the legality of these agreements varies slightly from state to state. 28 Michael J. Garrison & John T. Wendt, The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach , 45 AM. BUS. L.J. 107, 110– 11 (2008) (explaining that while the traditional approach has been to review non-compete agreements based on a common law reasonableness test, the test has evolved and has been given a broader meaning in favor of the employer). 29 Most U.S. states implement a very similar “reasonableness” standard to that of Ohio, balancing the necessary protection of the employer with the hardship on the employee. See, e.g. , Robert S. Weiss & Assoc., Inc. v. Wiederlight, 546 A.2d 216, 219 (Conn. 1988); St. Clair Med., P.C. v. Borgiel, 715 N.W.2d 914, 918–19 (Mich. Ct. App. 2006); Healthcare Servs. of the Ozarks, Inc. v....