Corporate Law Blog

Employee Non-Compete Agreements in Mergers and Acquisitions

Businesses routinely execute non-compete agreements with their employees in order to protect legitimate business interests. These agreements are not just an important interplay in the employer/employee context, but also factor into many other business deals, such as partnership, franchise, or consulting agreements. Recently, the effect of a merger on a non-compete agreement has become a hot topic.

In June, the Connecticut legislature passed a bill that placed restrictions on the use of non-compete agreements subsequent to mergers. The law provided that if an employer mergers with, or is acquired by, another employer and then the surviving employer presents an employee with a new, renewed, or extended non-compete agreement as a condition of continued employment, the employer must provide the employee with a written copy of the non-compete agreement and a "reasonable period of time" of at least seven calendar days to consider the agreement. The employee would be able to waive this right if he signed a waiver before entering into the agreement. The bill required the waiver to be in a separate document from the agreement itself and explain the forfeiture of rights. If an employer failed to take these steps, any non-compete entered into, renewed, or extended on or after October 1, 2013 would be void.

In July, the Governor vetoed the legislation. The veto was supported by many corporate attorneys who believed the proposed law destroyed the validity of existing and future non-competes. But, Connecticut is not alone in their effort to restrict these agreements; New Jersey, Minnesota, and Massachusetts have all proposed similar bills in recent legislative sessions. This restrictive trend is largely in response to dwindling job markets. During a time of high unemployment rates, many believe that employees should not be further hampered in their efforts to find employment.

Closer to home, the Ohio Supreme Court considered the related issue of the assignability of existing non-compete agreements in 2012. In Accordia of Ohio v. Fishel ("Accordia I")[1], the question before the Court was whether a non-compete agreement applied only to the original contracting employer or whether, post-merger, the surviving company could enforce it. The Court concluded that a surviving company does not step into the shoes of an original employer and therefore cannot enforce a non-compete agreement, unless the agreement includes specific language extending the agreement to the employer's "successors and assigns."

Just a few months after deciding Accordia I, the Court reconsidered the case, conceding that the ruling was based on an incomplete reading of precedent. In Accordia II[2], the Court reached the opposite conclusion - that a surviving corporation can enforce non-compete agreements as if it was the original contracting employer. The omission of "successors or assigns" language in an agreement is not a barrier to enforcement.

The case law in Kentucky echoes the holding of Accordia II. In Managed Health Care v. Kethan[3], the United States Court of Appeals for the 6th Circuit reversed the trial court's decision that a non-compete clause was unassignable. In its decision, the Court of Appeals noted the general theory that a contract is assignable and emphasized the favorable role of non-competition clauses in businesses.

While legislative activity in other states indicates that non-compete agreements are becoming less popular, Ohio and Kentucky still recognize (for now) the enforceability of post-merger non-compete agreements.

If you would like to know more about non-compete agreements or you are considering a company merger, contact the corporate attorneys at McBrayer for experienced advice.

James H. Frazier, III is the Managing Member of the firm, a position he has held for over 18 years. Mr. Frazier's practice focuses on real estate, bankruptcy, mergers and acquisitions and general corporate practice with special emphasis on mineral and energy law. He can be reached at jfrazier@mcbrayerfirm.com or (859) 231-8780, ext. 1303.

[1] Accordia of Ohio v. Fishel, 133 Ohio St. 3d 345, 2012-Ohio-2297.

[2] Accordia of Ohio v. Fishel, 133 Ohio St.3d 356, 2012-Ohio-4648.

[3] Managed Health Care v. Kethan, 209 F.3d 923 (6th Cir. 2000).