Georgia Bar Journal
GSB Vol. 11, No. 2 - #2.
New Growth Industry: Racing to Georgia Courts Over Non-Competition Agreements
Georgia State Bar JournalVol. 11, No. 2, October 2005"New Growth Industry: Racing to Georgia Courts Over Non-Competition Agreements"By Donald W. Benson and Stephanie M. BauerEmployers and employees with multi-state noncompete contracts may want to lace up their best pair of running shoes and get ready for a race. On April 1, 2005, in Palmer & Cay, Inc. v. Marsh & McLennan Companies, Inc.,1 the Eleventh Circuit Court of Appeals revised a ruling of the United States District Court, Southern District of Georgia, that an employer's noncompete agreement was unenforceable only in Georgia. The employee initiated the case in Georgia in order to take advantage of the pro-employee Georgia law regarding non-compete and non-solicitation covenants (NCAs). The Eleventh Circuit extended the unenforceability to any other lawsuits regarding the NCA between the same parties, even if such other lawsuits are filed outside of Georgia. Most importantly, this ruling may provide an avenue of escape from an otherwise valid NCA to employees who can relocate to Georgia and are willing to preemptively bring a declaratory judgment action in Georgia. Because so many of these cases would be removable to federal court on the basis of diversity of citizenship, the Palmer & Cay decision is attracting significant attention nationwide by confirming that federal courts sitting in diversity in Georgia will issue declaratory judgments in NCA disputes that are as broad in scope as those rendered by Georgia state courts. Although the Palmer & Cay case continues as the Defendant filed a Notice of Petition for Writ of Certiorari to the United States Supreme Court,2 the debate it is creating among commentators is likely to focus more and more attention on the importance of winning the race to the courthouse.
Marsh & McLennan Companies, Inc. (MMC) bought the brokerage that employed James Meathe in 1997. As part of the sale and transition, Meathe sold his shares in the acquired brokerage and accepted employment with MMC, ultimately becoming managing director and head of the Midwest Region of MMC and (according to MMC) relocating to Illinois.3 In 1997, in connection with the sale of his interest in MMC, Meathe executed a stock sales agreement containing an NCA (the 1997 Agreement). In 2002, in order to be able to cash in MMC stock options, Meathe signed another NCA that was triggered upon the termination of his employment with MMC (the 2002 Agreement). In February of 2003, Meathe left MMC, relocated to Georgia, and joined Palmer & Cay in allegedly direct competition with MMC in both Georgia and his former Midwest territory. The 1997 Agreement included a provision preventing Meathe from
soliciting or accepting unsolicited business for a specified time from any clients or prospects of MMC who were solicited by Meathe while with the company: (b) Each Seller who is not a director of the Company as of the date hereof hereby agrees that during the Non-Solicit Period, such Seller will not (x) solicit, accept or service business that competes with businesses conducted by the Company, Buyer or any of their Subsidiaries (i) from any clients or prospects of the Company or its affiliates who were solicited directly by Seller or where Seller supervised, directly or indirectly, in whole or in part, the solicitation activities related to such clients or prospects or (ii) from any former client who was such within two (2) years prior to such termination and who was solicited directly by Seller or where Seller supervised, directly or indirectly, in whole or in part, the solicitation activities related to such former client; or (y) solicit any employee of the Company or its affiliates to terminate his employment.4 The 2002 Agreement included a similar prohibition against accepting unsolicited business from clients of the company who were directly or indirectly solicited or serviced by employee within two years prior to the termination of employment. In it, Meathe agreed that he would not: (a) solicit or accept business of the type offered by the Company during my term of employment with the Company, or perform or supervise the performance of any services related to such type of business, from or for (i) clients or prospects of the Company or its affiliates who were solicited or serviced directly by me or where I supervised, directly or
indirectly, in whole or in part, the solicitation or servicing activities related to such clients or prospects; or (ii) any former client of the Company or its affiliates who was such within two years prior to my termination of employment and who was solicited or serviced directly by me or where I supervised, directly or indirectly, in whole or in part, the solicitation or servicing activities related to such former clients; . . . 5 To take advantage of Georgia's anti-NCA precedent, Meathe and his new employer, Palmer & Cay, filed a declaratory judgment action in the federal district court in Savannah, Georgia, seeking an order that both the 1997 stock sale NCA and his 2002 employmentrelated NCA were unenforceable. MMC counterclaimed for enforcement of both agreements. Although both the 1997 and 2002 Agreements contained forum selection clauses, the district court found that the parties had waived these contractual rights by litigating the merits of the claims, counterclaims, and defenses without challenging venue: As a preliminary matter, the parties have waived any "New York," contractually forumselected, venue rights they might hold. Plaintiffs did so by filing its case here; MMC did so by Answering, Counterclaiming and litigating the merits without challenging venue.6
Unenforceability of the 2002 Agreement
Georgia is one of the most difficult states for an employer to obtain enforcement of an employment- related NCA. Georgia will not "blue pencil" an overly broad, employment-related NCA to enforce it to the extent reasonable.7 The 2002 Agreement did not arise contemporaneously with Meathe's sale of stock (and was thereby employment-related), and the NCA was in essence a non-solicitation of customers covenant without a geographic...