Littler Mendelson offers advice to both employers and employees in the wake of a recent federal court decision rewarding swift action and giving Georgia law precedent in multi-state non-compete matters.
Atlanta, GA (May 18, 2005) -- Due to a recent Georgia federal court opinion in Palmer & Cay, Inc. v. Marsh & McLennan, workers looking for a way to escape the confines of a valid non-compete agreement may be able to find safe haven in a neighboring state, according to Littler Mendelson, the nation's largest employment and labor law firm.
In Palmer, a Midwestern employee of Marsh relocated to Georgia and joined Palmer, a direct competitor of Marsh, both in Georgia and the Midwest territories. Before either Palmer or the employee could be sued for breach of contract, the two preemptively filed a declaratory judgment action in a local Georgia federal court, outlining the parties' contractual rights. As a matter of policy, Georgia is one of the most difficult states to enforce an employment-related non-compete agreement (NCA). The Palmer ruling establishes that rushing to court in Georgia can assure that Georgia's substantive restrictions against NCAs will likely make a NCA unenforceable, even if the state where it was originally signed and drafted would reach a different conclusion.
"What the Eleventh Circuit did is revise the trial court's ruling that said an employer's non-compete agreement was only unenforceable in Georgia," said Donald W. Benson, a shareholder in the Atlanta office of Littler Mendelson. "The employee initiated the case in Georgia in order to use the pro-employee Georgia law. What is so novel about this decision is that it extends the unenforceability of a NCA to any other lawsuit between the same parties, even if other lawsuits are filed outside of Georgia." Benson suggests that this ruling may provide employees with an avenue of escape from an otherwise valid non-compete and that employees may soon ask other states, such as California and Texas, with anti-non-compete policies to extend their declaratory judgment protections in the same way.
While the full impact of the case is difficult to predict, Benson has advice for both employers seeking to enforce their agreements and those looking to states like Georgia to invalidate them:
- Employers in close proximity of states hostile to NCAs, or whose workers can perform their duties remotely, need to assess their vulnerability to a Palmer & Cay-like pre-emptive strike. Employers with operations in anti-NCA jurisdictions should consider the likelihood of such relocations and draft NCA provisions with an eye toward enforceability in neighboring states, not just the current location of the employee.
- Most NCAs include provisions that select the forum and choice of law to adjudicate disputes, which basically decides where and how disputes over the contract are heard. Employers should carefully draft and examine their employment contracts to make sure they've selected a state with strong NCA enforcement predicate and policies.
- Where a case is heard can decide its outcome. Employers should take care not to unwittingly waive their venue and forum rights, and upper hand, by rushing to a court in a state not stipulated in the contract.
- Litigation strategy must recognize that it is not the first court that enters a TRO or preliminary injunction, but the first to enter a final judgment that will be followed in other jurisdictions. Consequently, employers may be forced to aggressively fight any Georgia litigation until a final judgment can be obtained elsewhere.
- Both employee and employer must balance the merits of choosing a forum where jurisdiction is easily obtained and where docket pressures allow for a quick hearing to be set against the importance of one applying favorable law.
- Companies seeking to help a new employee avoid the enforcement of an NCA might pursue a declaratory judgment voiding the NCA by rushing to a state or federal court applying favorable anti-NCA case law.
As parties continue to assess the import of the Palmer & Cay decision, one message is clear: Employers will have to be more strategic about how they draft and defend their employment contracts if they want to keep once-valued employees and information from falling into the hands of their competition.
Donald W. Benson is a shareholder in Littler Mendelson's Atlanta office and a member of the Unfair Competition and Trade Secrets Practice Group.
About Littler Mendelson
With more than 400 attorneys and 28 offices in major metropolitan areas nationwide, Littler Mendelson is the largest law firm in the United States devoted exclusively to representing management in employment, employee benefits and labor law matters. The firm's client base ranges from Fortune 500 companies to small-business owners. Established in 1942, the firm has litigated, mediated and negotiated some of the most influential cases and labor contracts in the nation's history. Its affiliated global migration practice, Littler Mendelson Bacon & Dear, provides support to major companies in moving employees around the world. For more information, visit www.littler.com.