Earlier this week, the United Parcel Service, Inc. (“UPS”) filed a lawsuit in the Northern District of Georgia, Atlanta Division, against several unidentified UPS pilots, who are referred to in the complaint as “John Does 1-5.” The lawsuit alleges that “[i]n August 2017, certain UPS employees developed strategic plans regarding the Company’s aircraft. These plans were developed for, among other things, reporting to senior executives of the Company in late August 2017 so that they could make certain strategic business and financial decisions. Portions of these plans were included in a PowerPoint presentation created by this limited group of UPS employees (the “PowerPoint”). In preparation for the meeting, a very limited number of UPS employees had access to the PowerPoint for the purpose of its drafting and editing.” (Complaint, ¶ 7.) The lawsuit goes on to allege that the PowerPoint contained highly confidential and trade secret information. (Id. at ¶¶ 9-10.) Continue Reading Big Brown v. PowerPoint Pilferers in Trade Secret Spat
In Spring 2011, the Georgia legislature passed a new restrictive covenant statute, which, for the first time, allowed Georgia courts in reviewing non-competition agreements between employer and employee to blue-pencil or “modify a covenant that is otherwise void and unenforceable so long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” O.C.G.A. § 13-8-53(d). Since the new Georgia statute only applies to agreements executed after its enactment, there has been limited litigation concerning the meaning and scope of this provision.
Most of the litigation between 2011 and the present has involved requests by a party that the Court strike an offending provision in a non-compete agreement. Recently, the Northern District of Georgia was given the opportunity to determine whether Georgia’s blue-pencil provision also gives Georgia courts the authority to modify an unenforceable non-compete provision. In LifeBrite Labs., LLC v. Cooksey, No. 1:15-CV-4309-TWT, 2016 WL 7840217, at *1 (N.D. Ga. Dec. 9, 2016), the former employer, LifeBrite, sued its former employee, Cooksey, after she began working for a competitor company. Cooksey’s non-compete provision provided as follows:
7.2. Non-Competition. For as long as she is employed and for a period of one (1) year thereafter, employee shall not participate, directly or indirectly, as an owner, employee, consultant, office management position, in any proprietorship, corporation, partnership, limited liability company or other entity, engaged in any laboratory testing that is being sold by employee on behalf of company.
The Northern District of Georgia found that this provision was overbroad and unenforceable as it did not contain any geographic limitation. Consequently, the Court considered whether or not Georgia’s blue-pencil rules allowed it to modify the non-compete provision to insert a reasonable geographic limitation. In reasoning through the analysis, the Court referred to pre-2011 cases in which Georgia courts interpreted a similar non-compete provision in the context of sale of business agreements. In those cases, Georgia courts held that the blue-pencil marks but it does not write. Thus, the NDGA declined to enforce Cooksey’s non-compete and held that in applying Georgia’s blue-pencil statute, “courts may not completely reform and rewrite contracts by supplying new and material terms from whole cloth.”
The NDGA also noted that Georgia’s employers are “sophisticated entities” which “have the ability to research the law in order to write enforceable contracts; courts should not have to remake their contracts in order to correct their mistakes.” This case is simply further caution to Georgia employers to review their non-competition agreements for overbreadth, vagueness, and the absence of essential limiting terms. As always, the attorneys at Seyfarth Shaw LLP are available to assist in these endeavors.
The LifeBrite Laboratories, LLC v. Cooksey case was dismissed with prejudice on January 25, 2017.
The Computer Fraud and Abuse Act (“CFAA”) gives rise to an actionable claim if someone “knowingly access[es] a computer without authorization or exceed[s] authorized access.” 18 U.S.C. § 1030(a)(1). The term “exceeds authorized access” is defined as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” 18 U.S.C. § 1030(e)(6). In recent years, plaintiffs have attempted to argue that someone “exceeds authorized access” under the CFAA when they access work related information on their employer issued computer for non-work related reasons. In Georgia, courts appear to be divided on whether such an allegation gives rise to a valid CFAA claim.
For example, in United States v. Rodriguez, 628 F.3d 1258, 1263 (11th Cir. 2010), the Eleventh Circuit adopted a broad view of the definition “exceeds authorized access,” holding that when an employer has a policy limiting an employee’s computer access to that done for business purposes, an employee who accesses that information for non-business purposes exceeds authorized access. In Rodriguez, the defendant worked for the Social Security Administration, which had a policy that the use of its databases to obtain personal information was authorized only when done for business reasons. 628 F.3d at 1263. The defendant conceded that his access of personal information at issue was not done in furtherance of his duties as a teleservice representative. Id. As such, the court ruled that the defendant had exceeding his authorized access under the CFAA.
The following year, the Northern District of Georgia applied Rodriguez’s broad interpretation of “exceeding authorized access,” holding that an employee’s e-mailing of confidential employer information to herself without a business purpose exceeded any authorized computer access and, therefore, violated the CFAA. See Amedisys Holding, LLC v. Interim Healthcare of Atlanta, Inc., 793 F.Supp.2d 1302, 1315 (N.D. Ga. 2011) (“[T]here is no question that [an employee] exceeded any authority she had when she sent [documents] to herself after accepting a position at [another company] for use in competing with [the plaintiff].”)
Since Rodriguez and Amedisys, however, several district courts in the Eleventh Circuit, including in at least one in Georgia, have applied a more narrow definition of “exceeds authorized access,” concluding that if a defendant has full administrative access to a computer, a claim for unauthorized access cannot be stated under the CFAA. See, e.g., Power Equip. Maint., Inc. v. AIRCO Power Servs., Inc., 953 F.Supp.2d 1290, 1297 (S.D. Ga. 2013); Enhanced Recovery Co. LLC v. Frady, No. 3:13-cv-1262-J-34JBT, at *26 n.7 (M.D. Fla. Mar. 31, 2015).
The Power Equip. decision is particularly instructive on the issue, explaining that:
the CFAA focuses on an individual’s unauthorized access of information rather than how a defendant used the accessed data. More specifically, the proper inquiry is whether an employer had, at the time, both authorized the employee to access a computer and authorized that employee to access specific information on that computer. 953 F.Supp.2d 1290, 1295 (S.D. Ga. 2013) (emphasis in original).
The court further held that the CFAA
does not confer upon employers the ability to sue their employees in federal court for violations of company policy regarding computer usage… [It] does not speak to employees who properly accessed information, but subsequently used it to the detriment of their employers: either one has been granted access or has not. Employers cannot use the CFAA to grant access to information and then sue an employee who uses that information in a manner undesired by the employer.
Id., at 1296 (emphasis added). Other courts in the Eleventh Circuit have held the same. See Trademotion, LLC v. Marketcliq, Inc., 857 F.Supp.2d 1285, 1291 (M.D. Fla. 2012) (concluding that plaintiff failed to state a claim under CFAA because plaintiff admitted that defendant had “full administrative access” to plaintiff’s computer system).
When deciding whether to assert a cause of action under the CFAA based on “exceeding authorized access,” the safest course of action in Georgia is to only do so when the facts demonstrate that the individual in question did not have permission to access the information in question. If the individual was given access to the information in question, but you believe accessed that they accessed that information for a non-work related purpose, consider relying on alternative theories of liability, such as conversation, breach of contract, or misappropriation.
While the federal Defend Trade Secrets Act is garnering a great deal of attention, it’s worthwhile to remember that state law remains critically important in drafting restrictive covenants. This week, May 11, 2016, marks the fifth anniversary of Georgia’s revised trade secrets act, which fundamentally recast how courts view and enforce restrictive covenants.
Prior to enactment of the new law, Georgia was one of the most difficult states in which to enforce restrictive covenants against employees. As a result, before the revised act, employees sometimes moved to Georgia to take advantage of Georgia’s extremely pro-employee public policy. (In fact, some lawyers commented — only half -jokingly — that their clients should go to Las Vegas to get out of their marriage and go to Atlanta to get out of their non-compete.)
The new act implemented a sea change in Georgia’s public policy towards restrictive covenants. The new act substantially liberalizes drafting requirements for restrictive covenants in Georgia (which, before the new act, were governed by a series of arcane court decisions that imposed a variety of highly technical drafting requirements). Perhaps most notably, the new act permits Georgia courts to “blue pencil” or partially enforce overbroad restrictive covenants (though the Georgia courts have had few opportunities to exercise that new power). As a result, with enactment of the new law, Georgia is one of the more favorable jurisdictions for enforcement of restrictive covenants in employment agreements.
In our one-year anniversary post on the act’s passage, we made three predictions: (1) Georgia courts would be considerably more likely to enforce restrictive covenants under the new act than they had under prior Georgia law, (2) Georgia courts would “blue pencil” overbroad restrictive covenants, and (3) Georgia courts would continue to apply prior Georgia law to agreements that predate the new act. Five years later, the jury is still out. Few published or appellate decisions have examined the revised act. Although some trial courts have grappled with the act in recent years, there has not been enough time for agreements signed after May 11, 2011 to make their way into more than a handful of published or electronically-available decisions.
Nevertheless, one decision over the past few years, Cellairis v. Duarte, is particularly notable. That case (which we previously examined here as an illustration of the difficulties in drafting effective carveouts from arbitration provisions) suggests that courts are more likely to enforce restrictive covenants under the new law, just as we predicted four years ago.
In Cellairis, a franchisor sued a former employee who, at various times, worked as an officer, employee, and independent contractor. A 2014 franchise agreement between the franchisor and employee obligated the employee to refrain from owning or operating a competing business within 10 miles of any franchise operating as of the termination date. The franchise agreement also contained a two-year non-solicitation provision prohibiting the employee from soliciting any customer who the franchisee or the employee did business with in the two years preceding the agreement’s termination.
The franchisor moved for and obtained a preliminary injunction. The court sidestepped the employee’s multifaceted career with the franchisee by analyzing the restrictive covenants as if the employee worked only as an employee.
The court quickly found that a two-year restriction was “presumptively reasonable” under Georgia’s new act and brushed aside the employee’s attempts to argue that it was still unreasonable. The court also honored the new act’s position on geographic limitations; it held that a 10-mile radius from any franchise, even those that did not exist when the agreement was signed, was reasonable.
Unlike previous restrictive covenant decisions, the court did not limit the non-compete and non-solicitation to customers that the employee managed. This is a clear departure from pre-amendment Georgia law, which routinely struck down restrictive covenant agreements that were untethered from customers managed by the former employee.
Finally, the court found that the public interest now favored the entry of a preliminary injunction because “reasonable restrictive covenants . . . serve the legitimate purpose of protecting business interests and creating an environment favorable to attracting commercial enterprise to Georgia and keeping existing businesses within the state.” Formerly, the public interest element always weighed against imposing a preliminary injunction. This decision suggests a party moving for a preliminary injunction can always cite to public interest as a factor favoring preliminary injunctive relief because even overly broad restrictive covenants can be “blue penciled” to reasonable limitations on competition.
The Cellaris decision illustrates the profound impact that the new act has on restrictive covenants signed on or after May 11, 2011. Restrictive covenant agreements governed by pre-act law remain vulnerable. Employers with restrictive covenants signed before May 11, 2011 should sign new agreements to erase any doubts about which law governs. (Some decisions have found that pre-act restrictive covenants amended after May 11, 2011 are still governed by pre-act law.)
Employers should also feel more comfortable about seeking preliminary injunctive relief if they can present evidence that a former employee is violating a restrictive covenant. With the public interest on its side and a blue pencil in hand, courts seem less hesitant to impose preliminary injunctive relief — even though the federally governed standard for preliminary injunctive relief has not changed.
Finally, practitioners should look to federal Alabama and Florida decisions until Georgia state courts have established Georgia’s position on post-act restrictive covenants. The Cellaris court looked to Florida law to guide its analysis. Without any binding authority, these out-of-state decisions should serve as a rough proxy for how much evidence a district court wants to see before it grants preliminary injunctive relief.
If you have any questions about how the May 2011 revisions to Georgia’s law on restrictive covenants affects your restrictive covenants portfolio, or if you would like assistance drafting compliant agreements for your workforce, please contact a Seyfarth Shaw Trade Secrets Group attorney.
Alex Meier, a co-author of this post, had the honor to serve as a clerk to Judge O’Kelley the presiding district court judge in the Cellaris case. The analysis of the case in this blog reflect the author’s view alone and should not be construed as an endorsement of either litigant’s position.
A recent verdict in the Superior Court of Fulton County, Georgia is an excellent reminder of the importance of conducting thorough discovery in unfair competition cases. Earlier this year, after a four day trial, a Georgia jury awarded telecom company Cost Management Group (“CMG”) $282,001 in damages, $300,000 in attorneys’ fees, and $200,000 in punitive damages, finding that CMG’s former president, Daniel Bommer, breached his contract by operating a competing company, as well as siphoning employees and business away from CMG to a second competing company, all while employed by the plaintiff.
Interestingly, this particular case was preceded by a separate 2009 action, in which CMG filed suit against another one of its former officers, who it also accused of diverting CMG’s accounts and agents to a competing business. According to court filings, CMG prevailed in that case as well and was awarded more than $120,000 in damages. The added “bonus,” however, was a cache of e-mails discovered on CMG’s former chief operating officer’s server (who was not even named in the lawsuit). Among those e-mails were communications in which Bommer allegedly requested the competing business “destroy all evidence of past and future email communications between [itself] and Bommer.” In large part based on the information secured in these retrieved e-mails, CMG proceeded with filing suit against Bommer, alleging claims for breach of fiduciary duty, usurpation of corporate opportunities, unfaithful agent, conversion/theft of corporate property, breach of the securities and exchange agreement and fraud, as well as a claim for punitive damages.
Perhaps even more importantly, as a direct result of CMG’s discovery in the first case, prior to trial against Bommer, CMG filed a motion for sanctions, claiming Bommer spoliated critical evidence. The court agreed and granted CMG’s motion, completely striking Bommer’s answer and counterclaim. Accordingly, at trial, the only remaining issue for the jury was a determination of damages — always a position plaintiffs’ lawyers love to find themselves.
Had CMG’s counsel not conducted thorough and sifting discovery in the original case, including seeking electronic discovery from non-parties, it is quite possible that CMG may have never located the evidence of spoliated e-mails. By doing so, CMG was able proceed directly a trial on damages, without ever having a jury even establish liability. Had CMG’s lawyers not located this information, the trial undoubtedly would have been much more complicated and certainly gone on for much longer than four days. Again, the case is a superb testament to leaving no stone unturned during the discovery process in unfair competition matters — particularly electronic stones.
The case is Cost Management Group v. Bommer, Civil Action File No. 2009CV168191, Fulton County Superior Court, Georgia.
A recent decision by the Georgia Court of Appeals, Holland Ins. Group, LLC v. Senior Life Ins. Co., 766 S.E.2d 187 (Nov. 20, 2014), includes several excellent reminders regarding the enforceability (and unenforceability) of restrictive covenants in Georgia.
Relevant Facts and Holding
William Holland and Senior Life Insurance Company entered into an agreement (“Agreement”) authorizing Holland to sell Senior Life’s insurance products as an independent agent. Senior Life subsequently terminated the Agreement and notified Holland that it had “suspended” payment of commissions to Holland pending an investigation into whether Holland had violated restrictive covenants contained in the Agreement. Holland then filed a complaint against Senior Life seeking injunctive relief and a declaratory judgment that the Agreement’s restrictive covenants were overbroad and thus, unenforceable. Holland also filed a motion for judgment on the pleadings, which sought a declaratory judgment that: “(1) the non-solicitation and confidentiality provisions of the [Agreement] are unenforceable as a matter of law; and (2) the liquidated damages of the [Agreement] are void[.]” The trial court denied Holland’s motion, and Holland appealed.
Although the Court of Appeals found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to the Agreement’s non-solicitation and confidentiality provisions, it did reverse the trial court’s decision that the Agreement’s liquidated damages provision was valid. The Court’s analysis on both of these issues is worth examining.
First, Holland contended that Section 5.5 of the Agreement, entitled “Confidentiality,” was overly broad. The provision provides, in relevant part, that “[u]ntil this Agreement terminates and at all times thereafter, you will hold in the strictest confidence and not use in any manner detrimental to us, or disclose, publish, or divulge, directly or indirectly, to any individual or entity any Confidential and Proprietary Information[.]” Section 5.5 defines “Confidential Proprietary Information” as:
certain confidential and proprietary information relating to our business, including, but not limited to, certain lists of or data relating to our Customers and Prospective Customers … and certain other information relating to our services, marketing techniques, business methods or finances, which information is generally not known to the public…. [Senior Life] take[s] all reasonable steps necessary to ensure that each and every component of the Confidential and Proprietary Information constitutes a “Trade Secret.”
Holland contended that the “Confidential and Proprietary Information” defined in Section 5.5 did not constitute a trade secret and, thus, the confidentiality covenant was void because it did not contain a time limit. While Georgia law does not require a time limit to safeguard trade secrets, it is well established that a “nondisclosure clause with no time limit is unenforceable as to information that is not a trade secret.” (Citation omitted.) Allen v. Hub Cap Heaven, Inc., 225 Ga. App. 533, 539, 484 S.E.2d 259 (1997).
Ultimately, the Court of Appeals determined that it could not conclude as a matter of law that the “Confidential and Proprietary Information” defined in Section 5.5 of the Agreement was not a trade secret. Instead, the Court believed that additional facts beyond those set forth in the relevant pleadings was needed to determine whether the information defined as Senior Life’s “Confidential and Proprietary Information” is a legitimate trade secret or merely confidential information relating to its business. As a result, the Court found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to this provision.
Second, Holland contended that Section 5.7 of the Agreement, entitled “General Remedies and Damages,” was unenforceable because the section included an overbroad non-compete clause. Section 5.7 provides a “formula” for determining liquidated damages as well as other damages that could be imposed if it is found that Holland violated “the terms of this Agreement[.]” That section also includes the following non-compete clause:
[n]otwithstanding our proprietary interest in our Customers and Prospective Customers, we recognize that upon termination of this Agreement, certain of our Customers may choose to sever their respective relationship with us in favor of you or any person engaging you after the termination of this Agreement, without any direct or indirect solicitation by you in violation of the terms of this Agreement. As such, … you hereby agree that, with respect to any Customer of ours who completely or partially severs his/her relationship with us in favor of you … you shall pay us an amount equal to 100% of the commissions you earned (whether accrued or actually received) from us with respect to the Severing Customer during the twenty-four (24) month period immediately preceding the termination of this Agreement.
The Court noted that, generally speaking, a restrictive covenant in Georgia “may not validly preclude the employee from accepting unsolicited business from customers of his former employer.” Vulcan Steel Structures, Inc. v. McCarty, 329 Ga. App. 220, 764 S.E.2d 458 (2014). While an employer may properly protect itself from the risk that a former employee “might appropriate its customers by taking unfair advantage of client contacts developed while working for that employer,” the employer “cannot prevent [the employee] from merely accepting overtures from those customers.” (Citation and punctuation omitted.) Id. Accordingly, the Court held that “because the plain language of Section 5.7 penalizes Holland from accepting the unsolicited business from Senior Life’s former clients, regardless of who initiated the contact, it is unreasonable and unenforceable.”
Holland Ins. Group reinforces several important aspects of Georgia restrictive covenant law that one should take into account when including these types of restrictions in employment agreements:
- Do not use the phrase “confidential information” interchangeably with “trade secrets.” “Confidential information” and “trade secrets” are very separate and distinct legal terms. If you do not fully appreciate the legal differences, it will likely result in severe enforceability issues.
- Utilizing a liquidated damage provision can be a very beneficial way to streamline litigation, but only if it is properly applied. Tacking on a liquidated damages provision to a non-solicitation provision without first understanding Georgia non-solicitation law (and the interchange between the two) is never advisable.
If you have any questions about whether your restrictive covenant agreements comply with Georgia law, contact a Seyfarth Shaw trade secrets lawyer.
In many cases, the execution of a mutual release is often the last step in resolving a trade secret or non-compete case. Typically included in the release is an affirmation that all confidential information has been returned and the once former adversaries promise not to sue one another. Once the release is executed, the fight is usually over. Usually, but not always.
The recent opinion of EarthCam, Inc. v. OxBlue Corp., 1:11-CV-2278-WSD, 2014 WL 793522 (N.D. Ga. Feb. 26, 2014), addresses an uncommon situation where a former employer filed suit against one of its former employees for allegedly violating the terms of his non-compete agreement; notwithstanding the fact that the former employer and employee had previously executed a general mutual release wherein both sides agreed to release one another from any and all claims concerning the former employee’s non-compete agreement.
In response to the company’s complaint, the former employee filed a motion for Rule 11 sanctions on the grounds that the claims were allegedly barred by the executed general release. The former employer contended that it had a good faith basis for believing that the release was obtained through fraud and that, accordingly, it was void. Specifically, the company alleged that the former employee fraudulently affirmed that he had returned all of the company’s tools and materials, when in fact, he was now using these items to compete against the company.
The court noted that, in Georgia, to void a contract based upon fraud in the inducement, the party seeking the relief must prove five elements: (1) a false representation or concealment of a material fact; (2) that the defendant knew the representations or concealment were false; (3) an intent to induce the allegedly defrauded party to act or refrain from acting; (4) justifiable reliance by the plaintiff; and (5) damages as a result of the false representations or concealment.
With this standard in mind, Judge William S. Duffey, Jr. held that “what matters here is not whether the fraud actually occurred, but whether [the company] has a colorable argument that the fraud might have occurred. If that is the case, then [the company] does not violate Rule 11 by asserting that the Release is void, allowing it to assert claims against [the former employee].” (Emphasis in original.) The court then examined the company’s allegations of fraudulent inducement and stated that the “allegations are sufficient, albeit barely, to form a basis for the conclusion that some fraudulent inducement occurred. [The Company’s] assertion that the Release is voidable is thus at least arguably credible, and there is an insufficient basis for imposing Rule 11 sanctions.”
A general release does not automatically bar all future litigation between signatories if one of the parties subsequently discovers evidence enabling them to argue that the release should be voided based upon fraud in the inducement. While the standard for establishing fraud in the inducement is certainly high, asserting a colorable argument to survive a motion for sanctions is much lower. If you seek to assert such a claim, it is critical to plead all predicate elements or you run the risk of having your claim summarily dismissed, as well as being sanctioned
District courts are divided as to whether there is a private right of action under the Computer Fraud and Abuse Act (CFAA) for persons whose computer service is not interrupted but who nevertheless incur costs (a) responding to a CFAA offense, (b) conducting a damage assessment, or (c) restoring computerized data or programs as they were prior to the offense. A Georgia U.S. district court judge recently sided with those jurists who hold that a service interruption is not required. Southern Parts & Eng’r’g Co. v. Air Compressor Services, LLC, Case No. 1:13-CV2231-TWT (N.D. Ga., Feb. 19, 2014).
Two employees of Southern, a manufacturer of air compressors, resigned and created a competitor corporation. Allegedly, both before and after their resignation, the two employees accessed Southern’s computerized confidential information, but the employees did not cause an interruption in the company’s computer service. Southern sued the employees in a Georgia federal court for violating the CFAA. The employees moved to dismiss on the ground that Southern had not sustained a compensable loss because no “interruption of service” had occurred. Acknowledging a split of authority, the Georgia judge ruled that a service interruption is not required, and so the motion to dismiss was denied.
A jurisdictional requirement under the CFAA is a “loss” of at least $5,000 caused by a violation of the Act. The CFAA defines a “loss” as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.” 18 U.S.C. § 1030(e)(11). Courts are divided as to whether the phrase “incurred because of interruption of service” (a) modifies “any reasonable cost to any victim,” or (b) applies only to “any revenue lost, cost incurred, or other consequential damages.”
Some judges have concluded that the CFAA provides for recovery of expenses resulting from “responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense,” regardless of whether there was an “interruption of service.” The other view is that an “interruption of service” is a condition precedent to any recovery.
The judge in the Southern Parts case adopted the former interpretation — “interruption of service” is not a prerequisite — as have judges in the Middle and Southern Districts of Florida, the Middle District of Louisiana, and the Southern District of Texas, and one judge in the Eastern District of Michigan. By contrast, judges in the Northern District of Florida, the Northern District of Illinois, the District of Maryland, and the Southern District of New York, and a different judge in the Eastern District of Michigan, disagree. (Those are not the only courts to have ruled on the issue.) Clearly, reasonable minds can differ!
The victim of a CFAA violation must demonstrate that it has incurred $5,000 in expense in a single year. In the absence of an “interruption of service,” there may be an opportunity for forum shopping. The victim might consider whether personal jurisdiction and venue would be proper in a court that allows CFAA suits to proceed even though no interruption occurred. If the victim selects such a forum, the alleged wrongdoer might consider the possibility of seeking to transfer the litigation either to a district that declines to adjudicate CFAA lawsuits when there has been no “interruption of service” or, at least, to a district that has not yet weighed in on the issue.
Notwithstanding a forum-selection provision in the parties’ consulting agreement designating the Northern District of Georgia as the place for litigating non-competition and non-solicitation covenants disputes, a Georgia federal judge transferred covenant violation litigation to the Middle District of Florida. Also, the judge explained why he thought that an arbitration clause was unenforceable, but he said that the Florida court should make the decision. Direct Response Products, Inc. v. Roderick, Case No. 1:11-cv-0945-WSD (N.D. GA, Nov. 1, 2013).
Summary of the case
Direct Response, a DeKalb County, Georgia company, stages sales events for automobile dealerships. Roderick was an independent contractor who marketed the events to dealers. After Roderick terminated the relationship, and allegedly began competing with Direct Response and soliciting members of Direct Response’s sales team to join him, Direct Response filed a diversity jurisdiction case against him in the federal court in DeKalb County. The parties’ agreement included a forum selection clause specifying that county as the place for litigating any dispute. At all relevant times, Roderick lived and worked in Florida. He moved to dismiss on various grounds including supposedly improper venue. In the alternative, he moved to stay the action because, he claimed, the agreement contained a mandatory arbitration provision. All of his motions to dismiss were denied but, on the court’s own motion, the case was transferred to Florida “in the interest of justice.” The Georgia judge declined to rule on Roderick’s alternative motion but suggested that it should be denied by the transferee court.
The parties’ contentions and court’s decision regarding venue
Roderick asserted that his territory did not include Georgia and that, if the breach he is alleged to have committed took place at all, it was in Florida and not in Georgia. Direct Response countered that the effects of the alleged breach would be manifested in DeKalb County. Further, the agreement was executed there, Roderick was trained in Georgia, and he was given access to confidential and proprietary information there. Finally, the agreement provided that all civil actions regarding Direct Response “must be processed in” DeKalb County; under the circumstances, that provision seems reasonable.
The Georgia federal judge denied Roderick’s venue motion but, nonetheless, held that the “required focus” in determining the proper venue for this case is the site of the alleged breach, where Roderick is allegedly competing. Exercising the court’s discretion under 28 U.S.C. § 1406(a), the case was transferred to Florida
The arbitration provision consisted of only two sentences. The first merely specifies what discovery rules are applicable in the arbitration proceeding and states, without any attachment or explanation: “Use the standard ‘one shot’ provision.” The second sentence simply reserves the parties’ “right to apply to a court of competent jurisdiction for equitable relief as necessary to preserve and enforce their rights under this Agreement.”
The court cited “the strong federal policy supporting arbitration” and said Georgia law provides that “an arbitration clause does not need to be detailed to be enforceable.” However, it “must have sufficient specificity to show what is to be arbitrated.” Here, the arbitration provision was silent in that regard as well as where the proceedings were to take place, what process was to be used for selecting a neutral, etc. Thus, it is not surprising that the Georgia judge was skeptical about Roderick’s claim that arbitration was mandated. Moreover, the parties’ testimony was diametrically opposite. The president and owner of Direct Response insisted that his intent was to delete the arbitration provision altogether but it was accidentally left in the agreement. Roderick asserted that he initialed the page with the arbitration clause and intended to include it. The Florida judge will have to decide whether the case is to be litigated or arbitrated.
This case makes clear that even a reasonable forum selection clause might be disregarded if the court decides that transfer to a different venue serves “the interest of justice.” Further, the opinion here reminds us that a judge may disclose how he or she would resolve certain contested issues and yet leave the actual ruling to a different decision-maker.
Three years ago last week, Georgia voters overwhelmingly approved a constitutional amendment that substantially altered Georgia’s public policy on restrictive covenants.
Prior to enactment of the amendment, Georgia’s public policy was actively hostile to restrictive covenants in employment agreements — so much so that a provision of the state constitution enshrined the state’s public policy and declared covenants that defeat or lessen competition to be “unlawful and void.” Applying this constitutional provision, Georgia courts developed a number of drafting rules that rendered all but the most limited restrictive covenants unenforceable. This was the case even when the employee subject to the covenant was a high-ranking executive like the former vice chairman of a Fortune 500 telecommunications company who successfully challenged his non-compete agreement in the Georgia Court of Appeals’ 2004 decision in BellSouth Corp. v. Forsee, 595 S.E.2d 99 (Ga. Ct. App. 2004). As a practical consequence, Georgia was one of the most difficult jurisdictions in the country for employers to enforce restrictive covenants against former employees. Making matters worse for the state’s business community, the Georgia constitutional provision against restrictive covenants thwarted legislative attempts to reform and modernize Georgia law on restrictive covenants.
Voters’ approval of a constitutional amendment in November, 2010 removed the constitutional roadblocks, reversed the state’s longstanding public policy against restrictive covenants, and ultimately paved the way for Georgia’s enactment of its new Restrictive Covenants Act, which the Georgia General Assembly enacted after a tortuous legislative history that we previously reported here, here, and here. As we previously reported, Georgia’s new Restrictive Covenants Act makes it much easier for employers to enforce restrictive covenants against former employees than was permitted by prior Georgia law and arguably reverses decades of Georgia court decisions.
The new law only applies to contracts entered into on or after May 11, 2011, the date that the Act became law. As a result, judicial decisions interpreting the new statute are still limited in number. Nevertheless, with the passage of three years since voters approved the constitutional amendment that made the new law possible, we can now identify general trends in judicial decisions. Although lawyers might disagree on which trends are the most notable, the following are, in our view, the top five trends about which Georgia employers and their counsel should be aware.
1. Covenants dated on or after May 11, 2011 are more likely to be enforced. Our first trend is a no-brainer, but we would be remiss in not stating it: employers will have less difficulty enforcing covenants executed on or after the effective date of the Restrictive Covenant Act than they will have in enforcing covenants entered into before passage of the new Act. Because continued at-will employment is usually considered sufficient consideration in Georgia for a new restrictive covenant agreement, employers in Georgia would be wise to update their existing agreements with employees if they have not already done so.
2. Georgia courts will continue to apply old law to covenants dated before May 11, 2011. Our second trend is a corollary of the first: because the law applies only to agreements entered into on or before May 11, 2011, courts continue to apply pre-Act Georgia law to covenants made before the effective date of the Act (May 11, 2011). As we discussed here, this appears to be the case even where the covenant was signed before the 2011 Act but after voters approved the constitutional amendment that made way for the new Act. As courts continue to interpret contracts that predate the new Act, courts will likely continue to apply the old law in a number of cases. Anticipating the new law when voters approved the constitutional amendment, some Georgia employers immediately updated their agreements with employees between November 2, 2010 and May 11, 2011. Because these agreements may actually be subject to old Georgia law, employers in this situation should consider updating their agreements again to avoid application of old Georgia law.
3. Georgia courts will continue to apply Georgia’s old public policy in cases involving pre-Act covenants, even though Georgia’s old public policy is inconsistent with the current public policy. Although this trend is also a corollary of the first two trends, it’s not as obvious. When courts are asked to enforce choice-of-law provisions in pre-Act agreements, courts have to consider whether application of the chosen’s state’s law would violate Georgia’s public policy. But what public policy do courts apply: the public policy as it exists now, or the public policy that existed when the agreement was executed? As demonstrated by the Boone case discussed here, Georgia courts appear to have settled on the latter option and continue to invoke old (and now rejected) public policy when reviewing choice-of-law provisions in pre-Act covenants. This is the case even though the chosen state’s law may be consistent with Georgia public policy as it exists now. We expect Georgia courts to continue to reject choice-of-law provisions in pre-Act agreements that are inconsistent with Georgia public policy as it existed pre-Act.
4. Georgia courts will “blue-pencil” overbroad restrictive covenants that are entered into on or after May 11, 2011. The new Restrictive Covenant Act provides that, “if a court finds that a contractually specified restraint does not comply with the provisions of [the Restrictive Covenant Act], then the court may modify the restraint provision and grant only the relief reasonably necessary to protect such interest or interests and to achieve the original intent of the contracting parties to the extent possible.” O.C.G.A. § 13-8-55(b). As demonstrated by the Pointenorth Insurance Group decision that we discussed here, Georgia courts can and will apply their power to “blue-pencil” overbroad restrictive covenants executed on or after the effective date of the Act. Nevertheless, it is not yet clear whether Georgia courts may only excise grammatically severable language or if they can effectively rewrite the parties’ agreement by adding or inferring terms. Over the next few years, Georgia courts will likely better clarify the scope of their power to modify overbroad restrictive covenants and explain the situations in which they will exercise that power. Until the courts rule otherwise, prudent employers should assume that Georgia courts can only excise grammatically severable language and that they will use this power sparingly.
5. Georgia courts will enforce true non-compete covenants only against employees who meet one or more of statutory definitions. Although the new Restrictive Covenant Act is most favorable to employers who seek to enforce restrictive covenants, in one area the new law is arguably more restrictive than prior Georgia law. The new Act provides that “enforcement of contracts that restrict competition after the term of employment, as distinguished from a customer nonsolicitation provision . . . or a nondisclosure of confidential information provision . . . shall not be permitted against any employee who does not, in the course of his or her employment:
(1) Customarily and regularly solicit for the employer customers or prospective customers;
(2) Customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others;
(3) Perform the following duties:
(A) Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
(B) Customarily and regularly direct the work of two or more other employees; and
(C) Have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees; or
(4) Perform the duties of a key employee or of a professional [which are defined elsewhere in the statute].
O.C.G.A. § 13-8-53(a). To date, very few (if any) reported decisions have construed these statutory definitions. Over the next few years, Georgia courts likely will be called upon to apply these statutory definitions and determine whether certain classes of employees are appropriately subject to true non-competes (as opposed to non-solicitation or non-dislosure covenants). Until the Georgia courts provide clearer guidance, Georgia employers should pay close attention to the language of the new statute when deciding which employees should have true non-competes in their agreements.
If you are interested in reviewing your existing restrictive covenant agreements for compliance with the new Act, or if you would like assistance drafting such agreements for your workforce, contact a Seyfarth Shaw Trade Secrets Group attorney.