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New Look At Ruling On Non-Compete Agreements

Eleventh Circuit Decision Applies Georgia Law To Invalidate Non-Compete Agreement Nationwide

by Kathryn D. Weston

On April 1, 2005, the Atlanta-based Eleventh Circuit Court of Appeals rendered its decision in Palmer & Cay v. Marsh & McLennan Companies, No. 16248 (11th Cir. April 1, 2005) (the “Opinion”), holding that an insurance executive is not bound by a non-compete agreement signed while employed by insurance giant Marsh & McLennan Companies, Inc. (“Marsh”). The case was filed by James B. Meathe, managing director for the Midwest region for Marsh USA, a subsidiary of Marsh, until January 2003. In 2003, Meathe earned $725,000 in salary and bonuses plus Marsh stock valued between $2 million and $10 million. During his employment with Marsh, Meathe signed an agreement (the “Agreement”), which barred Meathe from soliciting former Marsh clients and from working for former Marsh clients that came to him on their own for a two-year period commencing on the date on which Meathe’s employment with Marsh ended. The Agreement also prohibited Meathe from disclosing or using for the benefit of himself for an entity other than Marsh any of Marsh’s trade secrets or confidential proprietary information. There was no geographic limitation on the scope of the Agreement.

One month after leaving Marsh, Meathe joined Georgia-based Palmer & Cay, Inc. (“Palmer”), a direct competitor of Marsh. Meathe and Palmer sued Marsh to have the Agreement declared unenforceable. Marsh then filed a counterclaim against Meathe, alleging that Meathe violated the Agreement by raiding Marsh for employees and clients and disclosing confidential business information.

The 11th Circuit, held the Agreement invalid under Georgia law, which holds unenforceable non-compete agreements prohibiting employees from accepting unsolicited business from former clients after leaving employment. Georgia law is one of the toughest on employers seeking to enforce non-compete agreements. Unlike many other states, Georgia courts subject non-compete agreements to strict scrutiny and, if any illegal section is found, invalidate the entire agreement rather than simply severing the problematic section. In other words, if an otherwise valid contract contains one overly broad non-compete covenant, all of the other non-compete covenants in the same agreement are automatically rendered unenforceable. Accordingly, because the Agreement contained an unenforceable provision, the Court ruled the entire Agreement unenforceable in Georgia.

The Court next addressed, in perhaps the most interesting part of the opinion, the scope of the declaratory judgment and injunctive relief, if any. This was relevant because the Court might have determined that, although the Agreement was invalid and unenforceable in Georgia, it could nevertheless be enforced outside the state. The Court held, consistent with its prior decisions, that Georgia law did not have the power to enforce nationwide, by way of a nationwide injunction, its public policy interests.

Accordingly, the court upheld the injunctive relief instituted by the lower court barring Marsh from seeking to enforce the Agreement in Georgia. In contract, the Court concluded, applying the Full Faith & Credit Clause of the U.S. Constitution and federal common law, that the Agreement was invalid and unenforceable in any state.

Commentators have claimed that the Court’s decision will lead to the proverbial “race to the courthouse,” and that unless an employer has a non-compete agreement that is accepted under Georgia law, that employer will need to “get to some other court first.”

The chief lesson to be learned from the Opinion is that non-compete agreements should be drafted not only in accordance with applicable Florida law, but also with an eye toward what might be enforceable in other states.

Under Georgia law, the law of a jurisdiction chosen by the parties to a contract will generally govern the parties’ contractual rights and obligations. Georgia courts will not, however, apply the chosen law if it contravenes the policy of, or would be prejudicial to the interest of, the State of Georgia. Accordingly, even if the parties had included a choice of law provision in the Agreement, the Georgia courts would likely have disregarded the other state’s law as in contravention to Georgia policy regarding non-compete agreements.