Recent Case May Complicate Enforcement of Noncompetition Agreements
By: ROBERT C. BOISVERT, JR.
September 2005
Enforcing noncompetition agreements has always been dicey. While many (but not all) states will enforce reasonable noncompetition agreements prohibiting former employees from working for competitors, courts dislike the agreements and often will look for ways to narrow or throw them out.
Recently, a federal court added to the uncertainty of trying to enforce noncompetition agreements and, in the process, upped the stakes for being the first to sue under a noncompetition agreement.
Employee Signs Two Noncompetition Agreements
The federal court case involved a senior executive, James Meathe, who had been an employee and minority shareholder at a national insurance brokerage, Johnson & Higgins (J&H). In 1997, J&H merged into Marsh and McLennan Companies (Marsh), and Meathe received cash and Marsh stock for his J&H stock. As part of the merger, Meathe became a Marsh employee and signed a stock purchase agreement containing noncompetition restrictions prohibiting him from soliciting or accepting business from Marsh's clients or soliciting Marsh's employees for two years following termination of his employment with Marsh (the 1997 Agreement). In 2002, Meathe signed a second, similar noncompetition agreement in exchange for rights to exercise Marsh stock options (the 2002 Agreement).
In early 2003, Meathe left his high-level position with Marsh and, about one month later, moved to Georgia and became president of Marsh's direct competitor, Palmer & Cay (P&C). Meathe and P&C then sued Marsh in federal court, asking the court to declare as unenforceable the noncompetition restrictions in the 1997 and 2002 Agreements. Marsh counterclaimed alleging breach of the two agreements.
The Georgia federal district court decided the case based on Georgia law (which is hostile toward noncompetition agreements). The court ruled for Meathe and P&C, finding the 1997 and 2002 Agreements unenforceable in Georgia and barring Marsh from enforcing the Agreements in Georgia. The case was then appealed to the U.S. Court of Appeals for the Eleventh Circuit.
Appellate Court Bars Enforcement in Any State
The appellate court affirmed the district court's ruling that the 2002 Agreement was overly broad under Georgia law because it prohibited Meathe from accepting unsolicited business from former customers after leaving Marsh. While some states revise or "blue pencil" overly broad noncompetition restrictions, Georgia does not. Thus, the appellate court ruled that the entire 2002 Agreement was unenforceable and that none of its noncompetition restrictions could be enforced by Marsh. Palmer & Cay, Inc. v. Marsh & McClennan Companies, 404 F.3d 1297 (11th Cir. 2005) rehearing and rehearing en banc denied (May 31, 2005). The appellate court sent the issue of the 1997 Agreement back to the district court for further review.
The appellate court disagreed with the district court's ruling that the 2002 Agreement was unenforceable only in Georgia. Instead, the appellate court ruled that the district court's declaratory judgment striking down the 2002 Agreement is valid in all states, barring Marsh from trying to enforce the Agreement anywhere in the United States.
The appellate court distinguished between declaratory judgments (the action brought by Meathe and P&C) and injunctions. The court said that under the U.S. Constitution and federal law, declaratory judgments (which determine a party's legal rights) are entitled to "full faith and credit" in all states, while injunctions (ordering a party to do or not do something) are limited to the respective state.
Lessons to be Learned
The impact of Palmer & Cay is unclear, in part because it is the opinion of only one appellate court. But if other courts follow suit, it could mean that parties to multi-state noncompetition agreements will be forced to hurry to file lawsuits in states with laws favorable to their respective positions, and then will need to press the court to issue a final judgment that will be binding nationwide.
Any employees seeking to escape multi-state noncompetition agreements and employers considering hiring them should consider filing preemptive lawsuits in states hostile toward such agreements, such as Georgia.
The decision also highlights the possible importance of "boilerplate" language. In particular, when drafting noncompetition agreements, employers should include forum selection clauses designating where a lawsuit must be filed, consent-to-jurisdiction clauses in which a party consents to jurisdiction in a particular state, and choice-of-law clauses designating which state's law should govern the agreement. And, because of the ever-increasing challenges to enforcing noncompetition agreements, employers should work with counsel to draft and regularly update noncompetition agreements.