Georgia Case Demonstrates Importance of Addressing Choice of Venue and Law Clauses

Readers know from prior posts that Georgia is one of the "red-flag" states when it comes to non-compete disputes.

Non-compete contracts entered into before the ratification of a constitutional amendment in 2011 are governed by the common law, and that body of law remains exceedingly treacherous for companies enforcing covenants.

A recent Georgia appellate case illustrates why procedural choice of venue and choice of law rules are vitally important.

The case of Carson v. Obor Holding Co., LLC yields a fairly common fact-pattern. Carson wore two hats for Obor Digital, a company that supplies staffing and software services in the defense industry. He was a member of the holding company (the defendant in the case) and an employee of the operating entity (not a defendant). He resigned in April of 2011, claiming "constructive discharge" by virtue of a reduction in his commissions. He then immediately filed suit in Georgia state court seeking an injunction against enforcement of the restrictive covenants contained in the Holding Company operating agreement.

The trial court dismissed his case, finding a Florida choice-of-forum clause was valid. That contract also required application of Florida law. Florida, in direct contrast to Georgia, is an exceedingly friendly enforcement state.

The Court of Appeals of Georgia reversed and held that the forum selection clause was invalid. It is important to note that courts won't invalidate forum selection clauses simply because one state's law (here, Georgia) is more favorable to employees than another state's (here, Florida). Rather, the difference has to implicate some fundamental public policy.

Florida tends to pose special problems with choice-of-forum and choice-of-law clauses if the suit is brought in another state. This is so for two primary reasons. First, Florida has a mandatory blue-pencil rule, requiring courts to modify overbroad covenants to the extent necessary for protection of the enforcing party. Georgia (pre-2011) is the exact opposite, essentially adopting an all-or-nothing policy. Second, Florida disallows a court from considering any employee hardships - economic or otherwise - that may result from enforcement. Georgia requires courts to consider such hardships in the balancing analysis. (Illinois adopted a similar rationale a few years back to invalidate Florida choice-of-law provisions in non-compete cases pending in Illinois courts.)

Turning to the substance of the covenants, Obor Holding's operating agreement had the following deficiencies in the restrictive covenants:

(1) The non-disclosure covenant did not define "confidential information," and it barred use of confidential information in perpetuity. Georgia law holds this is invalid if the non-disclosure for non-trade secret information is unlimited. (This is ridiculous, but maybe more on this in another post.)

(2) The non-solicitation covenant was not limited either (a) to a discrete class of customers, or (b) territorially. It also barred Carson from accepting business from a customer. Georgia cases hold that non-solicitation covenants that bar this so-called "passive solicitation" are invalid. (Again, stupid. How can an enforcing party know who contacted whom?)

(3) The non-compete covenant was invalid because it applied throughout the country and had no discernible territory limitation and because it had no activity scope tied to it. That is, it barred any affiliation with a competitor, not just some particular competitive conduct.

Because of the fundamental difference in how Georgia and Florida courts view non-competes, the Court of Appeals found that the operating agreement covenants violated Georgia public policy and that a Florida court would enforce them (at least to some extent). That means that, in Georgia, the choice-of-venue clause was invalid. A Georgia court had to hear the case and had to apply Georgia law. IIt must be nice to be a Georgia non-compete lawyer. No shortage of cases. And plenty of contract rewrites given the change in the law in 2011.

Other states that will pose similar procedural problems like this are Wisconsin, Oklahoma, North Dakota, and California. States that are viewed as more employee-friendly may not have robust public policy considerations that require courts to override choice-of-forum and choice-of-law clauses.

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Court: Court of Appeals of Georgia
Opinion Date: 11/20/12
Cite: Carson v. Obor Holding Co., LLC, 2012 Ga. App. LEXIS 971 (Ga. Ct. App. Nov. 20, 2012)
Favors: Employee
Law: Georgia

Employer Unable To Condition ERISA Severance Payments on Signing Undisclosed Non-Compete

For those of you dying to know more about ERISA, here ya go.

First, the basics. ERISA is a sweeping federal statute that governs employee health, welfare, and benefit plans. Employers often institute ERISA-based plans and within those plans provide that terminated employees are eligible to receive severance benefits under certain condictions. For instance, employees who have been discharged without cause or who worked at the company for a certain number of years may be eligible for severance pay, even if that is not contained within an employment contract.

Simple enough. But ERISA-based plans almost always contain the requirement that an employee, as a condition of receiving severance pay, execute a release. That makes perfect sense, for it would be somewhat absurd for an employer to pay out benefits and not get some assurance that a Title VII charge won't arrive in the mail months later.

Severance plan documents often attach a form release for employees to see, and from there, it's just a matter of filling in the blanks at the time the severance benefit rights accrue. But what rights does an employer have to insert in a severance document the requirement that the employee sign a non-compete?

According to one Illinois federal court, none.

The case of Pactiv Corp. v. Rupert dealt with a case where the ERISA plan simply stated that the employee's separation agreement must "be in a form acceptable to the company." The plan documents mentioned nothing about a non-compete. Though Pactiv understandably was concerned that its ex-employee was in a position to capitalize on knowledge he gained while at Pactiv, the court refused to imply a requirement into the severance plan Pactiv adopted.

The court stated: "Reserving the right to have a separation agreement in a 'form acceptable to the Company' is not notice to an ERISA beneficiary that a non-competition covenant could be required as a condition to receive benefits." ERISA plans are not subject to ad hoc amendments or interpretation.

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Court: United States District Court for the Northern District of Illinois
Opinion Date: 11/1/12
Cite: Pactiv Corp. v. Rupert, 2012 U.S. Dist. LEXIS 158413 (N.D. Ill. Nov. 1, 2012)
Favors: Employee
Law: Federal/Illinois

Does the Illinois Computer Crime Prevention Law Benefit Employers?

The Illinois Computer Crime Prevention Law (ICCPL) is a scaled back version of the federal Computer Fraud and Abuse Act. Effectively, it is a penal statute (contained entirely within the Criminal Code) that criminalizes improper computer conduct, such as hacking or improper access of a computer system.

It does contain one civil remedy, however, and that potentially gives employers another weapon to combat unfair competition. An increasing number of employment competition cases at least raise the specter of whether the employee transferred confidential data or information prior to his departure. Often, this can color a trade secrets or non-compete claim. It is more frequent that an employee's communications will tip off the employer what he or she is planning to do, and it may even reveal sensitive details of a future business opportunity.

Some departing employees, to be frank, are not that clever. They try to cover their tracks by wiping a hard-drive clean with off-the-shelf software like "Window Washer" or "Evidence Eliminator." (Yes, the program names are as sinister as they sound.) The ICCPL potentially gives employers a statutory claim if a departing employee installs and runs one of these programs which has the effect of deleting data from a work computer. This information could consist of stored e-mails or even a detailed competing business plan.

What does this ICCPL claim get an employer? Perhaps not much. I am not a huge fan of piling on claims just so I can see my own work product on paper. In my mind, the claim ought to give the client some other type of relief - injunction, attorneys fees, punitive damages - or an alternative path to victory.

The ICCPL allows for damages and discretionary fee-shifting, but an employer likely has those claims anyway. However, there may be an issue on the type of damages the ICCPL allows and which may not otherwise be recoverable. From a plain reading of the statute, the damages seemingly would have to relate to the lost data. Potential damages, therefore, could include time spent on a forensic examiner to assess and recover lost data. It theoretically could include indirect damages, such as the value of employee time spent recreating the substance of what was lost. This is not clear, but if so, this may be a potentially valuable add-on claim. I am not so sure the typical business tort or contract-based claims would allow for those types of damages.

As one might expect, there are virtually no cases under the ICCPL (certainly none of note). The ICCPL also contains several other provisions, none of which provide for a civil remedy.