Leaving on a midnight train (and forum selection clause) from Georgia

It is well known that Georgia has a strong public policy against restraints on trade, including restrictive covenants in employment agreements. The application of this public policy results in "strict scrutiny" of restrictive covenants (covenants not to compete, customer non-solicitation covenants, non-disclosure of confidential information, and non-solicitation of employees) contained in employment agreements.

For years, Georgia's public policy has led Georgia courts to ignore provisions in employment agreements where the parties have agreed that another state's laws will apply. The rationale has been that Georgia's public policy trumps foreign law that would likely be more favorable toward the restraints.

Several years, the Georgia Court of Appeals held that enforcing a forum selection clause in an employment contract containing a non-competition clause did not typically contravene Georgia public policy. More recently, in Hasty v. St. Jude Medical S.C., Inc, 2007 WL 1428733 (M.D. Ga. 2007), the federal district court for the Middle District of Georgia upheld a forum selection clause in an employment-related non-competition agreement and transferred the case to the federal district court in Minnesota.

In light of these decisions, employers who want to have foreign (non-Georgia) law applied to agreements signed by their employees working in Georgia should be sure to include mandatory forum-selection clauses in their employment agreements (and cross their fingers that the law does not change).

Noncompetes, Injunctions and Credibility

We thought we'd report about an interesting opinion written by United States District Court Judge Sarah Evans Barker from the Southern District of Indiana involving noncompetes, injunctions and the credibility of parties in lawsuits involving the same.

Seems that Cook Medical Incorporated is in the business of manufacturing and selling many of the devices now commonly used worldwide to perform minimally invasive medical procedures. A competitor of Cook Medical's, Endologix, manufactures a device to treat abdominal aortic aneurysm (AAA) that is a direct competitor to Cook Medical's Zenith line of AAA endografts. It is apparent from the reports that Endologix designed to hire away a number of Cook Medical's sales personnel and that those people had noncompete agreements with Cook Medical. So Cook Medial sued them and Endologix . . . . Nothing unique there.

Cook Medical moved for an injunction against their former employees and they persuaded the federal court in Indiana to grant that injunction (see link attached above). BUT the parties disagreed with the meaning and accuracy of the written injunction due to the fact that the court apparently orally announced its ruling and the resultant written injunction order suggested to the enjoined defendants something other than what was supposed to occur. So - they asked Judge Barker for a clarification. And a clarification is exactly what they got.

This is what Judge Barker had to say:

"Defendants also seek clarification of the terms in Paragraph 7 of our March 25, 2008 Order. That section provides as follows:

Endologix is not enjoined from further sales to or servicing of AAA customer accounts tied to the individual Defendants, so long as the contacts maintained by the sales agent are by someone other than the four individual Defendants. Any such sales or servicing must be performed without reliance on confidential Cook materials or information which Endologix may have access to

Defendants object that the language of this provision is too broad, in that it “extend[s] the scope of the covenants not to compete ... such that the individual Defendants would be enjoined from engaging in business on behalf of Endologix with his or her own former Cook accounts and the other individual Defendants' former Cook accounts, regardless of whether he or she ever had any relationship with these accounts.” Defendants propose that the provision be rewritten to clarify that each individual Defendant may make contacts with the customer accounts formerly held by the other individual Defendants.

Editor's note: The employees are essentially asking and telling Judge Barker "you didn't mean that, did you? If you stop me from selling to customers I didn't even have contact with at Cook Medical then you are putting an expanded noncompete on my back. I have to be free to contact and sell to accounts I did not service at Cook Medical - it's my right to do that." But - Cook Medical smelled something fishy (i.e., "you sell to my former accounts and I'll sell to yours and that won't violate the injunction") in this clarification request, and so did Judge Barker. The opinion continues . . . .

Plaintiffs counter that the provision as written is reasonable and justified in light of Defendants' deliberate and egregious disregard for the terms of the non-compete agreements. We agree. In our oral findings at the preliminary injunction hearing, we noted our doubts about Defendants' abilities to self-police their sales activities, in light of our serious concerns about the credibility of Defendants' testimony and the bad faith they had exhibited in flagrantly violating their non-compete agreements. Moreover, as Plaintiffs point out, the individual Defendants are not strangers to one another; they were colleagues while employed at Cook and, in conjunction with this litigation, they share common counsel and no doubt collaborate on their defense. Based on the bad faith the individual Defendants have exhibited (and Endologix' active encouragement that the individual Defendants disregard their non-compete obligations), we consider it likely that Defendants will work in concert in order to circumvent the terms of their non-compete agreements and our injunctive orders by “handing off” the accounts of one individual Defendant to another individual Defendant. Thus, we DENY Defendants' request to narrow the terms of our order as to this provision.

Editor's note: Here's an example of a judge who watched witness after witness testify that they didn't do anything wrong in violation of a noncompete and that judge simply didn't believe the witnesses. She apparently concluded they coordinated with Endologix a strategy to disregard their contractual promises to benefit themselves and their new employer to the detriment of their former employer. That they lost credibility with the court in the process of defending themselves is clear in this clarification opinion - the judge concluded that these people WILL try to circumvent the injunction through word parsing and legalistic gamesmanship. So the judge was unwilling to limit the injunction per the request of the former employees and probably DID, in fact, grant an order that was broader than mere enforcement of the textual promise in the noncompete covenant.

In short, injunctive relief orders are granted by human beings who wear robes. Those human beings assess the credibility of those coming before them - whether they are attorneys or witnesses. These credibility assessments will have an effect on the court's treatment of the matter. It is always easier to make arguments to the court when you do so with credibility on your side. Things are much tougher when you don't - as is evidenced by Judge Barker's words identified above.

Consideration - Mere Continuation of Employment May Not Be Enough in Georgia

As most practitioners here know, Georgia public policy is extremely hostile to employee non-compete agreements. There are many traps for the unwary. On the issue of consideration, however, Georgia is actually pretty lenient compared to some other states. It is almost axiomatic that “mere continuation of employment” usually provides sufficient consideration. That is, in Georgia the employer is generally not required to pay the employee any additional money (or promotion or other enhancement), even if the employee is required to sign the covenant long after the employment commences.

But there is an important, and easily overlooked, caveat to this axiom, as demonstrated by the Georgia Court of Appeals in Glisson v. Global Security Services, LLC, 287 Ga. App. 640 (2007). In Glisson, the employee was required to sign a new non-competition agreement approximately 18 months into his 2-year employment agreement. This requirement was apparently prompted by the departure of several other employees. The new covenant expressly conditioned continued employment upon the signing of the new agreement, which prohibited the employee from competing in certain specified counties for 2 years following termination. The employee signed the new covenant, but several months later he resigned. The company sued to enforce the covenant, and the trial court granted the company’s requests for injunctive relief.

The Court of Appeals reversed, finding a failure of consideration. After noting the general rule that continuation of employment is usually sufficient, the Court pointed out that, in this case, the contract provided that, during the first two years, the employee could be terminated only for “cause,” and “cause” did not include refusal to sign the covenant. Because of this, the Court reasoned that the company was under a preexisting duty to continue the employment, at least until expiration of the 2-year term. “Thus, although the [new] agreement purportedly conditioned [the employee’s] continued employment on adherence to its terms, [the company] was already obligated to employ him through [the end of the 2-year term]. And a promise to perform a preexisting contractual obligation does not constitute consideration for a new agreement.” Id. at 641 (emphasis in original). The trial court abused its discretion in finding the covenant to be enforceable and in granting the injunction.

Main point: Before assuming that mere continuation of employment provides sufficient consideration for a non-compete covenant, be sure that the employment is truly “at will.” Otherwise, the preexisting duty rule may bite you.

Bonus point: The Court noted that the agreement recited $10 as additional consideration, but the evidence showed that the $10 dollars was never actually paid. Query whether the result would have been different had the company simply forked over the ten spot.