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The recent 11th Circuit ruling in Palmer & Cay Inc., et. al. v. Marsh & McLennan Companies Inc., No. 03-16248 (11th Cir. April 1, 2005) means corporate counsel should reconsider their approach to drafting and enforcing non-compete agreements. Reviewing a Georgia trial court’s ruling in a declaratory judgment action that a non-compete agreement was unenforceable only in Georgia under Georgia public policy, the 11th Circuit ruled that the unenforceability ruling should be extended to any other lawsuit between the parties in any other state. The ruling means corporate counsel must carefully consider dispute resolution clauses and other aspects of employment agreements to ensure their company is not forced into a situation where a federal court sitting in a state hostile to non-competes issues an adverse decision that is then enforced nationally. In addition, the ruling has the effect of imposing additional due diligence burdens in the context of mergers and acquisitions. THE FACTS In 1997, Marsh & McLennan Companies Inc. bought a national insurance brokerage firm in which James B. Meathe was both an employee and a shareholder. At the time of the acquisition, Meathe sold his stock to Marsh and signed a stock purchase agreement that contained customer and non-solicitation covenants. Meathe became the managing director and head of the Midwest region for Marsh. In 2002, Meathe signed another customer and employee non-solicitation agreement in exchange for rights to exercise certain Marsh stock options. Meathe was not a Georgia resident at the time he executed the two agreements. In early 2003, Meathe moved to Georgia and became president of Palmer & Cay Inc., a direct competitor of Marsh. Meathe and Palmer sought to enjoin Marsh from enforcing the two agreements. In an order granting judgment on the pleadings, the federal district court declared both agreements “unenforceable within the State of Georgia” on public policy grounds and enjoined Marsh from enforcing the covenants against Meathe in Georgia. Palmer & Cay Inc. v. Marsh & McLennan Cos., No. 403CV094 at 11 (S.D. Ga. Nov. 11, 2003). In its ruling, the 11th Circuit remanded the dispute over the 1997 agreement back to the trial court for review under Georgia law. It directed the court to decide whether the agreement should be evaluated under Georgia’s tougher employment-related standards or on a less restrictive sale-of-business standard. The 11th Circuit then focused on the 2002 agreement and a provision prohibiting Meathe from accepting unsolicited business from former clients of Marsh. It noted that Georgia applies strict scrutiny to non-compete and non-solicitation provisions and will not blue-pencil such covenants. The Georgia Supreme Court, for example, refuses to reform even reasonable employment covenants. In addition, Georgia courts refuse to enforce non-competition agreements that prohibit employees from accepting unsolicited business from former clients after leaving employment. Id.at 19, citing Waldeck v. Curtis 1000 Inc., 583 S.E. 2d 266, 268 (Ga. App. Ct. 2003). Since the 2002 agreement contained such a provision and it cannot be blue-penciled under Georgia law, the court found the 2002 agreement unenforceable in Georgia. Palmer & Cayat 19. ON REVIEW Up to this point, the decision is unremarkable. The 11th Circuit went even further, however. It effectively imposed Georgia’s public policy on other states by finding that the trial court had erred in limiting the scope of its declaratory judgment to Georgia and vacated the district court’s declaratory judgment to the extent it attempted to limit relief to Georgia. The 11th Circuit determined that because Georgia does not attempt to limit its declaratory judgments in cases involving non-competition agreements, “A federal district court sitting in Georgia and applying Georgia law should not do so either.” Palmer & Cayat 28. The court noted that federal common law determines the scope of judgments rendered by federal courts sitting in diversity, and federal common law requires an enforcing court to apply the law of the state courts in the state where the rendering federal court sits, unless the state’s law conflicts with federal interests. Id.at 27, citing Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 509 (2000). Prior to the 11th Circuit’s decision, employers were faced only with the limited risk that a former employee would seek to have an employee non-compete agreement declared invalid under a particular state’s laws, and therefore unenforceable in that state. Now, there is a real threat of former employees bringing declaratory actions in federal courts in a state that is hostile to non-competes and use a favorable judgment as a shield against enforcement in other states. CONSEQUENCES FOR CORPORATE RAIDING Even more troubling, the decision may have the unintended effect of actually encouraging companies to raid their competitors’ key employees, move them to a state considered hostile to employment non-competes and commence actions for declaratory judgments invalidating non-compete provisions. While this may seem far-fetched, corporate counsel are well-advised to review their current forms of employment non-compete agreements to determine how to protect their companies from the potential consequences of the Palmer & Caydecision. A single adverse decision could undermine the entire framework of a company’s non-compete and non-solicitation policies. First, seriously consider binding arbitration as the sole and exclusive vehicle for dispute resolution. Alternatively, specify forum selection in a state that is not hostile to non-competes in your consent-to-jurisdiction provision. Second, add a provision on governing law that makes the laws of a state friendly toward non-competes govern the interpretation and enforcement of the agreement, without regard to that state’s conflict of laws provisions. Third, set an aggressive corporate policy regarding enforcement of non-competes and strictly comply with it, so you are prepared to quickly commence either an arbitration proceeding or litigation in a favorable court before the former employee can obtain a declaratory judgment in a hostile court. The key is to obtain your final judgment first, so designate venue and forum in a court known to move its docket rapidly and to meet the other standards set forth above. Equally important, a due diligence review of the employment contracts of companies you are considering acquiring must include a careful analysis of those contracts and enforcement policies in light of Palmer & Cay. The 11th Circuit decision in Palmer & Cayshould not dissuade you from including non-compete and non-solicitation provisions in employment agreements. It should, however, make you smarter about how you craft the procedural terms of such covenants and how you enforce them. It also adds a further level of inquiry in your due diligence review of the employment contracts of your acquisition targets. Keith R. Styles is the Regional Managing Partner in the Washington, D.C., Office of Robins, Kaplan, Miller & Ciresi (www.rkmc.com). His practice focuses on mergers & acquisitions, project & business finance and general corporate counseling. Subscribe to the Corporate Counselornewsletter.

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