Covenants Not to Compete in Georgia

Transcription

1 Covenants Not to Compete in Georgia How to avoid the pitfalls of noncompete agreements what you don t know could hurt you. Tortious Interference with Business Relations in the Employment Context Thomas J. Gallo Barnes & Thornburg LLP Prominence in Buckhead 3475 Piedmont Road, N.E., Suite 1700 Atlanta, Georgia (404) October 18, 2011

2 TABLE OF CONTENTS I. INTRODUCTION... 1 II. GENERAL ELEMENTS OF A CLAIM OF TORTIOUS INTERFERENCE... 1 A. Improper Means... 2 B. What Constitutes Malice?... 3 C. Contractual or Business Relationship D. Financial Injury... 4 III. TORTIOUS INTERFERENCE WITH EMPLOYEE RELATIONS... 4 A. Claims by Employer B. The Competition Privilege C. Claims by Employee... 7 IV. TORTIOUS INTERFERENCE WITH CUSTOMER RELATIONS... 8 V. THE STRANGER DOCTRINE... 9 VI. DAMAGES RECOVERABLE FOR A CLAIM OF TORTIOUS INTERFERENCE i

3 I. INTRODUCTION Georgia courts have long recognized a cause of action for tortious interference with business or contractual relations in the employment context. See, Nager v. Lad N Dad Slacks, 148 Ga. App. 401, 251 S.E.2d 330 (1978); Rome Industries, Inc. v. Jonsson, 202 Ga. App. 682, 415 S.E.2d 651 (1992); McDaniel v. Green, 156 Ga. App. 549, 275 S.E.2d 124, 126 (1980) ( The intentional and non-privileged interference by a third party with existing contractual rights and relations constitutes a tort for which an action shall lie. ). The claim has its basis in the principle that each individual has the right to pursue a legitimate occupation and conduct business in accordance with his own plan, so long as he does not interfere with the rights of others. Perry & Co. v. New South Ins. Brokers, Inc., 182 Ga. App. 84, 354 S.E.2d 852 (1987). part: Tortious interference also has a statutory basis in O.C.G.A , which states, in [A] person who maliciously procures an injury to be done to another, whether an actionable wrong or a breach of contract, is a joint wrongdoer and may be subject to an action either alone or jointly with the person who actually committed the injury. II. GENERAL ELEMENTS OF A CLAIM OF TORTIOUS INTERFERENCE Claims for tortious interference with contractual relations and business relations have the same elements under Georgia law. The plaintiff must show that the defendant: (1) Acted improperly and without privilege; (2) Acted purposely and with malice and with the intent to injure; (3) Induced a third party or parties not to continue a business relationship with the plaintiff; and (4) The plaintiff suffered financial injury as a result. 1

4 White v. Shamrock Bldg. Systems, Inc., 294 Ga. App. 340, 669 S.E.2d 168 (2008)(Tortious interference involves proof of same elements as aiding and abetting breach of fiduciary duty); Kirkland v. Tamplin, 285 Ga. App. 241, 645 S.E.2d 653 (2007); Coloplast Corp. v. Am. Breast Care, L.P., 2006 U.S. App. LEXIS (N.D. Ga. 2006); Ferrellgas v. Barrow, 2006 U.S. Dist. LEXIS 9782 (M. D. Ga. 2006); Bacon v. Volvo Services Center, Inc., 266 Ga. App. 543, 597 S.E.2d 440 (2004); Sumter Regional Hospital, Inc. v. Healthworks, Inc., 264 Ga. App. 78, 589 S.E.2d 666 (2003); Camp v. Eichelkraut, 246 Ga. App. 275, 539 S.E.2d 588 (2000); Watkins & Watkins, P.C. v. Colbert, 237 Ga. App. 775, 516 S.E.2d 347 (1999). 1 A. Improper Means. To prove improper means, the plaintiff must show that the defendant used predatory tactics such as physical violence, fraud or misrepresentation, defamation, use of confidential information, abusive civil suits and unwarranted criminal prosecutions. Ferrellgas, 2006 U.S. Dist. LEXIS 9782 at *37; American Bldgs. Co. v. Pascoe Bldg. Systems, 260 Ga. 346, 392 S.E.2d 860 (1990). Inducing a former employee to disclose a competitor s confidential information would support a claim for tortious interference. Fine v. Communication Trends, Inc., 2010 WL (Ga. App. 2010). Where a party exercises its rights under a contract, there can be no liability for tortious interference with that contractual relationship. Nobel Lodging, Inc. v. Holiday Hospitality Franchising, Inc., 249 Ga. App. 497, 548 S.E.2d 481 (2001). Evidence of improper means must be conclusive, and not based upon speculation. Where the court must infer wrongful conduct, the claim will fail. Watkins, 516 S.E.2d at 347; Coloplast, 2006 U.S. App. LEXIS at *2 (No evidence of improper interference with employment 1 A claim for tortious interference relating to claims for misappropriation of trade secrets may be superseded by The Georgia Trade Secrets Act, O.C.G.A See, Diamond Power International, Inc. v. Davidson, 540 F. Supp. 2d 1322 (N.D. Ga. 2007). However, in Professional Energy Management, Inc. v. Necaise, 300 Ga. App. 223, 684 S.E.2d 374 (Ga. App. 2010), the Court of Appeals held that a tortious interference claim against a third party soliciting plaintiff s customers was not preempted by the GTSA. 2

5 contracts); Barnwell v. Barnett & Co., 222 Ga. App. 694, 476 S.E.2d 1 (1996) (No evidence of wrongful conduct); Camp, 539 S.E.2d at 593 (same); Palombi v. Frito-Lay, Inc., 241 Ga. App. 154, 526 S.E.2d 375 (1999)(same); Fine, 2010 WL (No evidence that employer asked employee to use former employer s customer s billing histories to project future revenue). B. What Constitutes Malice? For purposes of a tortious interference claim, malicious means any unauthorized interference or interference without legal justification or excuse. Batayias v. Kerr-McGee Corp., 267 Ga. App. 848, 601 S.E.2d 174 (2004). The act is malicious when the thing done is with the knowledge of the plaintiff s rights, and with the intent to interfere therewith. Architectural Mfg. Co. v. Airotec, Inc., 119 Ga. App. 245, 166 S.E.2d 744, 747 (1969); See also, White v. Shamrock Bldg. Systems, Inc., 294 Ga. App. 340, 669 S.E.2d 168 (2008) (No improper action or wrongful conduct by defendant); Cumberland Center Assoc. v. Southeast Mgmt. and Leasing Corp., 228 Ga. App. 571, 492 S.E.2d 546 (1997), disapproved of on other grounds by Atlanta Market Center Management Co., 503 S.E.2d 278. Personal ill will is not necessary to create malice. Valdez v. Power Industry Consulting, Inc., 215 Ga. App. 444, 451 S.E.2d 87, 91 (1994) (citing Arford v. Blalock, 199 Ga. App. 434, 405 S.E.2d 698 (1991), aff d, 262 Ga. 95, 414 S.E.2d 1 (1992)). Subjective good faith is also not sufficient to constitute a defense to the malice element of a claim of tortious interference. Id. at 90; See also, Lake Tightsqueeze v. Chrysler First Financial Serv. Corp., 210 Ga. App. 178, 435 S.E.2d 486, 489 (1993). C. Contractual or Business Relationship. In order to prove tortious interference with contractual or business relations, a contractual or business relation must exist between the plaintiff and a third party. In All Star, Inc. v. 3

6 Fellows, 297 Ga. App. 142, 676 S.E.2d 808 (2009), the Court of Appeals affirmed a directed verdict against the plaintiff who failed to prove that it had a business relationship with a third party that defendants allegedly interfered with. The alleged interference must be with a third party; a party cannot tortiously interfere with its own business relationship. H&R Block Eastern Enterprises, Inc. v. Morris, 606 F.3d 1285 (11 th Cir. 2010). D. Financial Injury. Plaintiff bears the burden of proving that defendant s alleged tortious conduct caused a third party to discontinue or fail to enter into a contractual relationship. Without some evidence that customers or potential customers decided to forego their business relationships due to tortious acts by the defendant, the tortious interference claim fails. B&F System, Inc. v. LeBlanc, 2011 WL (M.D. Ga. 2011). III. TORTIOUS INTERFERENCE WITH EMPLOYEE RELATIONS A. Claims by Employer. An employer may bring a claim against a former employee or a third party, including the former employee s new employer, for improperly inducing an employee to terminate his or her relationship. See, Rome Industries, 415 S.E.2d at 652; Witty v. McNeal Agency, 239 Ga. App. 554, 521 S.E.2d 619 (1999); Ferrellgas Ptnrs., Inc. v. Barrow, 2006 U.S. Dist. LEXIS 9782, *36 (M.D. Ga. 2006). Employers may also bring a claim against a third party for breach of a former employee s restrictive covenants. Bijou Salon & Spa, LLC v. Kensington Enters., Inc., 283 Ga. App. 857, 843 S.E.2d 531 (2007) (Party may be subject to injunctive relief where there is evidence that it maliciously induced former employee to breach restrictive covenant.). However, where the noncompete and/or non-solicitation agreements at issue are unenforceable, no claim for tortious 4

7 interference of these agreements exists. Thus, an employee s new employer should always examine the enforceability of any restrictive covenants its employees may have with their former employers. Becham v. Synthes (U.S.A.), 2011 WL (M.D. Ga. September 14, 2011); MAU, Inc. v. Human Techs., Inc., 274 Ga. App. 891, 619 S.E.2d 394 (2005); Atlanta Market Center Management Co. v. McLane Real Estate Investment Management, Inc., 269 Ga. 604, 503 S.E.2d 278, 282 (1998); Lake Tightsqueeze v. Chrysler First Financial Serv., 210 Ga. App. 178, 435 S.E.2d 486 (1993) (Tortious interference must be based on existing contractual rights); Kitfield v. Henderson, Black & Greene, 231 Ga. App. 130, 498 S.E.2d 537, 541 (1998). Courts have also found that a claim for tortious interference may exist without an actual breach of a contract. It is sufficient that a third party interferes with a contract such that performance of the contract is more difficult or more expensive. Each party to a contract has a property interest in that contract and a right to expect performance of the contract free from interference. Id. (citing Perry & Co. v. New South Ins., 182 Ga. App. 84, 354 S.E.2d 852 (1987)). This concept has its basis in O.C.G.A , which states: The right of enjoyment of private property being an absolute right of every citizen, every act of another which unlawfully interferes with such enjoyment is a tort for which action shall lie. Thus, a party may be liable for tortious interference where it induces a breach of a particular duty, such as a fiduciary duty. In Insight Tech., Inc. v. FreightCheck, LLC, 633 S.E.2d 373 (Ga. App. 2006), the court held that a freight factoring company s allegations that its competitors aided and abetted the company s president s breach of his fiduciary duty stated a viable claim for tortious interference. See also, White v. Shamrock Bldg. Systems, Inc., 294 Ga. App. 340, 669 S.E.2d 168 (2008) (Failure to prove defendant s aiding and abetting breach of 5

8 fiduciary duty claim also results in dismissal of tortious interference claim); McDaniel, 275 S.E.2d at 126; Rome Industries, 415 S.E.2d at 652. B. The Competition Privilege. Georgia courts have recognized that actions taken in furtherance of legitimate competition may be privileged. American Bldgs. Co., 392 S.E.2d at 862. The privilege guards against the imposition of undue restraints on the pursuit of employment opportunities in the marketplace. Gresham & Associates, Inc. v. Strianese, 265 Ga. App. 559, 595 S.E.2d 82 (2004). For example, a former employee with no valid contractual restrictions on employee piracy is permitted to properly solicit other employees of the employer so long as the solicitation is not done while he is still employed. Bacon, 597 S.E.2d at 444. The privilege has its basis in the Restatement of Torts 768 and exists where: (1) The relation concerns a matter involved in the competition between the actor and the competitor; (2) The actor does not intend to create or continue an illegal restraint of competition; and (3) The actor s purpose is a least, in part, to advance its interests in competition with the other. The privilege is lost when an illegal restraint of trade is established or wrongful means are used to solicit employees. Id.; American Bldgs. Co., 392 S.E.2d at 862; Orkin Exterminating Co. v. Martin Co., 240 Ga. 662, 242 S.E.2d 135 (1978). A defendant s actions are wrongful where he makes material misrepresentations about the plaintiff employer or its financial condition; or where he engages in a plan to damage the employer s ability to function. Orkin, 242 S.E.2d at ; American Bldgs. Co., 392 S.E.2d at 862. In Orkin, Martin Company (Martin) was a holding company that acquired and operated small pest control companies. Martin s executives solicited several Orkin employees. Id. at 137. None of the employees who left Orkin were induced to do so by any false statements. Id. The 6

9 court held that the defendant s actions were privileged in the absence of evidence that any Martin employee had engaged in a plan or scheme to steal employees from Orkin. Id. at Similarly, in Gresham, the court applied the privilege where the defendant solicited and hired four of Gresham s employees, nearly its entire wholesale property department. Although Gresham demonstrated that the loss of these employees harmed its business, the evidence showed that it had other employees who were capable of servicing and producing the business that the lost employees had produced. Id. at 563. There was no evidence that the solicitation destroyed or substantially injured Gresham s ability to function as an effective competitor. Id.; See also, American Bldgs. Co., 392 S.E.2d at 862 (Applying the privilege where seven employees left plaintiff, but testified that they left because they were dissatisfied with their work and that defendant made no disparaging or false statements about plaintiff). By way of contrast, the court in Nager v. Lad N Dad Slacks, 148 Ga. App. 401, 251 S.E.2d 330 (1978) found that issues of fact existed as to whether it was fair competition where the defendant solicited a substantial portion of plaintiff s sales force, solicited solely from the plaintiff and used confidential information in connection with the solicitations. See also, Airotec, Inc., 166 S.E.2d at (Questions of fact as to liability existed where practically entire sales force persuaded to leave and solicitations included misrepresentations of financial stability of plaintiff and use of confidential information. Court viewed it as planned campaign of recruiting) C. Claims by Employee. An employee may bring a claim alleging that a third party wrongfully interfered with his employment. Saye v. Deloitte & Touche, LLP, 295 Ga. App. 128, 670 S.E.2d 818 (2008) (Factual issues exist regarding auditor s statements to employer which resulted in termination of controller s employment; conditional privilege applied to auditor s statements); Batayias v. Kerr- 7

10 McGee Corporation, 267 Ga. App. 848, 601 S.E.2d 174 (2004). Such a claim applies both where the employee has an employment agreement and where he is an employee-at-will. Palmer v. Stewart County Sch. Dist., 2005 U.S. Dist. LEXIS (M.D. Ga. 2005); Ott v. Gandy, 66 Ga. App. 684, 19 S.E.2d 180 (1942). The plaintiff must still show wrongful conduct by the third party or the claim fails. Batayias, 601 S.E.2d at 176. Where an employee is terminated by a supervisor who does not have absolute authority to fire that employee, that supervisor may be held liable for tortious interference with the employee s employment, even where the employment is at-will. Palmer v. Stewart County Sch. Dist., 2005 U.S. Dist. LEXIS 35511, *45-46 (M.D. Ga. 2005)(Denying summary judgment, finding that employee, who did not authority to discharge the plaintiff without permission from his superiors, may be liable for such discharge.); See also, Troy v. Interfinancial, Inc., 171 Ga. App. 763, 320 S.E.2d 872 (1984). IV. TORTIOUS INTERFERENCE WITH CUSTOMER RELATIONS As shown above, unless an employee has executed a valid non-compete or non-solicit covenant, he is permitted to solicit customers of his former employer on behalf of a new employer, so long as improper means are not used. 2 His actions will be privileged. Cont l Mar. Servs. v. Mar. Bureau, Inc., 275 Ga. App. 533, 621 S.E.2d 775 (2005)(Absent a contractual restriction, there is no bar to former employee contacting customers of his former employer); Bacon, 597 S.E.2d at 444; Tom s Amusement Co. v. Total Vending Svcs., 243 Ga. App. 294, 298, 533 S.E.2d 413 (1990). In order to succeed on a tortious interference claim, a plaintiff must show improper action by the defendant, and that it lost customers due to the defendant s improper actions. Bacon, 597 S.E.2d at 444. Absent evidence that customers left due to the 2 Solicitation of employer s customers or prospective customers while still employed gives rise to claims for breach of fiduciary duty and tortious interference. See, White v. Shamrock Bldg. Systems, Inc., 294 Ga. App. 340, 669 S.E.2d 168 (2008). 8

11 defendant s actions, the claim fails. Cont l Mar. Servs., 621 S.E.2d at 779; Pendley Quality Trailer Supply, Inc. v. B&F Plastics, Inc., 260 Ga. App. 125, 578 S.E.2d 915, (2003) (Claim for tortious interference with customer relations failed where plaintiff obtained no testimony from any of the allegedly lost customers about their reasons for leaving, and jury would have had to speculate as to why customers left). V. THE STRANGER DOCTRINE In order to be liable for tortious interference, a defendant must be a stranger to the contract and to the business relationship giving rise to the contract. MAU, Inc. v. Human Techs., Inc., 619 S.E.2d 394 (Ga. App. 2005). Under Georgia law, a defendant is not a stranger as a matter of law when: 1) the defendant is an essential entity to the purported injured relations; 2) the allegedly injured relations are inextricably a part of or dependant upon the defendant s contractual or business relations; 3) the defendant would benefit economically from the alleged injured relations; or 4) both the defendant and the plaintiff are parties to a comprehensive interwoven set of contracts or relations. Brilliant Alternatives, Inc. v. Feed Management Systems, Inc., 2011 WL (N.D. Ga. 2011), quoting, Britt/Paulk Agency, Inc.., v. Vandroff Ins. Agency, Inc., 952 F. Supp. 1575, 1584 (N.D. Ga. 1996). Proof that the defendant was not a stranger to the business relationship at issue is fatal to a claim for tortious interference. Life Alarm Systems, Inc. v. Valued Relationships, Inc., 2011 WL (S.D.Ga. 2011); Kingdom Insurance Group, LLC v. Cutler and Associates, Inc., 2011 WL (M.D. Ga. 2011)(Defendants that were financing plaintiff s operations and received compensation as a result of insurance sales by plaintiff s agents were not strangers); ACS Construction Equipment USA, Inc. v. City Commercial Real Estate, Inc., 303 Ga. App. 309, 693 S.E.2d 559 (2010); OnBrand Media v. Codex Consulting, Inc., 301 Ga. App. 141, 687 9

12 S.E.2d 168 (2009); Perry Golf Course Development, Inc. v. Housing Authority of Atlanta, 299 Ga. App. 387, 670 S.E.2d 171 (2008) (AHA party to contractual relationship to redevelop Perry Homes and not a stranger to the relationship); MedSouth Health Plans v. Life of the South Insurance Co., 2008 WL (M.D. Ga.) (Sales agent of plaintiff not stranger to contracts between plaintiff and its sub-agents); ULQ, LLC v. Meder, 293 Ga. App. 176, 666 S.E.2d 713 (2008) (Minority owner of LLC not a stranger to business and contractual relationships between LLC and its customers); Harrick v. NCAA, 454 F. Supp. 2d 1255 (N.D. Ga. 2006) (NCAA is not a stranger to employment contracts between coaches and university in intercollegiate basketball); Sam v. Reich, 2006 U.S. Dist. LEXIS 8238, *7 (N.D. Ga. 2006); Kollman v. International Brotherhood of Electrical Workers, 369 F.3d 1209 (11th Cir. 2004); Strahley, 510 S.E.2d at 821; Lake Tightsqueeze, 435 S.E.2d at 489. All parties to an interwoven contractual arrangement are not liable for tortious interference with any of the contracts or business relationships. Nobel Lodging, 548 S.E.2d at 485; See also, Iraola & CIA v. Kimberly-Clark Corp., 325 F.3d 1274, (11th Cir. 2003); Mulligan v. Brunswick Memorial Hospital Auth., 264 Ga. App. 39, 589 S.E.2d 851 (2003) (Basing affirmation of summary judgment on the stranger doctrine); Voyles v. Sasser, 221 Ga. App. 305, 472 S.E.2d 80, 82(1996)(Claim fails where defendant was no stranger to business relations at issue). Where a defendant has a financial interest in one of the parties to the contract or within the contract, he is not a stranger to the contract or business relationship, even if he is not a contractual signatory. Hammer Corp. v. Wade, 628 S.E.2d 638 (Ga. App. 2006); See also, BMC v. Ceebraid-Signal Corp., 2008 WL (11th Cir.) (Lenders or equity investors not strangers); Wachovia Ins. Servs. v. Paddison, 2006 U.S. Dist. LEXIS (S.D. Ga. 2006). In other words, to qualify as a non-stranger, a defendant must have a legitimate economic interest in 10

13 either the contract or a party to the contract. Tidikis v. Network for Med. Communs. & Research, LLC, 274 Ga. App. 807, 619 S.E.2d 481 (2005) (No claim for tortious interference with employment agreement lies against majority shareholder of the employee s former employer). The stranger doctrine precludes an employee from filing suit against his employer for tortious interference with his employment. Walker v. General Motors, Corp., 152 Ga. App. 526, 263 S.E.2d 266 (Ga. App. 1979); McElroy v. Wilson, 143 Ga. App. 893, 240 S.E.2d 155, 157 (Ga. App. 1977), cert denied, 435 U.S. 931 (1978). An employee s supervisor is also not a stranger to an employment contract and cannot be sued for tortious interference. See, e.g., Weigand v. City of Perry, 2008 WL (N.D. Ga.); Palombi v. Frito-Lay, Inc., 241 Ga. App. 154, 526 S.E.2d 375 (1999); Atlanta Market Management Co., 503 S.E.2d 278 (1998). Additionally, in an employment-at-will situation, one who has the authority to terminate an employee cannot be held liable for having improper motives in the discharge or termination of the employee. McElroy, 240 S.E.2d at 157; See also, Moore v. Barge, 210 Ga. App. 552, 436 S.E.2d 746, 748 (1993) (citations omitted) (Where president had absolute right to terminate employee, he cannot be liable for tortious interference). An employee is not a stranger to the business relationship between his employer and the customers he personally served while employed. Tom s Amusement Co., Inc. v. Total Vending Services, Inc., 243 Ga. App. 294, 533 S.E.2d 413 (2000); See also, Physician Specialists in Anesthesia, P.C. v. MacNeill, 246 Ga. App. 398, 539 S.E.2d 216 (2000)(Doctors not liable for tortious interference with their former employer s business relations with their own patients); Mulligan, 2003 Ga. App. LEXIS 1379, *4-5; Parks v. Multimedia Techs., Inc., 239 Ga. App. 282, 520 S.E.2d 517 (1999). 11

14 VI. DAMAGES RECOVERABLE FOR A CLAIM OF TORTIOUS INTERFERENCE To be recoverable, damages must be proximately caused by the tortious act. If a plaintiff cannot show that damage to his rights or obligations under a contract proximately resulted from the third party s interference, the claim for tortious interference fails as a matter of law. Canter v. Willowrun Condo. Assn., 179 Ga. App. 257, 259, 345 S.E.2d 924 (1986). See, e.g., Duke Galish, LLC v. Manton, 291 Ga. App. 827, 662 S.E.2d 880 (2008); Smith v. Morris, Manning & Martin, LLP, 293 Ga. App. 153, 666 S.E.2d 683 (2008) (Law firm s alleged actions did not proximately cause damage); Trilink Saw Chain, LLC v. Blount, Inc., 583 F. Supp (N.D. Ga. 2008) (Failure to prove business relationships were reasonably likely to develop; claim for interference with business relationship cannot be based on speculation). A successful plaintiff in a claim for tortious interference may recover both actual and punitive damages. In Arford, 405 S.E.2d at 700, the plaintiff recovered $200,000 in actual damages and $1 million in punitive damages for tortious interference where the evidence supported the jury s verdict that the defendant intentionally took wrongful action to freeze out the plaintiff from his business partnership. Id. at