Be Careful What You Ask for: Selecting Forums for Arbitration

On October 2, 2014, the United States Court of Appeals for the Eleventh Circuit rendered its decision in Inetianbor v. CashCall, Inc. A copy of the slip opinion can be found here. Although this case did not involve a non-compete agreement, the Eleventh Circuit’s guidance regarding contractual arbitration provisions may have implications for those drafting and litigating non-competes.

The arbitration clause at issue in Inetianbor was a bit unusual (at least as to the specified forum), but the underlying dispute between the parties was not out of the ordinary. The plaintiff, Mr. Inetianbor, was a Florida resident who borrowed money from Western Sky Financial, LLC. The defendant CashCall, Inc. serviced this loan. Mr. Inetianbor sued the servicer in a Florida court, alleging, among other things, violations of the Fair Credit Reporting Act. After removing the case to a federal court, the servicer then moved to compel arbitration of the dispute pursuant to the terms of Mr. Inetianbor’s loan agreement with Western Sky. This loan agreement contained the following arbitration provision: “You agree that any Dispute … will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative ….

After the trial court initially compelled arbitration in accordance with this provision, Mr. Inetianbor contacted the Tribe in Eagle Butte, South Dakota. In response, Mr. Inetianbor received a letter from a Tribal Judge stating that the Tribe “does not authorize Arbitration,” but after some back-and-forth, a Tribal Elder was eventually chosen to arbitrate Mr. Inetianbor’s dispute. However, at the preliminary arbitration hearing, the arbitrator explained that “this is a private business deal” and that “[t]he Tribe has nothing to do with any of this business.” When Mr. Inetianbor brought the arbitrator’s statements to the attention of the trial court in Florida, the court was persuaded to reconsider its previous orders compelling arbitration.

The trial court determined that it was not possible to conduct an arbitration in accordance with the parties’ agreement, because the arbitration was not being conducted by an “authorized representative” of the Tribe. On appeal, the Eleventh Circuit affirmed the trial court’s decision. The dispute between Mr. Inetianbor and his loan servicer will now be resolved through judicial proceedings, not through arbitration.

So what does this mean for non-compete agreements? It is probably fair to say that most practitioners have never encountered a non-compete agreement specifying resolution of disputes through arbitration conducted by the Cheyenne River Sioux Tribal Nation. However, employment contracts sometimes contain both non-compete provisions and arbitration provisions. As an initial matter, such arbitration provisions may add additional steps to the process of obtaining injunctive relief from a court when an employer seeks to enforce its non-compete provisions. This said, when the arbitration provisions are enforceable, it is the arbitrator — and not a court — who will ultimately determine the scope and application of the non-compete provisions. The Eleventh Circuit’s decision in Inetianbor underscores the need to pay attention to the forum(s) specified for arbitration when drafting or litigating non-compete clauses subject to arbitration.

Georgia Court of Appeals Provides Ammunition for Saving Unenforceable Non-Competes

In the World War II epic Saving Private Ryan, Tom Hanks and his platoon of grunts cross dangerous enemy territory to rescue an American soldier before he becomes the fourth member of his family to be a casualty of the Big One.  In similar fashion, a trial court and a Georgia Court of Appeals panel in Fab’rik Boutique, Inc. v. Shops Around Lenox, Inc., 2014 Ga. App. LEXIS 612 (Ga. Ct. App. Sept. 8, 2014), led by Judge McFadden, recently marched through 40-plus years of hostile Georgia non-compete law to save an equally vulnerable restrictive covenant.

If you’ve been paying attention to this Blog or Georgia non-compete law in general, you know that May 11, 2011, is Liberation Day for Georgia restrictive covenants.  Following the enactment of Georgia’s  new non-compete statute, O.C.G.A. §13-8-50, et seq., restrictive covenants in agreements executed on or after May 11, 2011, were freed from the often draconian constraints of the prior body of case law governing, and usually dooming, Georgia non-compete agreements.  Of most significance, the new law allows a Court to blue-pencil (or modify, for you non-lawyers out there) an overbroad covenant so that it can be reasonable and thus enforceable.  Agreements that pre-date Non-compete Liberation Day, however, must strictly comply with the applicable body of case law or else be deemed not worth the paper they’re written on.  Decisions from state and Federal courts following the enactment of the new statute made it clear that they understood that Georgia non-compete law now existed in two parallel but supremely disparate dimensions — a litigant seeking to enforce a post-May 11, 2011 restrictive covenant could expect a benevolent jurist with a newly-sharpened blue-pencil eager to assist the over-zealous drafter of the non-compete by softening the effect of the over-reaching contractual language.  For those non-compete plaintiffs with a an older covenant, however, the judge’s ruling would likely continue to be as deadly as the bible-quoting sniper in Tom Hanks’ platoon.

InFab’rik,the Court of Appeals construed a restrictive covenant in a lease that prohibited the tenant, a women’s clothing boutique, from opening or operating “another store” within five miles of the leased premises.  Read literally, the clause would prevent the tenant’s owners from opening up an ice cream shop or hardware store in the restricted area, even though such uses would not be competitive with the tenant’s clothing store in the landlord’s retail center.  The tenant argued that under the pre-2011 strict scrutiny to be applied by Courts to restrictive covenants, the provision was grossly overbroad as drafted and thus unenforceable.

If I were a gambling man, I would have put my money on the tenant in succeeding in this argument, having seen many a similarly vague restrictive covenant felled by the prior body of employee-friendly non-compete law. I’m glad Vegas doesn’t take odds on appellate cases, however, because my wallet would be a little lighter today.  The Court of Appeals, recognizing that it could not use the new statute to blue-pencil the covenant, instead applied the rules of contract construction to narrow what it deemed to be an ambiguous phrase and held that, following such judicial construction, the covenant was reasonable and enforceable against the tenant.  In rationalizing its decision, the Court said that “the application of the rules of contract construction, and not the ‘blue pencil’ method, resolve any ambiguity in the lease.” Id. at *7.  It would be interesting to see how many of the legions of unenforceable non-competes from past opinions could be saved in similar fashion, but alas, that is an endeavor well-beyond the scope of this casual blog post.

BURR POINT:  The prevailing thought among non-compete lawyers In Georgia has been that pre-May 11, 2011 non-compete agreements would not receive any benefit of the change in public policy towards restrictive covenants heralded by the 2011 statute.  The most recent Court of Appeals case on the issue perhaps signals that there may yet be hope for Private Ryan-like older non-compete agreements under attack by a barrage of unfriendly pre-statutory case law.

Weeding through the Legal Uncertainty of Garden Leave

Employers seeking to limit employees from taking customers with them to new jobs should consider including “garden leave” provisions in their form employment agreements, in addition to or in place of the more traditional non-compete and non-solicitation covenants. A garden leave clause requires an employee to provide a certain period of notice to the employer before voluntarily terminating employment (usually 30-60 days) and restricts the employee from competing against his or her employer during the notice period.  During the notice period, the employee is paid full salary and benefits and is usually directed not to report to work during the notice period. Thus, the  “garden leave” term comes from the notion that, at least metaphorically, the employee will stay at home and tend to his garden during the restricted period, while the employer secures relationships with its customers before the employee goes to work for a competitor.

The potential benefit to garden leave clauses is that they are viewed more favorably by Courts from an enforcement standpoint because the employee is still being paid during the restricted period. Because the concept is relatively new in the United States (as opposed to its common use in the United Kingdom), there is not a lot of case law guidance about their enforceability.   As with non-competes, the law controlling these provisions is very jurisdiction-specific.  For example, garden leave provisions have been regularly enforced in New York. See Estee Lauder Co. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006) (granting preliminary injunction of five months against employee in charge of developing strategies for certain brands of employer’s skin care products and finding that risk of employee’s “loss of livelihood is entirely mitigated by the fact that [employer] will continue to pay [his] salary of $375,000 per year for the duration of the ‘sitting out’ period”); Ayco Co., L.P. v. Frisch, 795 F. Supp. 2d 193, 197 (N.D.N.Y 2011) (granting preliminary injunction against employee financial advisors and finding that agreement by employees to “give [employer] ninety days notice of termination, during which time they would remain . . . employees and continue to receive their base salary or salary draw, but would no longer participate in [employer's] compensation plan” was enforceable).

The law in the Southeast is significantly less developed.  The last word in Georgia, for instance, came in Carvalho v. Credit Suisse Securities (USA) LLC, 2007 U.S. Dist. LEXIS 80651 (N.D. Ga. October 31, 2007).  Carvalho indicates that courts applying Georgia law may view garden leave provisions less favorably than those applying New York law.  In Carvalho, the Northern District of Georgia considered the enforceability of a garden leave provision, which provided that the employees were entitled to their base salary and benefits during an unspecified notice period.  The court denied a temporary restraining order and preliminary injunction, reasoning that “[t]he income of these employees is substantially higher than their base salary [and] the employer has the ability to significantly reduce their income and prohibit them from working for another employer of any kind during the notice period.”  The Court also expressed doubt as to whether the covenant was enforceable in light of Georgia’s at will employment standard codified at O.C.G.A. § 34-7-1, reasoning that “because the employee may resign at any time, the Court questions whether he can be ordered to continue in his employment, especially under less favorable terms of employment.”

BURR POINT: Employers should consider adding garden leave provisions in addition to or in place of non-compete provisions in employment contracts.

If you would like to add a garden leave provision to your employee agreements, the Burr & Forman team would be happy to assist you. Please contact us at any time.

Key Ingredients for an Effective Non-Compete Agreement

In increasingly competitive business environments consisting of mobile and tech-savvy workforces, employers need to take full advantage of the most important protection available against unfair competition by former employees: a comprehensive and effective non-compete agreement. Employers should have non-compete agreements reviewed and/or drafted by an attorney familiar with the laws of any state that the agreement will be active in (usually the states in which employees reside). This is especially important because the laws governing non-compete agreements vary from state to state.

However, regardless of state, the key ingredients to a successful and protective agreement include the following types of provisions:

  • Non-Competes — While a “Non-Compete Agreement” usually refers to an employment contract that includes many of the provisions in this list, an actual non-compete provision is the one that actually prohibits an employee from working for a competitor.  To be enforceable, this type of provision typically must be reasonable in terms of the duration, the territory, and the scope of prohibited activities.  What is deemed reasonable varies from state-to-state and is often fact-specific based on the circumstances of each particular employee.
  • Non-Solicitation of Customers — In a world where anyone on the globe is potentially accessible by email or cellphone, an employer’s vulnerability to competition is often defined not by geography but by customers.  Accordingly, a provision for the non-solicitation of customers is essential for most modern businesses.  A non-solicitation covenant does not by itself prevent an employee for working for a competitor, but rather it prohibits an employee from affirmatively soliciting the customers of the former employer.  A non-solicitation provision often works in tandem with a non-compete clause, but a non-solicitation term is a must where employees are reluctant to agree to an absolute prohibition from competing in a certain area.
  • Confidentiality/Non-Disclosure — These provisions limit an employee’s ability to use or disclose non-public information relating to the employer’s business and customers.  Even in the absence of a non-compete or non-solicitation provision, confidentiality agreements can be used to hinder unfair competition and solicitation of customers by a former employee if it can be shown that the employee is using the confidential business information from the former employer.  Additionally, confidentiality agreements are usually necessary, at minimum, to prove the key element of a claim for a trade secret violation: efforts to maintain the “secrecy” of a purported trade secret.
  • Non-Recruitment — A non-recruitment provision seeks to limit a former employee’s ability to recruit other employees away from the employer.  There are few common law and statutory restrictions on the recruitment of a company’s employees, so these types of covenants are an important tool for staving off mass defections.
  • Return of Property — Many post-employment problems can be avoided, or grounds for a remedy improved upon if there is a problem, by a contract requiring that an employee return all company-related property, information, or documents obtained or created by the employee upon termination of the employment relationship.

BURR POINTWhile there are multiple other terms that are a part of a well-drafted non-compete agreement, the list above provides the backbone terms that will serve as protection for the employer.