BFV Perspectives, Noncompete & Trade Secrets, | May 02, 2011

Can a Non-Compete That Is Declared Unenforceable by a Georgia Court be the Subject of Further Litigation in Another State?

An important case from the Georgia Court of Appeals suggests that the adjudication of the enforceability of restrictive covenants by a Georgia Court precludes re-litigation of the enforceability of the covenants in other jurisdictions, even where the employment agreement at issue provides for the application of another state’s law.  See Hostetler v. Answerthink, Inc., 267 Ga. App. 325, 329-30, 599 S.E.2d 271, 275 (2004) (“When a final adjudication on the merits has been obtained in a jurisdiction that has both personal and subject matter jurisdiction, such final judgment can preclude other jurisdictions from litigating such issues either at the same time or subsequently; when a final adjudication on the merits has been reached, then the doctrines of res judicata and collateral estoppel cause the other jurisdiction to become bound by the finality of such judgment”); see alsoConvergys Corp. v. Keener, 276 Ga. 808, 582 S.E.2d 84 (2003) (answering certified question on enforcement of choice of law provisions in restrictive covenant context from the U.S. Court of Appeals for the Eleventh Circuit); Nasco, Inc. v. Gimbert, 239 Ga. 675, 676, 238 S.E.2d 368, 370 (1977) (illustrating rule that Georgia courts will not apply the laws of a jurisdiction chosen by the parties where the application of the chosen law contradicts the policy of, or will be prejudicial to the interests of, the State of Georgia).

Based on Hostetler, it was commonly understood in Georgia that a final judgment by a Georgia Court declaring a restrictive covenant unenforceable precludes further litigation regarding the enforceability of the restrictive covenants.  However, a case in the Superior Court of Connecticut suggests otherwise.

In Hilb Rogal & Hobbs Company v. Siech, No. HHDCVX04044034621A, 2011 WL 1030421 (Conn. Super. Feb. 17, 2011) (“Connecticut Hilb II”), the trial court denied a motion to re-argue its ruling in Hilb Rogal & Hobbs Company v. Siech, No. HHDVBX04044034621A, 2010 WL 1050540 (Conn. Super. Feb. 16, 2010) (“Connecticut Hilb I”).  The plaintiff in Connecticut Hilb I and Connecticut Hilb II brought an action against its former employee claiming that he violated restrictive covenants in his employment agreement, as well as the Connecticut Uniform Trade Secrets Act.  Mr. Siech, the former employee, moved for summary judgment on the grounds that the claims were barred by collateral estoppel and res judicata based on the Eleventh Circuit’s decision in Siech v. Hobbs Group, LLC, 198 Fed. Appx. 840 (11th Cir. Aug. 29, 2006) (Georgia Hilb), a case litigated in federal court in Georgia.

In Georgia Hilb, the Eleventh Circuit affirmed an order of the United States District Court for the Northern District of Georgia declaring his restrictive covenants unenforceable.  Notwithstanding that his employment agreement stated that it was governed by Connecticut law, the Georgia Court had applied Georgia law to analyze the enforceability of the restrictive covenants.  It found them unenforceable and in violation of the Georgia public policy.

Based on Georgia Hilb, Mr. Seich argued that Hilb was precluded from pursuing the Connecticut action.  The Connecticut Court rejected Mr. Seich’s argument.  Despite the fact that the Georgia Court did not limit the scope of the declaratory judgment to the confines of Georgia, the Connecticut Court found that the issue of whether the restrictive covenants were unenforceable under Connecticut law had not previously been litigated or adjudicated on the merits in the prior action.  As the issue of the enforceability of the covenants under Connecticut law was not actually decided, collateral estoppel did not bar the Court from applying Connecticut law to the enforceability of the restrictive covenants.

The Connecticut Court also found that res judicata did not apply.  The Court held that the plaintiff was not seeking to litigate the same causes of actions which were litigated in the prior action.  In the prior action, Mr. Seich sought a declaratory judgment and injunctive relief under Georgia law.  The Georgia Court “did not consider [Hilb’s] claims under Connecticut law since [it] was bound to apply Georgia law.”  The Connecticut action, unlike the Georgia action, included claims for breach of contract and misappropriation of trade secrets, as well as claims for damages and injunctive relief.  As the Georgia Court did not consider Hilb’s claims under Connecticut law, the Connecticut Court found that Mr. Seich did not carry his burden of showing that res judicata barred the Plaintiff’s claims.

The Connecticut Court’s decision suggests that a declaratory judgment issued by a Georgia Court that restrictive covenants are unenforceable might not preclude litigation of the enforceability of the covenants in other jurisdictions.  While it can reasonably be assumed that a Connecticut appellate court will review the trial court’s ruling and perhaps disagree with its analysis of and conclusions regarding the preclusion doctrines, this case arguably opens the door for never-ending litigation surrounding restrictive covenants in competing forums, where the employee is seeking the benefit of Georgia’s previously historically hostile law against restrictive covenants and the employer is seeking the forum of the law chosen by the parties.

BFV Perspectives, Noncompete & Trade Secrets, | May 02, 2011