BFV Perspectives, Noncompete & Trade Secrets, | Apr 25, 2011

Eleventh Circuit Opinion in Non-Compete Case Addresses Amount-in-Controversy Requirement and Mandatory Arbitration Provisions

Weiner v. Tootsie Roll Industries, Inc., No. 10-12989, 2011 WL 311668 (11th Cir. Feb. 2, 2011) (not selected for publication), provides a good illustration of some of the procedural variables that may arise when a litigant files a lawsuit in a Georgia state court seeking to have a non-compete declared invalid.

Bruce Weiner was a Georgia resident who owned several businesses that manufactured and distributed gum and other confectionary products.  Tootsie Roll acquired Mr. Weiner’s interest in these companies in a sale in which it paid over $200 million.  In connection with the sale, Mr. Weiner agreed not to compete with or solicit the employees or customers of Tootsie Roll for ten years following the closing.

Approximately six years after the sale, Mr. Weiner filed a complaint in a Georgia state court seeking a declaration that the restrictive covenants in the purchase and sale agreement were over broad and unenforceable.  Tootsie Roll removed the action to federal court based on diversity of citizenship.  Tootsie Roll also moved to compel arbitration based on a mandatory arbitration provision in the purchase and sale documents.  In this provision, the parties agreed to arbitrate any and all disputes related to the agreement, except for (1) claims barred by the applicable survival period in the agreement, and (2) claims for preliminary injunctive relief.

Mr. Weiner moved to remand, arguing that the amount-in-controversy requirement was not met.  Tootsie Roll offered two arguments for why the amount-in-controversy requirement was satisfied.  First, Tootsie Roll argued that Mr. Weiner received far in excess of $75,000.00 for his promise not to compete with Tootsie Roll, given that he received in excess of $85 million in exchange for his interest in the companies and for his agreement not to compete.  Second, Tootsie Roll pointed out that in 2003, Mr. Weiner had earnings of approximately $3.5 million as an owner and vice president for two of the companies sold.  Thus, the value to him of a declaration that he was free to compete with Tootsie Roll exceeded $75,000.00.

The trial court denied Mr. Weiner’s motion to remand.  Reviewing the district court’s jurisdictional findings for clear error, the Eleventh Circuit found no clear error in the District Court’s finding that the amount-in-controversy requirement was satisfied.  The Eleventh Circuit noted that the parties assigned millions of dollars of value to the goodwill of the companies sold to Tootsie Roll.  In his Complaint, Mr. Weiner acknowledged that his agreement not to compete was a component of that good will.

The Eleventh Circuit also noted the undisputed evidence that Mr. Weiner had collected millions of dollars in 2003 from his ownership interest in the companies.  The Eleventh Circuit thus found that the District Court did not clearly err in finding that Tootsie Roll established by a preponderance of evidence that the amount-in-controversy requirement was satisfied.  Compare Crump Insurance Services, Inc. v. All Risks, Ltd., Civil Action No. 1:10-CV-1555-RWS, 2011 WL 176892 (N.D. Ga. Jan. 18, 2011) (granting motion to remand in declaratory judgment action and finding that conclusory statement by employee concerning his previous compensation failed to establish that the value of a declaration that employee’s restrictive covenants were unenforceable exceeded $75,000.00, particularly when the employee’s non-solicitation covenant permitted him to exempt six of his customers and solicit them at will);Personnel Options, Inc. v. The Reserves Network, Inc., No. 3:10-cv-071-WSD, 2010 WL 2662733 (N.D. Ga. June 30, 2010) (remanding case seeking declaration that restrictive covenants in employment agreements were unenforceable and an injunction to prevent former employer from enforcing covenants, where factual allegations in Complaint and Defendant’s removal documents failed to show that the value to the Plaintiffs of the relief requested exceeded $75,000.00, as court cannot speculate to find the jurisdictional predicates are met in the absence of such allegations).

The Eleventh Circuit also affirmed the District Court’s grant of Tootsie Roll’s motion to compel arbitration.  The parties agreed that the arbitration provision had two exceptions, and the parties appear to have agreed that neither of these exceptions applied.  However, Mr. Weiner also argued that a provision within the covenant not to compete allowed him to litigate the covenant’s validity in court.  Specifically, Mr. Weiner relied on a provision stating that “a court of competent jurisdiction is directed to modify any provision to the extent necessary to render such provision enforceable …”

The Eleventh Circuit rejected Mr. Weiner’s argument that this provision allowed him to litigate the covenant’s validity in a court and not in arbitration.  The Eleventh Circuit instead found that this provision only addressed the relief to be entered by a court enforcing the covenant, i.e., the provision provided that a court enforcing the covenant could do so in whole or in part.

The Eleventh Circuit found that Mr. Weiner’s interpretation would have created a third exception from the arbitration provision for all disputes involving the covenant not to compete.  Therefore, accepting his argument would have been akin to re-writing the language of the arbitration agreement.  The Eleventh Circuit declined to do this and thus held that the dispute over the covenant not to compete must be submitted to arbitration.

While Weiner was not selected for publication, the opinion suggests that the Eleventh Circuit (and the District Courts within the Eleventh Circuit) may be less likely to allow individuals bound by restrictive covenants in employment agreements containing mandatory arbitration provisions to pursue declaratory relief in a federal court.  Compare Global Link Logistics, Inc. v. Briles, 296 Ga. App. 175, 674 S.E.2d 52 (2009) (affirming denial of motion to compel arbitration in action seeking declaration that restrictive covenants were unenforceable).

BFV Perspectives, Noncompete & Trade Secrets, | Apr 25, 2011
Neal F. Weinrich
Neal F. Weinrich

Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.