BFV Perspectives, Noncompete & Trade Secrets, | Aug 12, 2010

Georgia Court of Appeals’ Affirms Holding That Non-Solicitation Provision Is Overbroad; Finds That Employer’s Dissemination of Its Lawsuit Against Its Former Employees Does Not Constitute Libel

In a recent decision, the Georgia Court of Appeals affirmed a trial court’s decision finding a non-solicitation of customers covenant unenforceable.  Fine v. Communications Trends, Inc., 10 FCDR 2597 (August 6, 2010).  In the case, the Court of Appeals also upheld the trial court’s dismissal of a claim for libel based upon the former employer’s dissemination of the lawsuit against the former employee to customers.

In the case, the employer was a business engaged in media planning, purchasing, and cable network programming.  The employee was a vice-president of the company and was the main contact for the company’s major clients which allowed her to develop relationships with them.

The agreement she signed during her employment provided as follows:

The Employee hereby also agrees and covenants with [the company] that throughout the period of his employment and for a period of two (2) years immediately following cessation of Employee’s employment [with company], the Employee shall not solicit advertising media placement business similar to [the company] on behalf of any persons or entity other than [the company], either directly or indirectly, whether as a shareholder, partner, joint venturer, consultant, employee, officer, agent or otherwise, from any person or entity (or otherwise contact, call upon, communicate with or attempt to communicate with any such person or entity with a view to providing advertising media placement services, competitive or potentially competitive with [the company] [.]).

Based upon the terms in italics, the trial court held that the non-solicitation provision was an overbroad and unreasonable restraint of trade in that it not only prohibited the employee from soliciting the company’s clients, but also prohibited her from “otherwise” communicating with the former clients.  The court interpreted this to mean the employee was prohibited from accepting business from customers, without solicitation and regardless of who initiated the contact.  The Court of Appeals agreed with this interpretation.  As such, the provision was found to have violated the rule prohibiting restriction on the acceptance of unsolicited business as originally set forth in Singer v. Habif, Arogeti & Wynne, P.C., 250 Ga. 376 (1982).

The company argued that the provision was substantially similar to the non-solicitation provisions upheld in W.R. Grace & Co., 262 Ga. App. 464, and Covington v. D.L. Pimper Group, Inc., 248 Ga. App. 265 which also prohibited the employees from “communicating with” the customers.  However, in a footnote, the Court of Appeals held that contrary to the company’s argument, the non-solicitation covenant in the case was not substantially similar to the non-solicitation provisions upheld in those case because the Court interpreted the restriction to also extend to prohibit the employee from “otherwise” contacting and communicating with former clients to accept business, without her prior solicitation.

The discussion on this point leads one to wonder how a prohibition on “communication with” customers is permissible (as was held in W.R. Grace and Covington) and does not violate the rule against prohibiting the acceptance of unsolicited business.  If the employee cannot communicate with the customer, how can the employee accept unsolicited business?  The Georgia courts have reconciled this apparent inconsistency by finding that because the language was upheld in W.R. Grace, the seminal case permitting a non-solicitation provision which does not contain a territorial limitation, it must be ok.  In Covington, the Court of Appeals held that a covenant containing language prohibiting the employee from “communicating with” customers in the context of solicitation really only prohibits communication which is tantamount to affirmative solicitation on the part of the employee.

In any event, in Fine the Court of Appeals also affirmed the trial court’s dismissal of the former employer’s claims concerning breach of the confidential information provision and misappropriation of trade secrets finding that there was no evidence that the employee had disclosed any confidential information or trade secrets.

The Court of Appeals did reverse the trial court’s grant of summary judgment as to the former employer’s claim of breach of fiduciary duty finding that there was sufficient circumstantial evidence that the employee deleted client contact information and destroyed client files prior to her departure which caused the employer to lose crucial information regarding its major clients and weakened its position against its competitor.  The Court found that despite the former employee’s testimony that she had not engaged in this activity, there was sufficient circumstantial evidence to be considered by a jury.

In a not-uncommon twist, the former employer in Fine had sent a letter to some of the customers in an effort to keep the customers informed as to the steps the company had been forced to take to protect its company from misinformation and unlawful solicitation by its former employee.  The letter further advised the customers that the trial court had issued a restraining order against the former employee and her new employer.  Based on this activity, the employee and the new employer had filed a counterclaim for defamation.  However, the trial dismissed this claim and the Court of Appeals upheld the dismissal finding that the letter was privileged as a matter of law.

The company’s president testified that it was his intent in sending the letter to inform the customers about the business situation and the restraining order.  He also stated that it was necessary to inform some vendors about the situation since some of the information believed to have been taken by the employee related to exclusive pricing from those vendors which the company deemed to be confidential and subject to the  non-disclosure covenant.  Based upon the testimony of the company’s president, the Court of Appeals held the trial court was authorized to find that the letter was sent in good faith and that it was undisputed that the company’s business relationships with its clients and vendors was an interest to be upheld.  In light of the pending litigation and issuance of the temporary restraining order, the Court found the letter was also issued on a proper occasion.  The Court also found that the letter was published to proper persons, having been sent only to certain executives of the customers and vendors who had a business relationship with the company before the employee left to work for the competitor.  The Court found the evidence therefore established as a matter of law that the letter was protected by the good faith privilege defense to a claim of defamation.


BFV Perspectives, Noncompete & Trade Secrets, | Aug 12, 2010
Benjamin I. Fink
Benjamin I. Fink

Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.