Northern District Of Georgia Judge Rejects Argument That Former Employer Was Fraudulently Joined And Remands Declaratory Judgment Action To State Court

Posted by Neal F. Weinrich on

Smith v. Willis Insurance Services of Georgia, Inc., No. 1:11-CV-756-TWT, 2011 WL 2749556 (N.D. Ga. July 13, 2011), involved a battle over whether a declaratory judgment action filed in a Georgia state court was properly removed to federal court.

Litigation between the parties arose when William Moody and Eric Smith left employment with Willis Insurance Services of Georgia, Inc. (“Willis”) and began working for Marsh USA, Inc. (“Marsh”).  Mr. Moody and Mr. Smith had executed employment agreements and option agreements containing restrictive covenants.   Willis’ parent company filed suit against Mr. Moody and Mr. Smith in New York state court alleging that they were violating the restrictive covenants in the option agreements.  The parent company also alleged in the New York state court action that Marsh had tortiously interfered with the options agreements.

Mr. Moody, Mr. Smith, and Marsh subsequently filed an action in the Superior Court of Fulton County, Georgia.  In that action they sought a declaratory judgment that the restrictive covenants in the option agreements and the employment agreements were unenforceable.  The named defendants in the Georgia state court action were both Willis and its parent company.  Because both Willis and its parent company were named as defendants, there was not complete diversity between the parties (Mr. Moody and Mr. Smith are both Georgia residents; Willis’ parent company is a corporation organized under the laws of Ireland with its principal place of business in London, England; and Willis is a Georgia corporation).

After the Georgia state court action was filed, Willis sent letters promising that it would not seek to enforce the restrictive covenants in any of the agreements.  Willis’ president also submitted an affidavit representing that Willis would not seek to enforce the covenants.

Willis and the parent company then removed the action to Federal Court.   Wills and the parent company asserted that there was diversity of citizenship because Willis had been fraudulently joined in light of the fact:  (1) Willis was not a signatory or a third-party beneficiary to the option agreements; and (2) Willis had promised not to enforce the restrictive covenants in the employment agreements.  Willis and the parent company argued that Mr. Smith, Mr. Moody, and Marsh therefore could not maintain a declaratory judgment action against Willis and it was thus fraudulently joined.

Mr. Moody, Mr. Smith and Marsh moved to remand.  The District Court found that Willis and its parent company had not carried their burden to prove fraudulent joinder as Willis and its parent company had failed to establish that there was no possibility that the plaintiffs could establish a cause of action against the resident defendant (i.e., Willis).  The District Court found that although Willis had promised not to enforce the restrictive covenants, its promise may not be enforceable for lack of consideration.  The District Court found that there was at least a possibility that the state court would find that the plaintiffs’ complaint states a cause of action for declaratory relief against Willis.

Willis was therefore not fraudulently joined and diversity did not exist.  The case was therefore remanded to state court.

This result likely helps the plaintiffs avoid the first-filed rule, a doctrine of federal law which frequently arises when competing actions regarding restrictive covenants are filed in different federal court jurisdictions.  Although Willis’ parent company’s action was brought in a New York state court, Mr. Moody and Mr. Smith’s likelihood of obtaining declaratory relief regarding the restrictive covenants is significantly greater in a Georgia state court than in federal court, given the first-filed rule.

Although the District Court commented that “it makes [ ] determinations [regarding fraudulent joinder] based on the Plaintiff’s pleadings at the time of removal”, it did not analyze or comment on Willis and its parent company’s readily apparent attempt to “establish fraudulent joinder” after the declaratory judgment action was filed.  That is, Willis’ letters and representations that it would not seek to enforce the restrictive covenants were made after the filing of the declaratory judgment action and prior to removal.  Through these letters, Willis and the parent company sought to eliminate the viability of a declaratory judgment cause of action against Willis, such that they could then assert that Willis was fraudulently joined in the state court action.  However, the District Court did not seem troubled by this as it denied the plaintiffs’ request for attorney’s fees and found that the letters and promises therein gave Willis and its parent company a reasonable though mistaken basis for removing the action to federal court.