The 11th U.S. Circuit Court of Appeals decision is "significant" because "if a court decides to strike down a covenant not to compete or a nonsolicitation covenant, that determination will have effect in other jurisdictions," said William A. Clineburg Jr., a partner with King & Spalding in Atlanta, who wasn't involved in the case.
The court held that "if you obtain a declaratory judgment as opposed to an injunction, you will be more likely to be able to enforce that relief nationwide — as opposed to just within the state that issued it," said Lon A. Berk, a partner in Hunton & Williams' McLean, Va. office, who also wasn't involved in the case. "That has important implications, not only for insurance, but for all litigation everywhere," Berk said.
The case involved "employee and client non-solicitation agreements" from 1997 and 2002 between James B. Meathe and Marsh (NYSE:MMC), his former employer. Marsh employed Meathe from 1997 to 2003. By 2003, Meathe was managing director and head of the Midwestern region for Marsh USA, a Marsh subsidiary. In 2003, Marsh paid Meathe about $725,000 in salary and bonuses.
Meathe left Marsh on Jan. 1, 2003. A month later, he became president of Palmer & Cay Inc., a Georgia-based insurance broker and a direct competitor of Marsh.
In U.S. District Court for the Southern District of Georgia, Meathe and Palmer & Cay sought a judgment prohibiting Marsh from enforcing the 1997 and 2002 agreements. Marsh countersued, contending that Meathe violated covenants of both agreements in order to expand Palmer & Cay's business in the Midwest.
U.S. District Judge B. Avant Edenfield granted judgment in favor of Meathe and Palmer & Cay, holding the agreements were unenforceable in Georgia under state public policy. The District Court enjoined Marsh from attempting to enforce the agreements within the state.
Marsh appealed, arguing that Edenfield erred by holding the agreements were unenforceable under Georgia law. Palmer & Cay and Meathe cross-appealed, arguing that Edenfield erred in limiting the scope of its injunction and declaratory judgment to Georgia under the 11th Circuit's 2003 ruling in "Keener v. Convergys Corp."
In the April 1 ruling, the 11th Circuit first ruled that the District Court was wrong in granting judgment for Palmer & Cay and Meathe on their claim that the 1997 agreement is unenforceable. "Second, we determine that the district court did not err in ruling that the 2002 agreement is unenforceable under Georgia law," wrote Circuit Judge Stanley F. Birch Jr. for the panel.
"Finally, we decide that the district court correctly applied Keener to limit its injunction to Georgia but erred in limiting its declaratory relief to Georgia," Birch wrote.
Clineburg called the decision "important," noting it "eliminates the difference" between an injunction and a declaratory judgment. A declaratory judgment is a judgment of a court that determines the rights of parties without ordering anything to be done or awarding damages, while an injunction is an order issued by a court requiring a party to do something or prohibiting some act after a court hearing, according to a definition of legal terms by Web site law.com.
The court is "now saying that the declaratory judgment will have extra-territorial effect and that is effectively exporting (Georgia) public policy," Clineburg said.
The ruling on noncompete agreements also is significant because Georgia law is "very restrictive," compared with other states, on employers that make employees sign noncompete agreements, noted Berk.
The decision would likely encourage the "race to the courtho