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Employment Law When distance is no object
As employee turnover rises and technology improves, companies must rethink competition clauses
November 24, 2003

In today's economy of fierce global competition, high employee turnover and amazing technological advances, former employees are increasingly able to move hundreds, if not thousands, of miles away and still directly compete with their former employer. Unfortunately, the divergent state laws relating to noncompete agreements have not kept pace with this new economic reality.

Two recent cases illustrate the problems in drafting and then litigating over traditional noncompete agreements across state lines. First, the 11th U.S. Circuit Court of Appeals decision this year in Keener v. Convergys Corp. suggests that while a court has the power to enforce a noncompete agreement within a state's borders, that may be the extent of the court's authority. The other case, the California Supreme Court's 2002 ruling in Advanced Bionics Corp. v. Medtronic Inc. (Mark Stultz), goes even farther. Stultz suggests that while one court may be unable to stop a party from litigating the same noncompete agreement in another state, that court need not adhere to any ruling issued by that other state's court.

As described below, Keener and Stultz illustrate a number of important considerations for the drafting and enforcement of noncompete agreements. First, a legitimate competitive threat can be located anywhere in the country, not just down the street. Second, employees today are less parochial and are willing to relocate many hundreds of miles away for new job opportunities.

Third, states have very different views on noncompetes and may disregard the parties' contractual choice-of-law provisions. Fourth, litigants are aggressively forum shopping noncompete lawsuits, looking for the forum most favorable to their respective positions. Finally, this forum shopping very well may result in courts in different states issuing conflicting rulings on the same noncompete agreements involving the same parties.

In Keener v. Convergys, James Keener filed an action in the U.S. District Court for the Southern District of Georgia seeking a declaration that the noncompete he signed was unenforceable. Not stopping there, Keener also sought an injunction to restrain Convergys from even trying to enforce the noncompete against him.

Keener had begun working for a predecessor of Convergys in 1984 in Ohio. In 1995, Keener signed a noncompete agreement as a condition of his continued employment, which contained an Ohio choice-of-law provision.

Keener remained employed with Convergys in Ohio and then Illinois until he voluntarily resigned in March 2001, when he accepted a position with H.O. Systems, a competitor of Convergys located in Georgia. Upon leaving Convergys, Keener told the firm that he was leaving the telecommunications and computer software industries to work in the banking industry.

Chance encounter

Later that year, however, Keener bumped into a Convergys salesperson while making a business call for H.O. Systems. Following this encounter and a demand by Convergys that Keener honor the noncompete agreement, Keener filed a lawsuit in Georgia to declare the noncompete unenforceable.

The preliminary question faced by the court was what law would govern the noncompete: Georgia's or Ohio's? Convergys argued that Keener had virtually no connection with Georgia as the noncompete was negotiated and signed in Ohio, required performance in Ohio and contained a provision that Ohio law would govern. Kenner countered by arguing that he now was a Georgia resident working in Georgia, and that Georgia law governed because the noncompete agreement was against Georgia's public policy, which disfavored noncompetes.


The district court first determined that it had to apply Georgia's law. The court ruled that it could not follow "a contractual selection of law of a foreign state where such chosen law would contravene the public policy of Georgia." The court stated that it would not apply any contractual rights that would contravene the policy of, or would be prejudicial to, the interests of Georgia.

In analyzing the noncompete under Georgia law, the district court next noted that Georgia law did not authorize the court to modify any term of the noncompete that was deemed overbroad ("blue penciling"). Even if only one provision of the noncompete was unreasonable, therefore, Georgia law required a finding that the entire noncompete was void.

The district court ultimately found two of the noncompete provisions overbroad under Georgia law. The noncompete was overbroad, the court found, because it prohibited Keener from working for any competitor conceivably anywhere in the world (as Convergys conducted business worldwide). In addition, the noncompete did not identify its geographic reach until the date of employment termination, contrary to Georgia's requirement that territorial restrictions cannot change or expand during the course of the noncompete.

Because the noncompete was contrary to Georgia's public policy, the district court declared the noncompete agreement void and granted an injunction to Keener. Notably, the injunction prohibited Convergys from seeking to enforce the noncompete in any court worldwide.

On appeal, the 11th U.S. Circuit Court of Appeals modified the injunction. The court ruled that while Georgia was entitled to enforce its public policy interests within its boundaries, "Georgia cannot in effect apply its public policy decisions nationwide - the public policy of Georgia is not that everywhere [sic]. To permit a nationwide injunction would in effect interfere both with parties' ability to contract and their ability to enforce appropriately derived expectations." Accordingly, the court modified the injunction to preclude Convergys only from enforcing the noncompete in Georgia.

Fostering forum shopping

The district court in Keener recognized that noncompete litigation very well may turn into an exercise in aggressive forum shopping, with litigants rushing to the forums of their choice. As the district court noted, "This may wind up encouraging non-Georgia employees to 'flee to Georgia' to shed their [noncompetes]. The aches and pains of federalism ... however, have long formed part of the American legal fabric."

Keener also shows how courts may disregard choice-of-law provisions when the state in which the litigation is proceeding does not support the noncompete. For example, while an Ohio court may modify a noncompete if any provision is deemed overbroad, Georgia law voids the entire noncompete. And while an Ohio court may enforce a noncompete whose exact geographic terms are not set until the end of the employment relationship, Georgia prohibits such noncompetes. Finally, Keener illustrates that while a court has the power to address a noncompete's enforceability within its state's borders, that may
be the extent of the court's authority.

The Stultz case is even more remarkable in its portrayal of parallel litigation in dueling states. Medtronic hired Mark Stultz in 1995 as a senior product specialist. On his accepting employment, the parties entered into a noncompete, which was negotiated, signed and required performance in Minnesota. The noncompete included a provision that the law of the state in which Stultz last worked would govern, which ultimately would be Minnesota.

On June 7, 2000, Stultz quit his job at Medtronic and, on the same day, began his employment in California with Advanced Bionics. On that same day, Stultz and Advanced Bionics sued Medtronic for declaratory relief in a Los Angeles Superior Court, alleging that Medtronic's noncompete was contrary to California's public policy and that the noncompete's choice-of-law provision was unenforceable.

Dueling courts

On June 9, 2000, just two days later, Medtronic sued Stultz and Advanced Bionics in Minnesota. The Minnesota court, on that same day, entered a temporary restraining order enjoining Stultz and Advanced Bionics from taking any action in any other court that would interfere with the Minnesota action, and prohibiting Advanced Bionics from employing Stultz in any way that would violate the noncompete.

What followed was a three-month battle in two jurisdictions generating a flurry of allegations of procedural misconduct and an abundance of court orders. With this backdrop, a California appellate court affirmed the entry of a restraining order prohibiting Medtronic from proceeding with its Minnesota action. The dueling state courts were not done. Just two months later, a Minnesota appellate court also affirmed the entry of a restraining order. But this order prohibited Stultz and Advanced Bionics from obtaining relief in any other court - e.g., California - that would stay, limit or restrain the Minnesota court or restrict Medtronic from prosecuting its claims in the Minnesota action.

Two issues were left to be decided between these competing courts. First, whether a court in one state could stop ongoing litigation in another state. Second, if not, then which jurisdiction ultimately would resolve the noncompete dispute. Advanced Bionics and Stultz argued that California should resolve the noncompete dispute because that action was filed first and Stultz now resided and worked in California, which was where the noncompete would need to be enforced.

In turn, Medtronic argued that one court could not prohibit litigation in a court in another state based on the principle of comity. The resolution of these issues was critical because the California state court undoubtedly would void the noncompete under California law, while the Minnesota court likely would enforce the noncompete.

The California Supreme Court, in Advanced Bionics Corp. v. Medtronic Inc., eventually decided the first issue. The court noted that while a restraining order may be proper to prevent one court from resolving issues being litigated in another court of the same state, judicial restraint takes on a more fundamental importance when the cases involve different states. Based upon sovereignty concerns, the court ruled that the parties could continue to litigate in both forums.

While Stultz again illustrates how courts recognize forum shopping among litigants, Stultz unfortunately offers no hope of curbing this litigation strategy. Indeed, while the California Supreme Court would not halt the Minnesota action, the court stated that Medtronic still would have to demonstrate to the California trial court why "any Minnesota judgment [would be] binding on the parties" in the California action. In other words, Medtronic may get the judgment it wants in Minnesota, but may have no luck enforcing that judgment in California where Stultz was working. Thus, the second issue in Stultz remained unresolved.

The lesson learned from Keener and Stultz is that an employer should avoid boilerplate noncompete agreements that give little consideration to where a particular employee actually is located or where it reasonably anticipates competitive problems from that employee in the future. Instead, the noncompete should be drafted as narrowly and as specifically as possible to protect the employer's legitimate business interests while avoiding problems in states that refuse to blue-pencil the parties' contract.

Recent case law unfortunately also suggests that in litigating noncompetes, litigants may be forced to race to the courthouse in the forum at least initially most favorable to their respective positions. But even then, the litigant should recognize that the other party may be able to initiate a subsequent lawsuit in another state, and that either litigant may be unable to enforce any judgment beyond the state in which the judgment was obtained.

It is to be hoped that case law and statutory provisions on noncompete agreements will evolve in such a way as to address the problems that arise from these multistate issues. In the meantime, employers and employees alike can expect uncertainty in the enforceability of noncompete agreements across state lines."

Mark R. Cheskin is a partner in the labor and employment group and the litigation group in the Miami office of Washington-based Hogan & Hartson. He can be reached at mrcheskin@hhlaw.com.

Brian L. Lerner is an associate in these groups, also in the Miami office. He can be reached at bllerner@hhlaw.com.

This story first appeared in the National Law Journal, an affiliate of the Daily Business Review