Ferrero v. Associated Materials Inc.
| Citation | 923 F.2d 1441 |
| Decision Date | 01 February 1991 |
| Docket Number | No. 90-9012,90-9012 |
| Parties | 1991-1 Trade Cases 69,314 Terrence Lee FERRERO, Plaintiff, Counter-defendant, Appellant, v. ASSOCIATED MATERIALS INCORPORATED, a Delaware Corporation; Alside, Inc., a Delaware Corporation, Defendants, Counter-claimants, Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (11th Circuit) |
James Banks Deal, John Wesley Gibson, Gibson & Deal, Norcross, Ga., for plaintiff, counter-defendant, appellant.
Edward Scott Smith, Ford & Harrison, Atlanta, Ga., for defendants, counter-claimants, appellees.
Appeal from the United States District Court for the Northern District of Georgia.
Before JOHNSON and BIRCH, Circuit Judges, and MERHIGE *, Senior District Judge.
This case arises on an expedited appeal from an interlocutory order granting a preliminary injunction.
In January of 1976, Terrence Lee Ferrero, the plaintiff below, was hired as a building products salesman by the defendant, Associated Materials, Inc. During his orientation, he signed an employment contract which included a covenant not to compete.
Initially, Ferrero worked in the Greater Atlanta area. In 1978, Ferrero was transferred to Knoxville, Tennessee, where he spent seven years as a salesman. In 1985, he was transferred back to Atlanta and given sales territory # 838 (northern Georgia, and parts of South Carolina and Florida).
Ferrero evidently was a very successful salesman. He serviced 136 accounts and accounted for $4.8 million in sales in 1989, which was 75% of the activity in Associated Materials' Atlanta warehouse. Ten of Ferrero's accounts were his most important, accounting for more than half of his total sales and 40% of the warehouse's total activity.
Essentially, Associated Materials' products are indistinguishable from the products of Associated Materials' competitors. Associated Materials, however, attempts to distinguish itself by cultivating customer good will through various incentives and quality service. Associated Materials' sales strategy is to create a close relationship between its salesforce and its customers. To this end, Associated Materials spent nearly $336,000 over the last five years to enable Ferrero to take various buyers on trips to Europe and the Caribbean. In addition, Associated Materials spent $96,099 in order to enable Ferrero to entertain various buyers through meals, sporting events, and other forms of entertainment. With the money spent on building Associated Materials' goodwill, Ferrero grew to be close friends with the buyers for his ten largest accounts. Ferrero also eventually learned about various trade secrets.
On April 15, 1990, Ferrero resigned from Associated Materials. Associated Materials then transferred Ron Williams from a territory in North Carolina to replace Ferrero. Associated Materials claims that it takes at least two years for Williams to become completely familiar with Ferrero's former territory.
On July 5, 1990, Associated Materials wrote Ferrero to clarify the existing covenant not to compete. Associated Materials informed Ferrero that the previous covenant was superseded by a new covenant.
On August 23, 1990, Ferrero wrote Associated Materials that he intended to form a corporation called American Wholesale Building Supply Company and he intended to compete with Associated Materials in the greater Atlanta area.
On April 18, 1990, Ferrero filed a complaint in Georgia state court seeking declaratory and injunctive relief from Associated Materials' intentions to enforce the covenant not to compete. The next day Associated Materials removed the action to federal district court on the basis of diversity of citizenship. The parties at the time agreed to observe the status quo until the district court ruled on the preliminary injunction. On May 3, 1990, Ferrero moved for a preliminary injunction. On June 18, 1990, the district court denied Ferrero's motion for a preliminary injunction because Ga.Code Ann. Sec. 13-8-2.1 (Supp.1990) was soon to become effective and would probably permit the retroactive reformation of covenants not to compete.
On June 4, 1990, Associated Materials filed a counterclaim asking for reformation of the 1976 covenant. On August 28, 1990, Associated Materials sought a temporary restraining order against Ferrero because of Ferrero's announced intention to compete. The district court, with the approval of the parties, treated the temporary restraining order as a request for a preliminary injunction. On October 11, 1990, the district court granted the preliminary injunction. Ferrero then brought this appeal.
On November 29, 1990, pursuant to Ga.Code Ann. Sec. 13-8-2.1(g)(1), the district court "blue pencilled" the reformed covenant. The statute permits courts to narrow covenants, striking down any overreaching portion. The district court did so by restricting Ferrero from competing in Cobb and Fulton counties for eighteen months. Therefore, Ferrero may currently compete for forty-three percent of his 1989 sales volume and he may compete for the rest of his volume on October 15, 1991.
This Court reverses a district court's grant of a preliminary injunction only when the district court abuses its discretion. United States v. Alabama, 791 F.2d 1450 (11th Cir.1986). Findings of fact made in connection with a grant of a preliminary injunction are set aside only if clearly erroneous. Id. While findings of law are ordinarily reviewable de novo, this Court will defer to a district court's interpretation of unsettled questions of the law of the state where the court sits. Shipes v. Hanover Ins. Co., 884 F.2d 1357 (11th Cir.1989).
A federal court sitting in diversity applies the substantive law of the state in which it sits, including that state's choice of law. See Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Therefore, the district court correctly applied the Georgia conflict of laws rule for contracts which is lex loci contractus. Residential Industrial Loan Co. v. Brown, 559 F.2d 438 (5th Cir.1977). 1 Because the last act required for contract formation occurred in Georgia, we conclude that Georgia's contract law governs this employment contract. See Nasco, Inc. v. Gimbert, 239 Ga. 675, 238 S.E.2d 368 (1977).
The original covenant not to compete signed by Ferrero stated that he promised not to "engage in the manufacture, sale, distribution or promotion of the sale of ... any ... products manufactured or sold by the employer ... in any area or territory in which the employee shall have been located, employed or worked...." Under Georgia common law, this covenant not to compete could be struck down for two reasons: first, because one cannot create a covenant not to compete that applies to employment in a given trade "in any capacity," Fields v. Rainbow International Carpet Dyeing & Cleaning Co., 259 Ga. 375, 380 S.E.2d 693, 693 (1989); and second, because one cannot create a covenant not to compete that "allow[s] the employer to assign the employee to any territory it desires with the restrictive covenant following the employee." Orkin Exterminating Company, Inc. v. Pelfrey, 237 Ga. 284, 227 S.E.2d 251, 252 (1976).
When covenants not to compete are too broad, Georgia common law deems them unenforceable. The courts in such a case refuse to issue injunctions or award damages. See, e.g., Nasco, Inc. v. Gimbert, 239 Ga. 675, 238 S.E.2d 368 (1977). Moreover, the Georgia courts have refused to adopt a "blue-pencil theory" to reform overbroad contracts. Rita Personnel Services v. Kot, 229 Ga. 314, 191 S.E.2d 79 (1972). Unless the contract is severable on its face, see Horne v. Drachman, 247 Ga. 802, 280 S.E.2d 338 (1981), the contract is normally struck down in its entirety. See Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977). Therefore, it seems that the 1976 covenant not to compete was completely unenforceable under Georgia common law, prior to the passage of the statute.
Associated Materials argues that a new Georgia statute permitting contracts in partial restraint of trade changes the common law and saves this covenant not to compete. The new Georgia statute, codified at Ga.Code Ann. Sec. 13-8-2.1 (Supp.1990), does four things relevant to this dispute. First, it permits an employer to unilaterally reformulate a covenant not to compete to eliminate "unclear or overbroad" language "so long as [the reformation] is no broader than the terms of the original restraint." Id. at Sec. 13-8-2.1(f)(3). Second, it creates a presumption that sufficiently narrow covenants are acceptable. Id. at Sec. 13-8-2.1(c)(3). Third, it presumes that injunctions are appropriate remedies to a violation of such a covenant. Id. at Sec. 13-8-2.1(g)(1). And, fourth, it instructs the courts to reformulate covenants so they are not overreaching or unconscionable. Id. at Sec. 13-8-2.1(g)(1).
Pursuant to this new statute, Associated Materials unilaterally reformulated the contract. 2 There is no dispute that if this new statute applies, the statute would save this covenant not to compete from being void under Georgia common law. However, the following questions are in dispute: (1) should this statute be applied to this case; (2) does such an application violate the Georgia statute and constitutional provision forbidding retroactive applications of statutes; (3) does the new statute violate the Georgia Constitution; (4) is an injunction an appropriate remedy; and (5) should this covenant be "blue pencilled"?
The district court applied the statute to the case at hand. Ferrero alleges that this application is a retroactive application since the original contract was...
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