Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Stidham

• Decision Date: 15 October 1981
• Docket Number: Nos. 80-7735,81-7048,s. 80-7735
• Citation: Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Stidham, 658 F.2d 1098 (5th Cir. 1981)
• Parties: 1981-2 Trade Cases 64,324 MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Appellee, v. Reese M. STIDHAM, III, H. Paige Scarborough and John A. Bruner, Defendants-Appellants. . Unit B *
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1098

658 F.2d 1098

1981-2 Trade Cases 64,324

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff-Appellee, v.Reese M. STIDHAM, III, H. Paige Scarborough and John A Bruner, Defendants-Appellants.

Nos. 80-7735, 81-7048.

United States Court of Appeals, Fifth Circuit.

Unit B ^*

Oct. 15, 1981.

King & Spalding, William A. Clineburg, Jr., Atlanta, Ga., for defendants-appellants in both cases.

C. B. Rogers, Phillip S. McKinney, R. H. Sinkfield, Paul W. Stivers, Atlanta, Ga., for plaintiff-appellee in both cases.

R. Byron Attridge, Dan L. Heller, J. Kevin Buster, Atlanta, Ga., for defendants-appellants in No. 81-7048.

Appeals from the United States District Court for the Middle District of Georgia.

Before HILL, FAY and HENDERSON, Circuit Judges.

JAMES C. HILL, Circuit Judge:

Merrill Lynch, Pierce, Fenner & Smith, Incorporated(hereinafter Merrill Lynch) brought this action in United States District Court, Middle District of Georgia, to enjoin Reese M. Stidham, III, H. Paige Scarborough, and John A. Bruner(hereinafter defendants) from violating noncompetition and nondisclosure terms in their respective employment contracts.The district court granted the injunction which we vacate in part and affirm in part, 506 F.Supp. 1182.

I.

Defendants Stidham, Scarborough, and Bruner were employed by Merrill Lynch on December 30, 1974, March 14, 1977, and June 19, 1978, respectively.Contemporaneous with his hiring, each was placed in an "account executive training program," which involved intensive as well as expensive training at Merrill Lynch's New York headquarters.To these defendants, this program was an absolute necessity: neither Stidham, Scarborough nor Bruner had any prior securities experience, and obviously none of the three defendants met the strict license and registration requirements applicable to dealers in securities.The training period, during which defendants were compensated as salaried employees but generated no income for Merrill Lynch, lasted approximately one-half year.Following licensing, defendants became "account executives" stockbrokers with the Athens, Georgia office of Merrill Lynch.

In connection with his employment, each defendant executed a contract with Merrill Lynch containing two restrictive covenants, which are the essence of this litigation.These promises constitute the first two paragraphs of the agreements between the parties and provide:

1.All records of Merrill Lynch, including the names and addresses of its clients, are and shall remain the property of Merrill Lynch at all times during my employment with Merrill Lynch and after termination for any reason of my employment with Merrill Lynch, and that none of such records nor any part of them is to be removed from the premises of Merrill Lynch either in original form or in duplicated or copied form, and that the names, addresses, and other facts in such records are not to be transmitted verbally except in the ordinary course of conducting business for Merrill Lynch.

2.In the event of termination of my services with Merrill Lynch for any reason, I will not solicit any of the clients of Merrill Lynch whom I served or whose names became known to me while in the employ of Merrill Lynch in any community or city served by the office of Merrill Lynch, or any subsidiary thereof, at which I was employed at any time for a period of one year from the date of termination of my employment.In the event that any of the provisions contained in this paragraph and/or paragraph (1) above are violated I understand that I will be liable to Merrill Lynch for any damage caused thereby.

Defendants, it is fair to say, were successful with Merrill Lynch.Their salaries prior to their respective resignations from Merrill Lynch ranged from approximately $54,000 to $84,000 per year.¹Nonetheless, they were receptive when in mid-1980they were courted by a major southeastern securities firm, Atlanta-based Robinson-Humphrey Company, Incorporated.By August 1980, each had accepted a position with that firm to open and operate its new Athens office.The district court found that prior to informing Merrill Lynch of their plans, defendants duplicated various records containing vital sales information ² and provided Robinson-Humphrey with client names and addresses so that the latter might dispatch announcements of its new office opening to investors likely to take advantage of it.³

On September 12, 1980defendants resigned.Five days later Merrill Lynch brought suit.

The complaint, filed on September 17, alleged jurisdiction under 28 U.S.C. § 1332(1976), prayed for all manner of equitable relief injunction, preliminary and permanent, impression of constructive trust, and accounting and demanded legal damages, attorneys' fees, and costs.The district court on that very day conducted an in camera hearing and preliminarily enjoined defendants Stidham, Scarborough, and Bruner from violating the terms of the restrictive covenants set out supra.This Court, following defendants' immediate application, stayed the preliminary injunction pending appeal.Merrill Lynch shortly thereafter successfully moved the district court to schedule a hearing to consider the issue of permanent injunctive relief.The date was set for November 13.⁴

On January 15, 1981, the district court issued an order, obviously the product of careful research and considerable thought, permanently enjoining defendants from violating the nondisclosure provision of their employment contract, i.e., paragraph 1, see slip op. p. 12272, p. ----supra, and enjoining until noon September 12, 1981 violation of the noncompetition provision of their contracts, i.e., paragraph 2, see slip op. p. 12272, p. ----supra.Again, defendants appealed to this Court.Pending resolution of this matter, we have stayed that portion of the permanent injunction dealing with the noncompetition covenant.

III.

The basis of federal jurisdiction being diversity of citizenship, we are bound to apply the substantive law of the State of Georgia in this case.⁵

A. Noncompetition Clause

The parties have cited a host of cases containing numerous versions of restrictive covenants sustained or rejected under the authority of Georgia law.Beyond basic hornbook law, the authorities are at war.⁶"Reasonableness" is the purported touchstone of this analysis under the Georgia authorities.See, e.g., Barry v. Stanco Communications Products, Incorporated, 243 Ga. 68, 252 S.E.2d 491(1979);Orkin Exterminating Company v. Pelfrey, 237 Ga. 284, 227 S.E.2d 251(1976).That this standard has been rendered hollow and meaningless under the precedent can be no clearer than in the present case.

An investment banker, a stockbroker, develops customers globally.An Athens, Georgia stockbroker might have customers, for example, in Los Angeles, Chicago, and New York.For Merrill Lynch to attempt to prevent that broker, after severance, from soliciting business in California, Illinois and New York, would unduly hamper professional mobility and practice.But to draft a narrow contract that includes a promise not to solicit from "clients of Merrill Lynch whom I served or whose names became known to me while in the employ of Merrill Lynch," represents an exemplary attempt to identify a potential drain of corporate training resources and to respond with no more contractual adhesion than necessary.

Through the noncompetition covenant here at issue, then, Merrill Lynch sought no more than to prevent employees it trained at considerable expense from filling the coffers of a competitor by virtue of Merrill Lynch's efforts.Georgia law recognizes the validity of such a goal and has castigated in express terms the practice of "pirating (a) former employer's customers" through skills developed at the "employer's direct or indirect expense."Howard Schultz & Associates v. Broniec, 239 Ga. 181, 183-84, 236 S.E.2d 265, 268(1977).The covenant here at issue is reasonable.Nonetheless it fails.The Supreme Court of Georgia has injected a bright-line test into this area by requiring an express geographical description of the territory covered, without reference to the overall reasonableness of the limitation in light of the nature of the profession or trade involved.No such express territorial limitation is found in this covenant.In Guffey v. Shelnut & Associates, Incorporated, 247 Ga. 667, 670, 278 S.E.2d 371, 373(1981), the Georgia Supreme Court squarely held that "(a)lthough a covenant prohibiting solicitation of the employer's customers is less restrictive than a covenant prohibiting competition, both must specify the territory in which the employee is to be foreclosed."Id., 278 S.E.2d at 373.We would think that a "less restrictive" covenant would more likely be sustained by the court than a more restrictive one.Such is not the case.The Georgia Supreme Court without regard to reasonableness requires that a territorial limitation be set out in geographical terms and apparently does not intend to reconsider its position.⁷

B.Nondisclosure Clause

In its January 15, 1981 order, the district court permanently enjoined defendants"(f)rom directly or indirectly violating paragraph 1 of the subject contracts by in any way using all or any portion of Merrill Lynch's records copied, extracted, or verbally transmitted by either defendant to Robinson-Humphrey from Merrill Lynch's records ...."Defendants object to the district court's enforcement of their paragraph 1 promise on two key grounds.First, they argue that the duration of the covenant is perpetual and accordingly the covenant fails.Second, they argue that the order enjoins defendants from imparting their own personal recollections of their clientele.This is impermissible, allegedly, because actual physical records but not knowledge of their contents can be considered an employer's "property."These arguments fall flat; we explain why seriatim.⁸

Paragraph 1 of the employment...