Conflict of Laws Final Examination
Professor Martha Dragich Pearson
Fall Semester 2006
This is a four-hour, closed book examination. This packet consists of 10 pages. You are required to turn in the exam packet along with your answer at the end of the exam. You may take this examination on computer to the extent and under the conditions permitted by the School of Law. If not taking the exam on computer, any material you do not wish me to read should be crossed through with an "X" and marked in the margin "omit." I will neither read nor consider material so marked.
The materials provided include a statement of facts, information about the relevant substantive law and choice of law approaches of the various jurisdictions, and relevant sections of the Restatement (Second) of Conflict of Laws. You are asked to answer several specific questions. Other questions that may arise from the same fact pattern should not be addressed in your answer.
Your answer for each question should state your conclusion (i.e., jurisdiction exists, the law of state X applies, etc.) along with the analysis supporting your conclusion. Length of answers will vary somewhat among the questions, but in general can be rather brief. I believe that most or all can be answered in no more than a few paragraphs.
You may answer the questions in any order, but please label them as I have done so I know which question you are answering. You should answer each question separately, but you may refer in one answer back to your answer for a separate question if your analysis overlaps. Please be sure any such cross-reference is very clear.
You may use any abbreviations you like as long as you clearly indicate what each abbreviation means. You may refer to any of the materials provided in this packet by citing the page on which they appear. You may cite any case read or discussed in this class. You may cite by name or any other identifiable information. Proper citation form is not required. You may treat all cases read or discussed this semester as relevant, regardless of the jurisdiction, unless the approach a decision takes is not in keeping with that specified for the jurisdiction(s) involved in this examination question.
You should assume that these materials correctly and completely state the current, relevant law of the various jurisdictions relating to the issues presented. I may have modified jurisdictional provisions, choice of law approaches, case law, or other materials for purposes of this examination; any knowledge you may have of the true state of the law in a particular state is irrelevant for purposes of this examination.
You should assume that the facts stated are true. You may rely on additional facts or assumptions of fact or law, so long as they are not contradicted by the information contained in the examination materials, provided that you state such assumptions clearly in your answer.
Your grade will be based on the quality of your analysis (according to the points allocated to each question) and the clarity and succinctness of expression. Your answer need not follow any particular format.
Synergys, a large, publicly traded company incorporated and with its principal place of business in California, offers information management and customer relations management services worldwide, including all 50 states. Its wholly-owned subsidiary, HRSource, sells outsourced human resource services for large public and private employers. In 1999, Manfred B. Sales joined this subsidiary as a regional sales manager, and in June 2003 he was promoted to national director of sales. At all times during his employment with Synergys, Sales lived and worked in Florida. Sales' immediate superior during his employment as sales manager was in the regional office in Florida. After his promotion to director of sales, Sales reported directly to the Vice President of Operations of HRSource in California. Most contact between the two was by email and phone, along with occasional in-person meetings in various locations in Florida. Training in the company's business methods was provided online and by videoconferencing from the company's California headquarters to locations in Florida for personnel in the southeastern region.
Pursuant to the promotion in 2003, Sales signed a non-compete agreement ("NCA"). This agreement prohibits Sales from competing with Synergys or HRSource or soliciting any of their customers anywhere in the United States for two years following the termination of his employment. The agreement contains a choice-of-law provision requiring the application of California law. It does not contain a forum selection clause. Sales signed the agreement in Florida during a meeting with the Vice president of Operations who was there to finalize the details of Sales' promotion. The contract provides in relevant part as follows:
"5. Covenant Not To Compete.
"5.1 Employee acknowledges that the Company has established a valuable and extensive trade in the services it provides, which has been developed at considerable expense to the Company.
"5.2 In consideration of this employment promotion, the training and knowledge that Employee has received and/or will receive from the company, and the employment of Employee as provided in this agreement, Employee covenants and agrees that he shall not engage in or make any preparations to engage in any activity for any other business entity in competition with the Company for so long as he is employed by the Company and for a period of two (2) years thereafter. This prohibition shall apply regardless of whether the termination of Employee's employment occurred with or without cause, at the instance of Employee or the Company.
On March 12, 2006, Sales interviewed with Comprehensive Business Consulting, Inc. ("CBC") for a position with its human resources management services sales team in Atlanta, Georgia. CBC is incorporated in Delaware and has its principal place of business in Georgia. It provides consulting services throughout the United States and in several foreign countries. Its services relate to the human resources, corporate planning and visioning, marketing, and capitalization strategies of large companies.
As to the NCA, Sales advised CBC in his job interview that he did not believe Synergys would view CBC as a competitor or challenge his employment if hired by CBC. Nevertheless, Sales and CBC discussed the possibility that Synergys might sue to enforce the NCA, and for purposes of this examination you should assume that CBC is a competitor of Synergys at least with respect to human resources consulting. CBC offered Sales the position and he accepted on April 1, 2006. On April 8, 2006, Sales resigned from Synergys, although he agreed to stay on until the middle of the month.
On April 9, 2006, Sales signed a contract to purchase a house in Georgia and obtained a Georgia driver's license. Shortly thereafter, he moved from Florida to Atlanta, where he continues to reside and to work for CBC. Sales' projects to date for CBC have taken him to client sites in several states, but not to California. Sales plans to stop for two days in California next month while en route back to Georgia from a consulting project for CBC in Portland, Oregon, for the purpose of visiting an elderly aunt with whom he is close.
Sales subsequently sought counsel-that is where you come in. The senior partner in your law firm met with Sales early this month (December 2006), agreed to take on the representation, obtained a reasonable retainer, and conducted a conflict of interest check. With the representation now established, the senior partner has turned to you to get to work on the case. Sales wants to know whether it is likely that Synergys would prevail in any lawsuit it might bring against him alleging violation of the NCA, and whether there is any action Sales could take to head off that possibility. In the course of researching the matter, you encountered several questions requiring analysis before the firm can properly advise Sales.
Please answer the following specific questions relating to actions that might be brought by either Sales or Synergys. Assume that CBC is not involved as a party in any of the litigation. Your answers need not be consistent in favoring a particular party or position; rather your answer to each question should reflect your best judgment about the merits of that question. If necessary facts have not been provided, you may state any reasonable factual assumption upon which you base your answer. You should not consider any states not mentioned in the problem or in the specific questions. You may assume that notice, service of process and similar matters will be in order and need not discuss them.
1. If Synergys were to sue Sales on the NCA, to what extent, and on what basis, would personal jurisdiction over Sales likely be available in Georgia? California? Florida? [10 points]
2. If Sales were to sue Synergys seeking a declaratory judgment that the NCA is unenforceable, to what extent, and on what basis, would personal jurisdiction over Synergys likely be available in Georgia? California? Florida? For purposes of this question, assume that HRSource has no employees, offices, or clients in Georgia, but that Synergys does a significant amount of information management consulting in that state and maintains a regional office there. [10 points]
3. Assume that Sales files suit against Synergys in Georgia state court seeking a declaration that the NCA was illegal, invalid, and unenforceable, and that Synergys removes the case to federal court in Georgia. Assume further that Synergys then files a counterclaim in this action that alleges misappropriation of trade secrets. The trade secrets claim alleges that Sales has knowledge of the "very strict and particular requirements" associated with the services Synergys provides to its clients, including the careful selection and intensive training of its sales force and managerial employees, the development of customized services for major clients, and the like, as well as knowledge of customer lists, fee arrangements, etc. Sales' view is that Synergys's "requirements" actually emanate from its clients, who share those requirements with service providers (including Synergys and numerous others) whenever they enter into contractual relationships. Moreover, Sales claims that Synergys has widely touted its business model in seminars it offers for a substantial fee to corporate executives. Assume that the NCA did not specifically require Sales to safeguard trade secrets or other confidential or proprietary information. [40 points]
a. Is the choice of law clause effective as to the contract claim, the tort claim, or both?
b. Absent the choice of law clause (or if the choice is ineffective), which law governs the issue of the enforceability of the NCA?
c. Absent the choice of law clause (or if the choice is ineffective), which law governs the trade secret counterclaim?
d. Which law governs whether Sales is entitled to a declaratory judgment on the NCA?
4. Assume that Sales prevails on the contract claim (establishing invalidity of the NCA) in the declaratory judgment action in federal court in Georgia. Assume further that Synergys in the meanwhile (after Sales sued but before the ruling was issued) has sued in state court in California on the trade secrets claim. What effect, if any, will the issuance of a declaratory judgment in the Georgia action have on the California action, which is still pending? Assume that the Georgia court had subject matter jurisdiction. [10 points]
5. Assume that Synergys, not Sales, files the first lawsuit. Synergys files in state court in California. The suit includes a breach of contract claim on the NCA, and also includes a tort claim for misappropriation of trade secrets. For purposes of this question, assume that jurisdiction is available over Sales in California. [10 points]
a. Which law governs the contract claim?
b. Which law governs the trade secret claim?
6. Assume that Synergys prevails on both claims in the California action described in question 5 and is awarded damages on the tort claim. Sales did not appeal in California and the time for appeal has now passed. Assume that Synergys now files suit in Georgia for execution of the California judgment against Sales's Georgia assets. Assume that the California court had subject matter jurisdiction. [10 points]
a. What should the Georgia court do?
b. In what way(s), if any, can Sales challenge the enforcement of the California judgment?
Overall clarity of expression [10 points]
Choice of Law Approach
- California follows the comparative impairment approach for all issues.
- Georgia follows the Restatement 2d approach to choice of law for torts, but has not yet adopted that approach for contracts. Under a 40-year-old Georgia Supreme Court precedent, Georgia follows the first Restatement's vested rights approach for contracts.
- Florida follows Restatement 2d for both torts and contracts.
- California's long-arm statute provides that:
A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States.
- Georgia's long-arm statute provides that:
A court may exercise personal jurisdiction over
a person, who acts directly or by an agent, as to a cause of action in law or
equity arising from the person's
(a) transacting any business in this commonwealth;
tortious injury by an act or omission in this commonwealth;
(d) causing tortious injury in this commonwealth by an act or omission outside this commonwealth if he regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in this commonwealth; or
- Florida's long-arm statute provides that:
(a) Any person, whether or not a citizen or resident of this State, who in person or through an agent does any of the acts hereinafter enumerated, thereby submits such person to the jurisdiction of the courts of this State as to any cause of action arising from the doing of any of such acts:
- Note: "Person" in the jurisdictional statutes includes a corporation."
Covenants not to Compete
- California enforces such covenants provided that they are reasonable. California will reform overreaching agreements to make them reasonable and enforce them as modified.
- Georgia enforces such covenants only the restriction is carefully limited and the agreement protects only a proprietary or property right of the employer, such as a trade secret.
- Florida considers such agreements void as against public policy favoring mobility in employment and as restraints on trade. The Florida statute states: "... every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The Florida Supreme Court elaborated on the necessity for this policy with the observation that "[t]he interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change."
- California and Florida define a "trade secret" by statute (modeled on the Uniform Trade Secrets Act) to include "a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."
- Georgia defines a trade secret under common law to include any confidential information relating to customers, lines or methods of business, etc. The Georgia legislature considered but rejected a bill to adopt the Uniform Trade Secrets Act, preferring the broader common law definition. Significant opposition to the Uniform Act centered on its requirement that reasonable efforts be made to maintain the secrecy of the information.
Availability of Declaratory Judgment
- 28 U.S.C. 2201 provides that "In a case of actual controversy within its jurisdiction, any court of the United States may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such."
- California follows the same rule as the federal courts.
- Georgia law provides that "Courts of record shall have power to declare rights, status, and other legal relations only when no further relief is or could be claimed. The declaration may be either affirmative or negative in form and effect; and such declarations shall have the force and effect of a final judgment or decree. The court shall refuse to render or enter a declaratory judgment or decree where such judgment or decree, if rendered or entered, would not terminate the uncertainty or controversy giving rise to the proceeding."
Restatement 2d of Conflicts
§ 6. Choice-Of-Law Principles
(1) A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include
(a) the needs of the interstate and international systems,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
§ 122. Issues Relating To Judicial Administration
A court usually applies its own local law rules prescribing how litigation shall be conducted even when it applies the local law rules of another state to resolve other issues in the case.
§ 145. The General Principle
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicil, residence, nationality, place of incorporation and place of business of the parties, and
(d) the place where the relationship, if any, between the parties is centered.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
NOTE: There is no specific section on misappropriation of trade secrets.
§ 156. Tortious Character of Conduct
(1) The law selected by application of the rule of § 145 determines whether the actor's conduct was tortious.
(2) The applicable law will usually be the local law of the state where the injury occurred.
a. The term "conduct," as used in the rule of this Section, includes both action and non-action.
§ 187. Law Of The State Chosen By The Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
§ 188. Law Governing In Absence Of Effective Choice By The Parties
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203.
NOTE: There is no specific section on covenants not to compete.
§ 196. Contracts For The Rendition Of Services
The validity of a contract for the rendition of services and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that the services, or a major portion of the services, be rendered, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which the event the local law of the other state will be applied.
a. Scope of section. The rule of this Section applies to contracts for the rendition of services whether these are to be rendered by the contracting party himself or by others in his behalf. The rule applies to contracts with servants, independent contractors and agents and with persons exercising a public profession, as lawyers, doctors, brokers, commission agents and factors.
The rule applies if the major portion of the services called for by the contract is to be rendered in a single state and it is possible to identify this state at the time the contract is made. It is necessary that the contract should state where the major portion of the services is to be rendered or that this place can be inferred either from the contract's terms or from the nature of the services involved or from other circumstances.
The law selected by application of the present rule determines such questions as the duration of the contract, the circumstances under which either party may terminate the contract, the validity of a clause forbidding the employee from entering a business competitive with that of the employer for a stated period after the termination of the employment, and whether the contract of employment must be in writing to be binding.