Georgia Court Waives Staffing Firm’s Non-Compete Agreement
Based on Failure to Enforce It
In October 2019, a Georgia Court of Appeals affirmed that an information technology staffing and consulting firm waived its right to enforce a non-competition agreement based on its lack of diligence in filing a lawsuit. The court’s decision in Yash Solutions, LLC v. New York Global Consultants Corp., No. A19A1483, cautions parties to non-compete agreements to take action when they become aware that another party has violated the agreement to avoid risking their right to enforce the agreement entirely.
Case Background. Yash Solutions, an IT consulting and business solutions firm based just outside of Atlanta, places consultants and professionals with clients to meet their staffing and business development needs. Yash entered into a Master Supplier Agreement with New York Global Consultants (known as “NYG”), another company which recruits and screens IT professionals to place them with other companies. Under the Agreement, NYG would provide its own IT consultants to Yash, and Yash agreed to facilitate placements for those consultants with Yash’s clients. In exchange, Yash made its profits by billing clients at a 25 percent markup above the amount it paid NYG under the agreement. The Agreement also included a non-compete provision that prohibited NYG from providing the same or similar services that Yash provided to the clients where Yash agreed to place NYG’s consultants. The prohibition applied during the term of the Agreement and for one year after the Agreement terminated.
The parties operated successfully under the Agreement until October 2014, when Yash’s placement of one of NYG’s consultants with EMC, one of Yash’s clients, ended. Yash offered the consultant a new placement with EMC, but he declined. Yash’s operations manager then contacted the consultant’s accountant, who explained that the consultant had already been placed with EMC for a new project. The consultant then directed Yash’s operations manager to NYG for more information about his placement, making it clear that NYG had coordinated it. In December 2014, Yash’s counsel sent NYG a letter alleging that NYG had breached the non-compete provision of the Agreement by placing the consultant directly with EMC instead of going through Yash. Yash demanded that NYG terminate placement and cease all discussions with EMC about providing it with additional resources.
After Yash did not receive a response to the letter, it began refusing to pay NYG’s invoices related to the placement, despite a “pay-when-paid” provision in the Agreement which required Yash to pay NYG when its client paid Yash for the placement of an NYG consultant. In January 2015, Yash then learned that NYG had offered yet another NYG consultant a direct placement with EMC and became concerned that NYG had many other direct placements of which Yash was not aware. In February 2015, Yash sent NYG another cease and desist letter demanding “strict compliance” with the non-compete provision of the Agreement and that NYG must notify Yash if it actually placed that second consultant with EMC. Yash then refused to pay NYG’s invoices related to this second consultant.
NYG failed a lawsuit for breach of contract based on Yash’s violation of the pay-when-paid provision of the Agreement. Yash countersued, alleging a violation of the Agreement’s non-compete provision. The trial court decided that, as a matter of law, nothing in the Agreement, including a violation of the non-compete provision, excused Yash from its obligation to pay NYG’s invoices for past placements. By contrast, the trial court determined that NYG should be allowed to have a trial on two issues with Yash’s counterclaim: (a) whether the non-compete provision in the Agreement was enforceable; and (b) whether Yash had waived its right to enforce the non-compete provision based on Yash’s response to the violations of the Agreement.
Ultimately, a jury determined that Yash had waived its right to enforce the non-compete provision against NYG. Even worse, the jury ordered Yash to pay NYG’s attorneys fees, which amounted to more than $83,000, because it found that Yash had acted in bad faith, was “stubbornly litigious,” or had caused “unnecessary trouble and expense.”
Court’s Ruling Wavier of the Non-Compete Provision. The Georgia Court of Appeals agreed with the trial judge and the jury that Yash had waived enforcement of the non-compete provision by continuing to operate under the Agreement after it learned of the direct placements. Under Georgia law, a contract provision may be explicitly waived or a waiver may be inferred from actions, conduct, or a course of dealing. A court may determine that a party has waived its rights under the contract if the party acts as if the contract is still in force despite having knowledge of a breach by continuing to perform its obligations under the contract, demanding or urging the other party to perform its obligations, or allowing the other party to perform and accepting or retaining benefits under the contract. Essentially, a party to a contract may accept a breach and stop performing under the contract or pursue its rights and discontinue performance – but it cannot do both. A jury must consider all of the facts taken together and determine whether the non-breaching party intentionally gave up a right in order to find that a waiver occurred.
In this case, the court observed that the fact that Yash sent two demand letters shortly after it discovered the direct placements suggested that Yash intended to enforce the non-compete provision. The problem, however, was that Yash never actually pursued its rights to enforce the Agreement; instead, it continued operating under the Agreement even years after it sent these letters. The Agreement expressly provided that, if NYG violated the non-compete provision, Yash was entitled to pursue a variety of remedies, including seeking injunctive relief, which would involve filing a motion for a temporary injunction with a court to order NYG to stop the direct placements. Still, Yash never terminated the Agreement, pursued injunctive relief, or sued NYG for damages. Instead, Yash continued sending emails to NYG asking NYG to submit more candidates to Yash for placement even until April 2018 – almost four years after the alleged breach.
Waiving No-Waiver Provision. The appeals court upheld the verdict even though the Agreement included a “no-waiver” provision, a clause common to many contracts which provides that the failure of a party to enforce a provision of such an agreement will not be a waiver of a right to enforce the provision later. Under Georgia law, however, even a no-waiver provision of a contract may itself be waived. The rule grows out of Georgia Code § 13-4-4, which provides: “Where parties, in the course of the execution of a contract, depart from its terms and pay or receive money under such departure, before either can recover for failure to pursue the letter of the agreement, reasonable notice must be given to the other of intention to rely on the exact terms of the agreement. The contract will be suspended by the departure until such notice.”
Paying Opposing Party’s Attorney’s Fees. Georgia Code § 13-6-11 provides that a defendant may be required to pay the attorney’s fees of the opposing party if a jury (or a judge, if the parties waive a jury trial) determines that the defendant “has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense.” In this case, the court agreed with the jury that Yash had acted in bad faith even though the only evidence of bad faith that NYG offered was that Yash failed to pay NYG’s invoices when the Agreement still required Yash to do so despite violating the non-compete agreement.
Yash could not point to any language in the Agreement that excused Yash from paying NYG’s invoices under any circumstance except where EMC, the client, had not paid Yash. There was also no language which specified that NYG was entitled to payment only if it complied with the non-compete provision, which the court viewed as unrelated to the pay-when-paid provision. Under Georgia law, if the relevant language of a contract is clear and unambiguous, the court is only permitted to look at the contract’s terms. As a consequence, the court also rejected Yash’s argument that it was unfair for Yash to have to pay NYG’s invoices because of NYG’s “competitive misconduct” where no actual language in the Agreement supported that exception.
Takeaways for Parties to Non-Compete Agreements
- Carefully consider your next move before allowing a non-compete violation to slide. Once a party to a non-compete agreement learns that another party to the agreement has violated the terms, the next step is to determine the proper steps to take to enforce the non-compete agreement. At a minimum, a cease and desist letter is recommended. In instances where the violating party has already caused, or is about to cause, damages, it may be prudent to skip the letter and immediately file a lawsuit. While it may be cost-effective to send a demand letter and leave it at that, it may not be sufficient to a waiver of your rights, especially if there is continued non-compliance with the agreement.
- Make sure your response to the violation is allowed under the terms of the agreement. Parties to an agreement in which a promise not to compete is one of many important terms should consider including language at the outset which conditions major obligations under the agreement, including payment for any services or goods provided, on compliance with the non-compete agreement. Such a provision would then support a decision to end compliance in the event of a breach of the non-compete provision, in addition to the right to pursue other remedies. Otherwise, the non-breaching party may still be expected to meet its obligations, despite the knee-jerk reaction that it is unfair for her to continue doing so. Nonetheless, it is always important to consider the full range of options for addressing violations of a non-compete agreement and choose a path that is authorized by the specific language of the agreement.
- Consider options for settlement throughout the litigation. Parties to a lawsuit have an obligation to ensure that their claims and defenses have reasonable support under the law. While the tendency may be to defend a position based on principle, a defendant who continues to maintain a position that is clearly inconsistent with its rights under the law may wind up paying both his attorney’s fees and those of the other party as a penalty. Settling a claim to which you have a weak defense earlier in the case may end up saving money at the end if the case goes the distance.