Georgia Court Rules in Favor of Former Member of
Financial Services Company in Non-Compete Lawsuit
In late September 2020, a Georgia Court of Appeals dismissed most of a non-compete lawsuit brought by a financial services company against one of its former owners, which alleged the former owner violated provisions of an operating agreement. The case on appeal is called Owens v. Novae, LLC, Appeal No. A-20-A1268 (Ga. App. 2020). As explained in more detail below, the case is a reminder to: (i) fully understand and appreciate your obligations and rights relating to competing prior to leaving a company; and (ii) hire a damage expert during litigation if you are seeking damages for lost profits.
Case Background. According to the lawsuit, in 2014, Justin Owens, Reco McDaniel, and several others started Novae, LCC, a multi-level financial services marketing company that provides financial education and direct sales of products to its customers and members. Customers pay monthly subscription fees to access financial products and training opportunities and earn money by selling the products themselves and bringing in other subscribers. Novae is based out of Conyers, Georgia, which is a suburb of Atlanta, and markets throughout Georgia and beyond. Owens was the Vice President of Sales.
In connection with starting Novae, the owners entered into an operating agreement. Operating agreements are often used by LLCs to govern the internal operations of the business, including outlining the responsibilities, rights, and obligations of its member-owners. Here, the agreement required, among other things, the members to: (i) devote time and attention to the business and to carry out their duties; (ii) maintain a duty of loyalty that prevented them from entering into any competing business; and (iii) maintain the confidentiality of company information.
In 2017, Owens claimed that he started to have concerns about McDaniel’s leadership of Novae and the financial structure of the company, and he requested an audit of the company’s books. Around the same time, McDaniel claimed that Owens was not performing his job duties and that he complained to Owens about that. In sum, the two owners had a falling out.
In August 2017, Owens left Novae. A few weeks before leaving, however, Owens signed up as a customer of IML, another financial services multi-level marketing company that provided education and training in foreign currency exchange. According to its website, IML is based out of New York but also markets nationally.
Once McDaniel learned of Owen’s actions, he filed a lawsuit for breach of contract on behalf of Novae against Owens. The breach of contract claim was based on allegations that Owens violated the operating agreement by:
- Failing to complete his duties as Vice President of Sales;
- Working for a competing company and soliciting Novae members to do the same (i.e., breaching the non-compete provision in the operating agreement); and
- Revealing confidential information about Novae’s compensation plan and marketing strategy (i.e., breaching the non-disclosure provision in the operating agreement).
Owens denied the allegations and argued the lawsuit should be dismissed because he did not violate the operating agreement and, regardless, Novae did not sufficiently demonstrate that it incurred any damages. Both sides submitted testimony to the Georgia trial court (i.e., the Superior Court). The trial court determined that there was conflicting evidence on both issues, i.e., breach of the operating agreement and damages, and as a result, the case should proceed to trial. Owens appealed that ruling.
Court’s Analysis As explained below, the Georgia Court of Appeals ruled that: (i) there was conflicting evidence on whether Owens breached the operating agreement; but (ii) Novae failed to establish lost profits with reasonable certainty, which is required under Georgia law to survive a motion for summary judgment as to damages.
The Court started by reiterating that, under Georgia law, a contract, such as an operating agreement, may contain restrictive covenants that impose non-compete and non-disclosure limits on its member-owners. Those restrictive covenant provisions must comply with Georgia’s restrictive covenant statute, O.C.G.A. § 13-8-53.
To establish a claim for breach of contract, Novae was required to demonstrate both that Owens breached the provisions at issue in the operating agreement and suffered damages – here, lost profits – as a result. The Court noted there was sufficient evidence to create a dispute for a jury on the issue of breach of the agreement, but it found that Novae did not submit sufficient evidence on the issue of lost profits. The Court went on to recite Georgia’s law on demonstrating lost profits, stating, in relevant part:
In Georgia, the general rule as to the recoverability of lost profits as an item of damages is that the expected profits of a commercial venture are not recoverable as they are too speculative, remote, and uncertain. Nevertheless, when the type of business and history of profits make the calculation of profits reasonably ascertainable, lost profits may be recovered. Thus, generally speaking, lost profits may be recovered by a business only if the business has a proven track record of profitability. And although the amount of damages need not be calculated with exact mathematical certainty, a litigant must nonetheless establish lost profits with a reasonable degree of certainty… [I]t is well established that anticipated profits are too speculative and uncertain to be recoverable unless they are based on an actual track record of sales. And this requirement is based on the rationale that the profits of a commercial business are dependent on so many hazards and chances, that unless the anticipated profits are capable of ascertainment, and the loss of them traceable directly to the defendant’s wrongful act, they are too speculative to afford a basis for the computation of damages.
In this case, to support its alleged lost profits, Novae submitted only tax records, a spreadsheet chart of purported damages created by McDaniel (not an expert), and the testimony of McDaniel. The Court aptly noted that, even if these records and testimony showed lost profits generally, there was no evidence that the lost profits were traceable directly to the alleged breach of the agreement by Owens. As a result, the Court found that Owens was entitled to summary judgment.
Takeaways. Two important lessons from this non-compete case include:
- When you have entered into an agreement that contains any restrictive covenants, especially non-solicit or non-compete provisions, it is prudent to consult with an employment attorney prior to taking any actions that could constitute a breach. In this case, Owens could have likely avoided the entire lawsuit if he were counseled to wait until after he formally left Novae prior to working for a competitor and soliciting Novae customers to transition with him. An experienced non-compete attorney is able to provide guidance on what an individual can likely do and not do under a non-compete agreement and provide guidance to help reduce the changes of a non-compete related lawsuit.
- A damage expert is generally needed to prove damages in a non-compete lawsuit or any other lawsuit in which a company seeks damages in the form of lost profits. Here, Novae only submitted its tax records, a spreadsheet it created with no supporting documents, and testimony of one of its owners. There was no testimony or evidence provided by a damage expert. Damage experts are often able to review a company’s financial documents and prepare a detailed damage report that holds credibility in court.
Cantrell Zwetsch, P.A. is a litigation boutique that focuses its practice on non-compete disputes, employment law, and business disputes throughout Florida and Georgia, including the cities of Tampa, St. Pete, Clearwater, Sarasota, Fort Myers, Key West, Miami, Fort Lauderdale, West Palm Beach, Jacksonville, Orlando, Gainesville, Tallahassee, Pensacola, Savannah, Macon, Augusta, and Atlanta.