In many cases, the execution of a mutual release is often the last step in resolving a trade secret or non-compete case.  Typically included in the release is an affirmation that all confidential information has been returned and the once former adversaries promise not to sue one another.  Once the release is executed, the fight is usually over.  Usually, but not always.

The recent opinion of EarthCam, Inc. v. OxBlue Corp., 1:11-CV-2278-WSD, 2014 WL 793522 (N.D. Ga. Feb. 26, 2014), addresses an uncommon situation where a former employer filed suit against one of its former employees for allegedly violating the terms of his non-compete agreement; notwithstanding the fact that the former employer and employee had previously executed a general mutual release wherein both sides agreed to release one another from any and all claims concerning the former employee’s non-compete agreement.

In response to the company’s complaint, the former employee filed a motion for Rule 11 sanctions on the grounds that the claims were allegedly barred by the executed general release.  The former employer contended that it had a good faith basis for believing that the release was obtained through fraud and that, accordingly, it was void.  Specifically, the company alleged that the former employee fraudulently affirmed that he had returned all of the company’s tools and materials, when in fact, he was now using these items to compete against the company.

The court noted that, in Georgia, to void a contract based upon fraud in the inducement, the party seeking the relief must prove five elements: (1) a false representation or concealment of a material fact; (2) that the defendant knew the representations or concealment were false; (3) an intent to induce the allegedly defrauded party to act or refrain from acting; (4) justifiable reliance by the plaintiff; and (5) damages as a result of the false representations or concealment.

With this standard in mind, Judge William S. Duffey, Jr. held that “what matters here is not whether the fraud actually occurred, but whether [the company] has a colorable argument that the fraud might have occurred.  If that is the case, then [the company] does not violate Rule 11 by asserting that the Release is void, allowing it to assert claims against [the former employee].”  (Emphasis in original.)  The court then examined the company’s allegations of fraudulent inducement and stated that the “allegations are sufficient, albeit barely, to form a basis for the conclusion that some fraudulent inducement occurred.  [The Company’s] assertion that the Release is voidable is thus at least arguably credible, and there is an insufficient basis for imposing Rule 11 sanctions.”

Takeaways

A general release does not automatically bar all future litigation between signatories if one of the parties subsequently discovers evidence enabling them to argue that the release should be voided based upon fraud in the inducement.  While the standard for establishing fraud in the inducement is certainly high, asserting a colorable argument to survive a motion for sanctions is much lower.  If you seek to assert such a claim, it is critical to plead all predicate elements or you run the risk of having your claim summarily dismissed, as well as being sanctioned