by: MacGregor Lyon, LLC - a full service law firm based in Atlanta, Georgia.
The Georgia legislature and constitution prohibit contracts or agreements in general restraint of trade (Const. 1976, Art III., Par. VIII, Code Ann. S 2-1409). However, a covenant not compete is enforceable in Georgia when the proper steps are followed.
The Georgia courts review restrictive covenants under three levels of scrutiny: strict scrutiny, which applies to employment contracts; middle or lesser scrutiny, which applies to professional partnership agreements; and much less scrutiny, which applies to the sale of business agreements. (See, for instance, the case Habif, Arogeti & Wynne, P.C. v. Baggett, 231 Ga.App. 289, 290-291(1), 398 S.E.2d 346, (1998).)
This means that a covenant entered into as part of a sale of a business can generally be drafted more broadly than one which is entered into as part of an employment contract. The rationale behind the distinction in analyzing convents not to compete is that a contract of employment inherently involves parties of unequal bargaining power to the extent that the result is often a "contact of adhesion" (in other words, a contract so imbalanced in favor of one party over the other that it implies that it was not freely bargained between the parties). On the other hand, a contract for the sale of a business interest is far more likely to be one entered into by parties on equal footing. (See, for instance, Drumheller v. Drumgeller Bag & Supply, 204 Ga.App. 623m 626(1), 420 S.E.2d 331, (1992).) Moreover, "Georgia law provides substantial protection and latitude to covenants that coincide with the sale of a business because such covenants are a significant part of the consideration in the purchase of the business. (See Attaway v. Republic Svcs. Of Ga., 253 Ga.App. 322, 325, 558 S.E.2d 846, (2002).)
Covenants Against Competition in Employment Contracts
Covenants against competition in employment contacts are in partial restraint of trade. They are enforceable only if they adhere to 3 factors:
(1) Such covenants must be strictly limited in time. A covenant not to compete in an employment contract will generally be deemed unreasonable and unenforceable by the courts when it is absolutely silent in regards any time limitation. (See, for instance, T. V. Tempo, Inc. v. T. V. Venture, Inc., 262 S.E.2d 54 Ga., (1979).)
(2) They must be limited in territorial effect. In construing territorial restrictions in an employment contract, the trial court must look at the reasonableness of the restriction in view of all the facts and circumstances surrounding case. Restrictions related to territory in which the employee was employed, as opposed to broader territory in which the employer does business, will often be enforced if the other requirements of time and reasonableness are met. Territory covered by a restrictive covenant that relates to where the employer conducts business but the employee did not work is overly broad on its face, absent strong justification for such protection. A mere desire not to compete with the former employee will not be considered a strong enough justification for such a restriction on the employee's future actions. (See, for instance, Reardigan v. Shaw Industries, Inc., 518 S.E.2d 144, Ga.App., (1999); and Hulcher Services, Inc. v. R.J. Corman R.R. Co., L.L.C., 543 S.E.2d 461, Ga.App., (2000).)
(3) They must otherwise reasonable considering the business interest of employer sought to be protected and effect on the employee. In determining whether or not a restraint of trade imposed by a contract is reasonable, the court will consider "whether it is such only as to afford a fair protection to the interests of the party in whose favor it is given, and not so large as to interfere with the interests of the public." (As quoted in the cases of Orkin Exterminating Co. v. Murrell, 212 Ark. 449, 206 S.W.2d 185 (1947); and Edgar Lumber Co. v. Cornie Stave Co., 95 Ark. 449, 130 S.W. 452 (1910).)
Whether or not a covenant against competition in an employment contract is enforceable is a question of law for the court to decide, based upon the wording of the covenant.
Covenants Against Competition in the Sale of Business
Covenants against competition that are ancillary to the sale of businesses are subject to much less scrutiny by the courts than those applied to employment contracts. The reasonableness of a covenant not to compete given as part of the sale of a business is analyzed in terms of its limitations on (1) time, (2) territory, and (3) its description of the prohibited activity. In order to make this determination, Georgia courts use a three-factor test as a helpful tool - analyzing the covenant's duration, territorial coverage, and scope of the restricted activity as measured against whether or not the restrictions of the seller protect (1) the purchaser's legitimate business interests, (2) the value of the business, and (3) its good will.
(1) The limitations on time concerning a covenant not to compete given as part of the sale of a business must be reasonable. "[C]ovenants not to compete made in conjunction with the sale of a business may be unlimited as to time (so long as the buyer remains in business) and still be valid." (As quoted in the case of Jenkins v. Jenkins Irrigation, 244 Ga. 95, 98(2), 259 S.E.2d 47 (1979); see also Hood v. Legg, 160 Ga. 620, 627, 128 S.E. 891 (1925).)
(2) The limitations on territory concerning a covenant not to compete given as part of the sale of a business must also be reasonable. For example, a territorial restriction in a non-competition agreement which prohibited a seller of gutter services from competing and soliciting for five years within a fifty-mile radius of a city where the gutter service was located was found to be reasonable where the gutter service in question did business within a 100 mile radius. (see Hicks v. Doors By Mike, Inc., 579 S.E.2d 833. Ga.App., 2003. See also, for example, Martinez v. DaVita, Inc., 598 S.E.2d 334. Ga.App, 2004.)
(3) The reasonableness of the description of the prohibited activity, also known as the "scope", must be measured against whether the restrictions of the seller protect the purchaser's legitimate business interests, the value of the business, and its good will. (See, for example, Drumheller v. Drumheller Bag & Supply, Inc., 420 S.E.2d 331. Ga.App.,1992.)
Defenses to Anti-competition Covenants in Employment Contracts
If you are being sued for violating a non-compete clause or covenant in an employment contract, a defense can be established if you show one or more of the following:
(1) The covenant is not supported by a valid employment contract.
(2) The terms of the clause are unconscionable.
(3) The obligation has been discharged by the employer's material breach of the employment contact.
(4) The employer has abandoned the covenant, or should be barred on equitable grounds for enforcing it.
Remedies and Recovery for Plaintiff
If you are a plaintiff who can show that a valid non-compete clause has been broken by a party with whom you entered into such an agreement with, you may be entitled to relief in the form of one or more of the following:
(1) A preliminary injunction.
(2) A permanent injunction.
(3) The tolling of the non-competition period pending litigation.
(4) Actual damages.
(5) Liquidated damages.
(6) Enforcement of contractual provision for forfeiture, in the event of post-employment competition, of benefits which would otherwise be payable to the employee.
(7) Recovery of consideration paid to the employee for entering the anti-competition covenant.
(8) Recovery of attorney's fees and costs.
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