1. Glisson v. Global Security Services, LLC serves as a reminder that, while continued employment is valid consideration for an employment non-compete agreement in the case of at-will employment, it is not so where the employee has already signed an employment agreement for a definite period of time. Because Global had had several employees depart and take customer files with them, it required the employee in question, who was under a two-year employment agreement, to sign an updated covenant not to compete. When the employee left Global’s employment to start a similar business, Global sued to enforce the non-compete.
The Court of Appeals held that, to be enforceable, a covenant not to compete must be supported by valuable consideration. In an at-will arrangement, the consideration is nothing more than the opportunity to work in exchange for giving up an aspect of the employee’s freedom. But since Global had no choice but to employ the individual for two years absent his breach of the employment contract, and since the employment agreement contained no obligation on the employee’s part to sign a non-compete agreement, there needed to be consideration other than continued employment to support the new covenant.
The covenant itself recited that it was being given “in exchange for Ten Dollars ($10) and other good and valuable consideration.” Global argued that continued employment was sufficient to support the covenant; it did not contend, the Court noted, that the $10 payment referenced in the agreement provided sufficient consideration. In fact, the evidence demonstrated that this payment was never made. Thus, the Court concluded that covenant was unenforceable for failure of sufficient consideration.
Consider if the result might have been different had the $10 actually been paid or whether the covenant would have been enforceable had the employment agreement committed the employee to sign updates to his covenant not to compete.
2. In Tucker v. EBSCO Industries, Inc., the employment-related non-compete agreement in question prohibited the individual from competing with his library-services employer, for a period of two years after employment, “within the library territory and geographic territory assigned to him,” by soliciting sales of products or services offered by the employer’s Subscription Services division “to any customer or account of [employer’s] Subscription Services [division] which was such during any part of the time of his employment” or by directly or indirectly soliciting or servicing any customer or account of the type sold or serviced by such division. The agreement also stated that territory and market categories assigned to the employee were subject to change.
The court held that the covenant was unenforceable on two grounds: Because the employee’s ‘“territory and category assignments [were] subject to change,’ the territory could not be determined” at the time the employee signed the covenant. Second, the scope of activities that the employee was prohibited from carrying on was too broad in that the document did not specify the nature of the business activities in which the employee was forbidden to engage.
3. The covenant at issue in Avion Systems, Inc. v. Thompson prohibited the employee from working for himself or for any other individual or organization “for any pecuniary gain with [employer’s] customer or their client to whom he is assigned at the particular job site for that particular division or subdivision with whom Employee had contact” for a period of 12 months following completion of the project. During the course of a project with one of the employee’s customers, the employee notified the employer that she was terminating her employment and would be working at the same assignment through another contractor.
Reversing the Superior Court’s decision, the Court of Appeals found the covenant to be unenforceable on the ground that it did not “specify with particularity the nature of the business activities in which the employee is forbidden to engage . . .” By simply stating that the employee was not to “deal directly, indirectly, or by any other means” with the employer’s customer accounts, the employer was effectively prohibiting the individual from working in any capacity, even if performing services completely unrelated to the employer’s business.
It is interesting to note that the court did not discuss the propriety of restricting the employee from working for the employer’s customer rather than for a competitor. Typically companies address such concerns by including employee “no switch,” or “no hire,” clauses in their agreements with customers, rather than forbidding the employee himself from taking a job with a customer. However, there are instances in which the employer effectively losses an account through an employee taking an in-house position with a customer. In this case, the employee serviced the customer through a competing contractor, which may be why the court did not focus on this issue.
B. Covenants Not to Compete-Sale of Business
1. The next case addresses a limitation to the liberal treatment typically afforded by the courts to covenants ancillary to the sale of a business and is noteworthy because the covenant is made by the buyer rather than the seller. At issue in Waste Management of Metro Atlanta v. Appalachian Waste Systems, LLC, was a covenant ancillary to the sale of a waste disposal business (a management buy-out of a division) that required the buyer of the business, Appalachian, to deliver all of its non-hazardous solid waste to a particular landfill owned by the seller. Previously, in RTS Landfill v. Appalachian Waste Systems, the buyer sought injunctive relief against the seller, contending the covenant was unenforceable on grounds of unreasonableness because it lacked a territorial limit. In RTS Landfill, the trial court granted expedited declaratory relief to Appalachian, after characterizing the covenant as an unreasonable “exclusive dealing” provision and declaring it unenforceable for failure to contain a territorial limitation. That decision was reversed by the Court of Appeals because the lower court failed to apply the correct standard: this was a covenant ancillary to the sale of a business and such covenants should be enforced provided they are reasonable, founded on valuable consideration, not unduly prejudicial to public interests and are “reasonably necessary to protect the interest of the party in whose favor it is imposed.” The Court of Appeals noted that it had not previously addressed the type of agreement at issue in this case.
On remand the trial court again found that under the “liberal standards” applicable to sales of businesses, the disposal agreement was still unenforceable due to its failure to contain a territorial limit. The seller unsuccessfully argued that the territorial limitation contained in another agreement between the parties executed at the same time should be used to supply the missing territorial limit in the restrictive covenant at issue. The trial court rejected this position because there was no indication in the agreements that the parties intended this construction; furthermore, the court held that, without the territorial limitation, the contract was impermissibly overbroad because it seriously thwarted Appalachian’s ability to expand into other markets. The Court of Appeals in Waste Management agreed, stating the well established rule that, whereas a court may enforce reasonable portions of a restrictive covenant that is ancillary to the sale of business, while striking unreasonable portions-commonly referred to as the “blue pencil” doctrine-the court may not make an otherwise indefinite and vague covenant definite by reforming the contract. Accordingly, because the covenant lacked entirely a territorial limitation, it was held unenforceable on grounds of unreasonableness.
This covenant was not a typical sale-of-business restriction, whereby the seller rather than the buyer is restricted in order to protect the goodwill that the buyer has just purchased. The Court of Appeals noted that it had never addressed the enforceability of this type of agreement before. However, it still found that because it was “ancillary” to the sale of a business, it should be analyzed under the rule of reason and presumably would have been enforceable had it contained a reasonable territorial limitation on where the waste to be disposed of originated.
2. In Hilb, Rogal & Hamilton Co. of Atlanta v. Holley, Holley sold his business to HRH pursuant to an Agreement of Merger, which contained a five-year covenant not to compete. At the same time, in connection with his employment by the buyer, Holley, the seller, executed a separate Employment Agreement and Covenant Not to Compete, which not only prohibited Holley from contacting or soliciting customers of the business, but also from “accept[ing] an entreaty from” any such customer. The Agreement of Merger stated that execution of the Employment Agreement was a condition precedent to the closing of the merger. The Employment Agreement declared that the covenants not to compete contained therein had been separately bargained for and were “an integral part of the Agreement of Merger (and are distinct from the compensation for services set forth [above]) . . .”
When the five-year term of the non-compete in the Agreement of Merger was nearly over, Holley resigned from HRH and accepted a position with a competitor. He subsequently contacted customers of HRH he had serviced, who followed him to the new employer. HRH sued for breach of the non-solicitation covenant in Holley’s Employment Agreement. It argued that, since the covenants were ancillary to the sale of the business, they should not be subject to strict scrutiny, but rather the low level of scrutiny applied under Georgia law to sale-of-business covenants. The Court of Appeals declared, however, that “when parties execute separate contracts for the seller’s sale of the business and the seller’s subsequent employment and each contract contains different restrictive covenants, then the restrictive covenants in the employment contract are subject to strict scrutiny.” Because the employment-related covenants precluded Holley from “accepting an entreaty” from known or prospective customers, rather than merely soliciting them, it was overly broad, and the entire covenant was therefore deemed unenforceable.
C. Covenants Not to Compete - Franchisees
Gandolfo’s Deli Boys, LLC v. Holman is a useful summary of Georgia law on employment related non-compete agreements, in part, because it illustrates the Georgia courts’ attitude toward choice-of-law provisions that designate states other than Georgia. Gandolfo’s was a restaurant franchisor. Its Duluth, Georgia franchisee signed an agreement containing a non-compete that prohibited the franchisee for two years after termination from operating any competing business at its site, within 10 miles of the site, and within 10 miles of any other Gandolfo Deli restaurant. “Competitive business” was defined as any restaurant or food service facility offering casual dining and take-out sandwiches, salads or any type of deli foods and beverages. The covenant was to be governed by Utah law. Eventually the franchisee shut down its store, changed its name, signage, menus, and recipes and offered in addition to deli sandwiches, pizza, pasta, specialty coffees, grilled sandwiches, breakfast items, and other types of food.
In deciding whether the covenant was enforceable in Georgia, the court refused to apply Utah law because the covenant contravened the public policy of Georgia and was invalid under Georgia law. The court applied a strict level of scrutiny because Georgia considers franchise agreements to be analogous to employment contracts, which are not blue-penciled. Applying the employment-related standard of scrutiny, the court noted that the covenant was unenforceable for the following reasons: (1) it broadly prohibited the franchisee from having any interest in a competing business, including that of an owner, investor, partner, director, officer, employee, consultant, representative or agent or “any other capacity”; (2) the description of the business would cover not only deli sandwiches but any casual restaurant, including a McDonald’s, Burger King or Chick-fil-A; (3) the reference to 10 miles of any other Gandolfo’s restaurant was overly broad because the territory covered was capable of changing and expanding during the life of the agreement and could not be determined until the contract terminated; (4) the territorial restriction prevented the franchisee not only from doing business in areas in which it had actually operated, but also the areas of other franchisees, in which this franchisee had never operated, which included a number of states outside Georgia; and (5) this covenant contained a “tolling” provision, which would have the effect of extending the two-year time limitation indefinitely.
D. Forum Selection Clauses
The employment-related non-compete agreement in Hasty v. St. Jude Medical S.C., Inc., contained a forum-selection and choice-of-law provision, deeming Minnesota the exclusive place of jurisdiction and source of law for any future disputes between the parties. Holding the forum-selection provision valid and binding, the Georgia court transferred the case to a federal district court in Minnesota.
The plaintiffs argued the declaratory judgment action should be decided in Georgia because Georgia’s strong public policy against restrictive covenants in employment agreements would not be recognized in Minnesota. The court conceded that under Minnesota law, these agreements do not appear to be as strictly scrutinized as they are under Georgia law (e.g., Minnesota law adopts the “blue pencil” doctrine, enforcing valid portions of restrictive covenants in employment agreements while severing offending sections, while under Georgia law the entire covenant is deemed unenforceable if any part therein is unreasonable). The court also acknowledged that, in limited circumstances, forum-selection clauses can be deemed unenforceable “if enforcement would contravene a strong public policy.”
The court cited Iero v. Mohawk Finishing Products, Inc., a Georgia Court of Appeals decision, which held that the enforcement of a forum selection clause in an employment contract containing a non-compete clause did not typically contravene Georgia public policy. Relying on Bremen v. Zapata Off-Shore Co., a U.S. Supreme Court opinion, the Iero court stated that forum-selection clauses are prima-facie valid and should be enforced” unless it is unreasonable to do so. The court identified three exceptional scenarios: (1) where there is “fraud, undue influence, or overweening bargaining power;” (2) where enforcement of a forum-selection clause would be damaging to the forum itself and (3) where the chosen forum would be so inconvenient that it would effectively deprive a party of his day in court.
In Hasty, the court noted that Minnesota courts have applied the law of another state when not doing so would contravene that state’s strong public policy. Therefore, plaintiff was unable to establish that it would be damaging to Georgia to enforce the forum-selection provision, rendering the case properly transferable.
This decision affirms previous Georgia cases holding that, while a choice of law clause in an employment-related non-compete specifying a state other than Georgia will not by itself be enforced, such a choice will be enforced if it is coupled with a non-Georgia choice of jurisdiction clause, since Georgia courts appear to assume that a court of the other state will consider Georgia law.
E. Covenants Not to Recruit Employees
In Celtic Maintenance Services, Inc. v. Garrett Aviation Services, Inc., the court addressed the enforceability of a typical no-hire covenant between two businesses. Pursuant to the covenant, the parties agreed not to “directly or indirectly solicit, hire, or contract for services with any person employed by the other party.” Celtic alleged that Garrett attempted to circumvent this covenant, and therefore violated it, by directing a third party to offer employment to Celtic’s employees; Garrett maintained the covenant was unenforceable.
Under Georgia law, four types of restrictive covenants are recognized: nondisclosure of confidential information, noncompetition, nonsolicitation of customers and nonrecruitment of employees. “Georgia courts apply varying levels of scrutiny to restrictive covenants, depending upon the context” in which the covenant was formed. Whereas a covenant ancillary to the sale of business is subject to a low level of scrutiny, Georgia courts use strict scrutiny when deciding on the validity of restrictive covenants that are part of an employment agreement. Finally, restrictive covenants in professional partnership agreements are subject to an intermediate level of scrutiny because the parties thereto hold relatively equal bargaining power, share equally in the consideration, and mutually benefit from the covenants.
Recognizing the covenant at issue did not fall squarely within one of the three aforementioned categories, the court considered whether there was independent consideration for the covenant and whether the parties had relatively equal bargaining power. Because both parties (1) were proscribed from soliciting the other’s employees and (2) were businesses that hired independent counsel to negotiate and draft the agreement, the court determined the parties’ relationship was more analogous to a partnership than to that of an employee and employer; therefore, the court applied intermediate scrutiny to evaluate the validity of the no-hire clause. Using the standard for intermediate scrutiny-whether the “duration, territorial coverage and scope of prohibited activity” is reasonable-the court determined the covenant was valid.
Worth noting, the court declined to apply strict scrutiny, even though the no-hire provision had the indirect effect of restricting the employment opportunities of the parties’ employees, because the purpose of the covenants was not to prevent the employees from practicing their trade or profession; rather it was to prevent the contracting parties from being “an involuntary and unpaid employment agency.”
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