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holding that Georgia does not allow "blue-penciling" of agreements; therefore, if any restriction is unenforceable, all restrictions in the agreement are unenforceable
Summary of this case from Domtar Ai Inc. v. J.D. Irving, Ltd.Opinion
A01A0539.
DECIDED: JULY 2, 2001
Restrictive covenant. Fulton Superior Court. Before Judge Etheridge.
Michael A. Dailey, for appellant.
Arnall, Golden Gregory, Henry R. Chalmers, Kevin B. Getzendanner, for appellee.
The question on appeal is whether a restrictive covenant forbidding a distributor from contacting any of his supplier's clients for competitive purposes for two years following the termination of the distributorship agreement is enforceable, where no territory is specified. As the covenant is not limited to those clients actually contacted by the distributor during the tenure of the distributorship agreement, we hold it is not enforceable and therefore reverse the trial court's denial of a motion to dismiss claims arising out of alleged breaches of the restrictive covenant and related restrictive covenants.
This is the second appearance of this case before this court. Advance Technology Consultants (ATC) agreed to distribute RoadTrac's global-positioning-satellite-system (GPS) products in a distributorship agreement that contained the following three restrictive covenants:
Advance Technology Consultants, Inc. v. RoadTrac, L.L.C., 236 Ga. App. 582 ( 512 S.E.2d 27) (1999) (considering certain discovery rulings).
7.3 During the term of this Contract and for a period of two years after the date of termination of the Contract, Distributor will not contact, directly or indirectly, any of the Supplier's clients or client contacts (whether developed by Supplier or developed by Distributor) regarding the competitors or similar products and services to Supplier Products, or otherwise circumvent Distributor in the process of Supplier investigation, negotiation or consummation of any transaction relating to the Products. . . . 7.9 Prior to and two (2) years after the termination of this Contract, Distributor shall not pursue the clients of the Supplier in the Territory and in the business markets established during the term of this Contract. ["Territory" is apparently defined as the Communications Industry and the Field Service Industry in the United States.] . . . 11.4 All Products and related client contacts; client lists; monitoring materials, market strategies; pricing and costs information; Supplier's financial data; and all technical information; whether developed by the Distributor or by the Supplier is and shall become the sole and exclusive property of the Supplier for the Supplier'[s] sole and exclusive use and upon termination of this Contract, Distributor shall cease to use such Supplier Items and return all Supplier Items, and copies of such, immediately to Supplier.
Paragraph 11.4 is listed as a restrictive covenant because the prohibition against ATC using "related client contacts" following the termination of the agreement would prevent ATC from contacting those persons.
ATC allegedly became dissatisfied with RoadTrac's product and terminated the agreement. RoadTrac sued ATC, asserting various business torts and a breach of contract claim based in part on ATC's alleged post-termination violation of the restrictive covenants. Arguing the restrictive covenants were unenforceable, ATC moved to dismiss any claims arising out of those covenants. The court denied the motion, reasoning that although such broadly-worded covenants would normally be unenforceable, "the restriction of contact with any clients is unimportant because, by definition, any clients of [RoadTrac] are clients with whom [ATC] had contact." The court also explained that the lack of a geographical territorial restriction was not fatal "as it was understood that, as the exclusive sales distributor of [RoadTrac's] products, [ATC] would operate throughout an unlimited territory." We granted ATC's application for an interlocutory appeal.
1. The first step in considering the enforceability of restrictive covenants is to determine the level of scrutiny to be applied. Georgia courts have traditionally divided restrictive covenants into two categories: "covenants ancillary to an employment contract, which receive strict scrutiny and are not blue-penciled, and covenants ancillary to a sale of business, which receive much less scrutiny and may be blue-penciled." Under this traditional analysis, covenants found in distributorship agreements have always been treated like employee covenants ancillary to employment contracts.
Physician Specialists in Anesthesia, P.C. v. MacNeill, 246 Ga. App. 398, 402 (2) (a) ( 539 S.E.2d 216) (2000). See generally Habif, Arogeti Wynne, P. C. v. Baggett, 231 Ga. App. 289, 289-291 (1) ( 498 S.E.2d 346) (1998).
(Footnote omitted.) Baggett, supra, 231 Ga. App. at 289-290 (1).
Jenkins v. Jenkins Irrigation, Inc., 244 Ga. 95, 97-98 (2) ( 259 S.E.2d 47) (1979); see T.V. Tempo, Inc. v. T.V. Venture, Inc., 244 Ga. 776, 778 ( 262 S.E.2d 54) (1979); Amstell, Inc. v. Bunge Corp., 213 Ga. App. 115, 116 (2) ( 443 S.E.2d 706) (1994).
In recent years, however, a middle level of scrutiny has emerged for reviewing professional partnership or professional shareholder arrangements. The courts have reasoned that in such agreements the consideration flows equally among the contracting parties, as manifest in the partner or professional shareholder not only restricting himself but also exacting from each of the other contracting parties a like restriction. Also, partners and professional shareholders go into the transaction with bargaining power relatively equal to that of the other parties.
Baggett, supra, 231 Ga. App. at 290-291 (1).
Rash v. Toccoa Clinic Medical Assoc., 253 Ga. 322, 325 (2) ( 320 S.E.2d 170) (1984); see Baggett, supra, 231 Ga. App. at 290 (1).
The question in this case is whether, for purposes of determining the degree of scrutiny, we should depart from the traditional analysis treating distributorship agreements like employment agreements and instead treat this particular distributorship agreement more like a professional partnership agreement. Here the agreement is decidedly one-sided in favor of RoadTrac, reflecting that the parties entered into the agreement with disparate bargaining power. First, there are no restrictive covenants limiting RoadTrac's ability to compete with ATC by using other distributors. Second, RoadTrac, as the domestic owner of the GPS technology ATC wanted to distribute, clearly had the strong upper hand in bargaining power, as was manifest in numerous other provisions. The "Obligations" of ATC are set forth in 17 separately numbered and detailed paragraphs covering 3 pages, whereas the "Obligations" of RoadTrac are set forth in 6 paragraphs covering just over one page, with the largest paragraph focusing primarily on ATC's advertising duties. ATC agrees to sell RoadTrac products exclusively, whereas RoadTrac expressly reserves the right to contract with additional sales and marketing representatives who can service the same territory. Similarly, ATC, but not RoadTrac, agrees to perform its duties at a high ethical standard, to maintain a half-million dollar general liability insurance policy naming the other party as an additional insured, to protect the confidentiality and exclusivity of the other party's technology and customers, and to not assign or transfer the contract without the other party's consent. Conversely, only RoadTrac is authorized to terminate the contract upon 15 days written notice and to "take any actions it deems necessary against [the other party] for any material breach of this Contract," including but not limited to specific performance and recovery of attorney fees.
We discern no reason to depart from the historical treatment of the restrictive covenants in this distributorship agreement like covenants ancillary to an employment agreement. Thus, we employ the strict scrutiny standard, under which such covenants are enforceable only if strictly limited in time and territorial effect and otherwise reasonable considering the business interest of the supplier sought to be protected and the effect on the distributor.
Amstell, supra, 213 Ga. App. at 116 (2); see Sanford v. RDA Consultants, Ltd., 244 Ga. App. 308, 310 (1) ( 535 S.E.2d 321) (2000).
2. The restrictive covenants at issue are primarily nonsolicit covenants in that they attempt to preclude ATC from contacting or pursuing RoadTrac's clients. In any case, regardless of whether they are individually or collectively categorized as nonsolicit or noncompete covenants, Georgia law is clear that if one of them is unenforceable, then they are all unenforceable. This is based on the concept that in restrictive-covenant cases strictly scrutinized as employment contracts, Georgia does not employ the "blue pencil" doctrine of severability.
See generally Baggett, supra, 231 Ga. App. at 295 (2) (c).
See Ward v. Process Control Corp., 247 Ga. 583, 584 (2) ( 277 S.E.2d 671) (1981); Uni-Worth Enterprises v. Wilson, 244 Ga. 636, 640 (1) ( 261 S.E.2d 572) (1979).
Uni-Worth Enterprises, supra, 244 Ga. at 640 (1).
We recognize that two recent opinions of this Court in Wright v. Power Industry Consultants, Inc. and Wolff v. Protégé Systems, Inc. possibly strayed from this doctrine and explicitly or implicitly held that an unenforceable noncompete or nonsolicit covenant in an employment agreement would not necessarily invalidate other noncompete or nonsolicit covenants contained in the same agreement. In Wright we struck down a noncompete covenant as overbroad but upheld a nonsolicit covenant in the same agreement. In Wolff we held a noncompete covenant was unenforceable but nevertheless went on to consider the merits of the nonsolicit covenant found in the same agreement. As controlling Supreme Court precedent has not changed, and in light of the overwhelming authority on point, we are required to overrule Wright and to disapprove Wolff to the extent that they hold or imply that an overbroad noncompete or nonsolicit covenant in a contract being strictly scrutinized does not automatically render unenforceable other nonsolicit or noncompete covenants in the same agreement.
234 Ga. App. 833 ( 508 S.E.2d 191) (1998).
234 Ga. App. 251 ( 506 S.E.2d 429) (1998).
Wright, supra, 234 Ga. App. at 834-836 (2).
Wolff, supra, 234 Ga. App. 252-253 (1) (a b).
See Rollins Protective Svcs. Co. v. Palermo, 249 Ga. 138, 141 (1) ( 287 S.E.2d 546) (1982); Hogan Mgmt. Svcs., P.C. v. Martino, 242 Ga. App. 791, 793 (1) ( 530 S.E.2d 508) (2000); Johnstone v. Tom's Amusement Co., 228 Ga. App. 296, 297 (1) ( 491 S.E.2d 394) (1997) (physical precedent only); Sunstates Refrigerated Svcs. v. Griffin, 215 Ga. App. 61, 63 (2) ( 449 S.E.2d 858) (1994); Windsor-Douglas Assoc. v. Patterson, 179 Ga. App. 674, 675 (2) ( 347 S.E.2d 362) (1986); Adcock v. Speir Ins. Agency, 158 Ga. App. 317, 319 ( 279 S.E.2d 759) (1981).
Compare MacNeill, supra, 246 Ga. App. at 405 (3) (holding that in a "middle scrutiny" case an unenforceable noncompete covenant did not void a nonsolicit covenant in the same agreement). As we do not have a "middle scrutiny" case before us here, we do not address whether MacNeill was correctly decided on this point.
3. The nonsolicit covenant found in paragraph 7.3 prohibits ATC, for two years after the termination of the distributorship, from contacting any of RoadTrac's clients or client contacts regarding products or services similar to RoadTrac's products. No territory is specified. Georgia law is clear that unless the nonsolicit covenant pertains only to those clients with whom the employee had a business relationship during the term of the agreement, the nonsolicit covenant must contain a territorial restriction. The seminal case in this area, W.R. Grace c. v. Mouyal, explained that
262 Ga. 464 ( 422 S.E.2d 529) (1992).
a restrictive covenant prohibiting a former employee from rendering services to any client of the employer must contain a territorial restriction expressed in geographic terms because that restriction, which does not take into account whether the employee had a business relationship with that client or whether it was the client who solicited the former employee, is otherwise unreasonable and overbroad in its attempt to protect the employer's legitimate interest in keeping the employee from taking advantage of the goodwill generated during his employment with the employer to lure employer customers away.
(Emphasis in original.) Id. at 467 (2), n. 3; accord American Software USA, Inc. v. Moore, 264 Ga. 480, 481 (1) ( 448 S.E.2d 206) (1994).
Thus, under Mouyal, a "prohibition against doing business with any of an employer's customers, whether or not a relationship existed between the customer and the former employee, is overbroad" in the absence of a reasonable territorial restriction.
(Emphasis in original.) Mouyal, supra, 262 Ga. at 467 (2), n. 2; accord Sanford, supra, 244 Ga. App. at 310 (1). See Capricorn Systems, Inc. v. Pednekar, 248 Ga. App. 424, 427 (2) (b) (S.E.2d) (2001).
Here ATC, which is in the analogous position of the employee, is prohibited from contacting any of RoadTrac's clients, but no territory is specified. The trial court's rationale that a territorial restriction was not necessary is based on the misapprehension that the agreement makes ATC the exclusive distributor of RoadTrac's products, when in fact RoadTrac expressly reserves the right to contract with additional sales and marketing representatives, even within the same territory. Accordingly, we hold that this nonsolicit covenant is overbroad and unenforceable.
4. As held earlier in Division 2, the conclusion in Division 3 automatically invalidates the other nonsolicit covenants found in paragraphs 7.9 and 11.4 of the same agreement. Even if we considered the merits of these two paragraphs on their own, we note that in neither is the prohibition against contacting or pursuing RoadTrac's clients restricted to efforts competitive with RoadTrac, but each simply prohibits contact for any purpose. As this prohibits ATC from contacting these clients to sell them unrelated products such as soap or banking products, the covenants clearly go beyond what is necessary to protect RoadTrac's business interests. Moreover, the territory specified in paragraph 7.9 refers to "business markets established during the term of this Contract." Even assuming this description was not otherwise impermissibly vague, we hold that because the territory can not be determined until the contract terminates, this is yet another factor rendering the covenant unenforceable.
See Howard Schultz c. v. Broniec, 239 Ga. 181, 184 (2) ( 236 S.E.2d 265) (1977) (covenant may not impose "a greater limitation upon the employee than is necessary for the protection of the employer"); accord Fleury v. AFAB, Inc., 205 Ga. App. 642, 643 ( 423 S.E.2d 49) (1992).
AGA, LLC v. Rubin, 243 Ga. App. 772, 774 ( 533 S.E.2d 804) (2000); see Koger Properties v. Adams-Cates Co., 247 Ga. 68 (1) ( 274 S.E.2d 329) (1981).
The trial court erred in denying ATC's motion to dismiss claims arising out of alleged breaches of the three nonsolicit covenants found in the distributorship agreement.
Judgment reversed. Blackburn, C. J., Pope, P.J., Andrews, P.J., Johnson, P.J., Smith, P.J., Ruffin, Eldridge, Barnes, Ellington, Phipps and Mikell, JJ., concur.
DECIDED JULY 2, 2001.