A recent decision by the Georgia Court of Appeals, refusing to enforce a covenant not to compete signed by a former employee, serves as a poignant reminder of the strict scrutiny used by Georgia courts to interpret such agreements in the employment context. In this case, a Georgia corporation sought injunctive relief to prevent a former employee from competing in violation of a restrictive covenant agreement he signed while employed. The Court of Appeals upheld the trial court’s decision to deny the relief sought by the company, finding that the covenant at issue was overbroad and unenforceable.
In the case before the Court of Appeals, the company, Beacon Security, was engaged in the business of selling, leasing, and servicing burglar/fire alarms, closed circuit televisions, intercoms, telephone and television hook-up, central vacuum, and medical alert systems. Beacon Security hired the defendant and former employee, Beasley, to sell, lease, and service these systems. When hired, Beasley signed an “Employee’s Covenant Not to Compete,” in which he agreed that, upon termination of his employment, he would not “directly or indirectly, in Spalding, Henry, Butts, Lamar, Pike, Fayette, and Clayton Counties, Georgia, enter into or engage generally in direct competition” with Beacon Security in the business of “selling, leasing, or servicing burglar & fire alarms, Closed Circuit TV, Intercoms, Telephone & TV Hook ups, Central Vacs, and Medical Alert, or other Security systems of a type which would be in direct competition” with those marketed and serviced by Beacon Security at the time of his termination, for a period of two years after the date his employment terminated.
As soon as he resigned from Beacon Security, Beasley immediately began working for one of its competitors. Beasley admitted that he engaged in direct competition with Beacon Security in the counties specified in the covenant not to compete by selling, leasing, or servicing the type of security systems offered by Beacon Security. However, Beasley asserted that the covenant not to compete was an unreasonable restraint on trade and thus unenforceable.
In determining the reasonableness of the covenant, the court considered the nature and extent of the trade or business, the situation of the parties, and “all the other circumstances.” Here, the court analyzed the covenant almost as a hybrid of a noncompete and a nonsolicitation of customers. It is noted (like it would in addressing a nonsolicit of customers) that Beasley’s covenant prevented him from performing the listed functions for anyone in the eight-county region, regardless of whether Beasley had contacted such persons while working for Beacon Security.
The court recognized that prohibitions on competition with respect to customers (or potential customers) beyond those with whom the employee dealt during his employment will not always be considered unreasonable. Indeed, the Beasley court reasoned that Georgia courts should instead “focus the interplay between the territorial limitation and the scope of the prohibition.” In other words, a broad territorial restriction may be reasonable if the scope of prohibited behavior is sufficiently narrow.
Beasley’s covenant prohibited him from “directly or indirectly … engag[ing] generally in direct competition with [Beacon Security] in the business of selling, leasing, or servicing [the listed systems]” within the eight-county area. Beacon Security testified that the eight counties were “the main counties that [it] worked in,” and that Beasley worked in each of those counties while employed by Beacon Security.
However, Beacon Security failed to introduce any evidence to establish that Beasley performed each of the activities prohibited by his agreement in each one of the eight listed counties. For example, although Beacon Security testified that Beasley serviced a security system for a grocery store in Butts County, it did not offer any evidence to show that Beasley sold or leased any security systems in Butts County or that Beasley had sold, leased, or serviced any of the other systems included in the covenant not to compete, such as central vacuum and medical alert systems.
The Court of Appeals agreed with the trial court’s decision that the restrictions contained in the covenant went further than necessary to protect Beacon Security’s customer base, as the “interplay” between the prohibited scope of activity and restricted territory created an overall restriction that was more broad than necessary to protect the legitimate interests of the company under Georgia law.
Employers’ Bottom Line:
This case is illustrative of an oft-overlooked area of Georgia non-compete law: the cumulative effect of the prohibited scope of activity and the restricted territory in a covenant not to compete. Although the eight-county restriction in this case and the specifically prohibited activities, each standing alone, could have been considered “reasonable” under the circumstances and under Georgia law, their combined effect rendered the entire covenant unenforceable. Even though, as a Beacon Security employee, Beasley had performed work in all eight counties and regularly engaged in each of the prohibited activities, because he did not engage in all of the prohibited activities in each of the restricted counties, the agreement was overbroad. When crafting non-compete agreements, employers in Georgia must ensure that the prohibited territory and prohibited activities “match up,” even if, independently, they are narrowly tailored, to avoid striking down the noncompete (and any nonsolicit of customers contained in the same agreement).
If you have any questions regarding this decision or other issues related to covenants not to compete or nonsolicitation agreements, please contact the authors of this newsletter, Jeff Mokotoff, jmokotoff@fordharrison.com, 404-888-3804, or Joey Costyn, jcostyn@fordharrison.com, 404-888-3811, or the Ford & Harrison attorney with whom you usually work.