In late 2019, the Northern District of Georgia (Atlanta federal court) addressed the duties owed when an independent contractor leaves one trucking company to work for another. In Wind Logistics Prof’l v. Universal Truckload, Inc., Universal Truckload (“Universal”) was in the business of transporting industrial wind equipment. In 2012, Mr. Parson, who previously had been employed by Universal to coordinate the transportation and delivery of wind equipment, entered into an independent contractor agency agreement with Universal.
As an independent contractor, Parson still coordinated transportation for Universal’s primary client, GE Wind, and he also managed the relationships between Universal, the client and the truck owner-operators who transported the equipment. Parson created Wind Logistics to facilitate this work. In Parson’s contract with Universal, Universal loaned him $500,000, $100,000 of which was to be forgiven each year that he remained working with Universal exclusively. If he violated the agreement by working for a competitor during that 5-year period, Parson agreed to repay the loan.
The arrangement worked well for a few years. Then, in mid-2015, Parson began discussions with Bennett, another trucking company. In November 2015, he signed a letter of intent to work with Bennett, to begin working on January 1, 2016. Seventy-five of the eighty drivers with whom Parson had worked at Universal followed him to Bennett. Universal’s business with GE Wind dried up, declining from $40 million in 2015 to $4.3 million in 2016. And Bennett’s business with GE Wind picked up by approximately the amount of Universal’s corresponding loss.
Before Parson notified Universal of his intent to end their relationship, he had extensive communications with Bennett, GE Wind, and his network of drivers about his intended move. For example, Parson provided Bennett with several documents about shipping windmill equipment, including the schedule of loads GE Wind awarded Universal; Universal’s projected line of business, showing prospective and existing business; and information on the trailers Bennett would need to perform wind equipment transportation. Parson also helped facilitate drivers moving from Universal to Bennett, including providing Bennett with each of the drivers’ addresses, dates of birth and driver’s license numbers, as well as a copy of Universal’s insurance materials. He also spoke with each driver about his leaving and sent them links to apply at Bennett. Finally, he spoke with GE Wind to facilitate his efforts to move its business to Bennett.
Ultimately, a lawsuit ensued. Universal sued Parson and Wind Logistics for, among other things, breach of fiduciary duty, breach of duty of loyalty and violation of the noncompete provision contained in the agency agreement.
The court first addressed the breach of fiduciary duty argument. Under Georgia law, an agent owes its principal a fiduciary duty, and such a relationship arises wherever one person authorizes another to act for him. The court held Universal had established a fiduciary relationship with Parson/Wind Logistics. The court stated that the fact Parson was an independent contractor was not dispositive on the issue: an individual can be both an independent contractor and an agent. Here, Parson/Wind Logistics had the authority to bind Universal in contract. They could bid for GE Wind work, accept loads that GE Wind awarded and bind Universal to provide those services to GE Wind, all with no approval from Universal.
Because Parson/Wind Logistics had an agency relationship with Universal that continued until the end of 2015, they also owed Universal a duty of loyalty until that day. Under Georgia law, an agent cannot directly compete with its principal. While an agent can prepare to compete and begin competing right after its agency relationship ends, it cannot do so before. Here, the court determined that, before leaving Universal, Parson (a) established himself as the client contact between Bennett and GE Wind; (b) sent emails from a Bennett email account; (c) provided Universal’s pricing and capacity information and (d) informed GE Wind that 100 percent of his drivers would follow him to Bennett. For these reasons, among others, the court determined Parson violated his fiduciary duty and duty of loyalty to Universal.
The noncompete provision in the loan agreement stated if Parson breaches the agreement and “leave[s] to form his own company or affiliate with a competitor” before repaying the note, he will immediately have an obligation to repay the outstanding balance “prior to representing any other freight companies” and will also pay a “a $10,000.00 penalty.” As an initial matter, the court held that the “penalty” provision was an unlawful restraint of trade under Georgia law and, thus, unenforceable.
Because the parties entered into the agreement in 2013, however, Georgia’s Restrictive Covenant Act (“RCA”) applied. Under the RCA, Georgia law considers any restraint longer than two years to be unenforceable. OCGA 13-8-57(b). It also addresses territorial restrictions in terms of what would be enforceable. OCGA 13-8-56(2). Applying these presumptions, because the promissory note had no geographic restrictions and a five-year prohibition, it was overbroad as to time and territory. And while a Georgia court is permitted to modify an overbroad noncompete provision under the RCA to render it enforceable, it cannot “reform and rewrite” contracts to make them acceptable to Georgia public policy. Because the repayment provision had no geographical limitation, the court would not add a material term that did not exist. Accordingly, the term requiring repayment upon leaving to compete was an unreasonable restraint on trade, and thus unenforceable.
Bottom Line:
Georgia courts examine closely any competitive actions taken prior to departing from either an employer or principal. Those seeking to leave an organization to directly compete and take business with them should ensure that they are “squeaky clean” in their efforts to prepare for their next venture and should also communicate with counsel. Further, as an employer, be sure that any loan or forfeiture of payment tied to a restrictive covenant that is enforceable under Georgia’s unique approach to non-compete law.
Jeff Mokotoff is the Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group. If you have any questions regarding this decision or other issues impacting the enforceability of employment-related restrictive covenants, please feel free to contact Jeff at jmokotoff@fordharrison.com. Of course, you may also contact the FordHarrison attorney with whom you usually work.