Eleventh Circuit Reverses District Court on Grounds that Restrictive Covenants Should Have Been Scrutinized as Ancillary to the Sale of a Business

Posted by Benjamin I. Fink on

In Mohr v. Bank of New York Mellon Corporation, No. 09-15813, 2010 WL 1063856 (11th Cir. March 24, 2010), the United States Court of Appeals for the Eleventh Circuit reversed a preliminary injunction entered by the District Court which enjoined enforcement of the restrictive covenants in the individuals’ employment agreements.  The individuals, Michael Mohr and Jack Sawyer, Jr., had sold their investment management business to a subsidiary of the company.  They executed an asset purchase agreement and also signed separate employment agreements in connection with the sale.

Following the merger of the company with Bank of New York, the individuals resigned from their employment and accepted employment with a competitor.  After the individuals received a letter concerning their obligations under the restrictive covenants from the company’s general counsel, they filed an action in the United States District Court for the Northern District of Georgia seeking a declaratory judgment that their restrictive covenants were unenforceable under Georgia law.  They also sought an injunction precluding the company from enforcing the covenants.  The company filed a cross-motion seeking a temporary restraining order enjoining the individuals from violating their restrictive covenants.

The District Court found that the restrictive covenants in the individuals’ employment agreements, which were signed contemporaneously with the asset purchase agreement for the sale of their business, became ancillary to their employment after they became employees-at-will.  The District Court therefore subjected the restrictive covenants to strict scrutiny rather than the lesser scrutiny applicable to restrictive covenants entered into ancillary to the sale of the business.  Applying strict scrutiny, the District Court found that the covenants were overly broad and unenforceable.  The District Court therefore entered a preliminary injunction against the company enjoining enforcement of the covenants.

On appeal, the Eleventh Circuit Court of Appeals held that the restrictive covenants should be treated as ancillary to the sale of the business, because the individuals had equal bargaining power with the company and because they received compensation from the company in the sale for their willingness to abide by the restrictive covenants.  As such, the covenants were subject to lesser scrutiny.  However, because the District Court had ruled that the covenants would be overly broad even under a lesser level of scrutiny, the Eleventh Circuit remanded the case for the District Court to determine whether it could blue pencil the restrictive covenants, given that Georgia law permits courts to blue pencil objectionable portions of restrictive covenants ancillary to the sale of a business.