BFV Perspectives, Noncompete & Trade Secrets, | Oct 11, 2018

Finally! GA Court Issues Guidance on “New” Non-Compete Statute

This blog carefully tracks developments related to Georgia’s Restrictive Covenant Act (RCA), which passed in 2011 and substantially revised Georgia’s non-compete law. Until last week, there were no published opinions from the appellate courts in Georgia addressing the RCA. Also, there were only a handful of federal district court opinions interpreting the law and giving guidance to non-compete practitioners. This has finally changed with the Georgia Court of Appeals’ recent decision in Carpetcare Multiservices, LLC v. Carle, 2018 WL 4763910 (October 3, 2018).

In Carpetcare, an employer sued a former independent contractor for violating his non-compete. The independent contractor moved to dismiss on the grounds that the non-compete was unenforceable. The non-compete stated that for one year after the end of employment, the contractor would not provide any service to any customer with whom he had contact during the term of his employment. In other words, the non-compete was a client-based restriction that prohibited him from servicing the customers with whom he dealt.

The employee argued this non-compete was unenforceable because it did not contain a geographic limitation.The trial court agreed. A divided Court of Appeals affirmed the trial court’s ruling. 

The majority’s conclusion was based primarily on the wording of O.C.G.A. § 13-8-53(a). This section of the new non-compete law states that “enforcement of contracts that restrict competition during the term of a restrictive covenant, so long as such restrictions are reasonable in time, geographic area, and scope of prohibited activities, shall be permitted.” The majority interpreted this provision to mean that a non-compete must have a reasonable geographic limitation. It also pointed to other parts of the non-compete statute that address territorial limitations that may be used in a non-compete. O.C.G.A. § 13-8-53(c)(2); O.C.G.A. § 13-8-56(2).  The majority also noted that whereas the statute requires a non-compete have a territory, O.C.G.A. § 13-8-53(b) expressly provides that a customer non-solicit need not contain a geographic limitation.  As the parties did not dispute that that the covenant at issue was a non-compete rather than a customer non-solicit, the majority concluded that the absence of a territory was fatal to the non-compete.

In trying to save its non-compete, Carpetcare argued that the statutory requirement of a geographic limitation need not be interpreted literally. Rather, Carpetcare argued that narrowly limiting the scope of the covenant to only the customers that the contractor dealt with meets the reasonableness requirements of the statute and therefore should satisfy the geography requirement. The majority concluded that such an interpretation would ignore the plain and ordinary language of the statutory text, which requires that a non-compete have a geographic limitation.

Judge Ray dissented. He concluded that the statute does not specifically require a geographic restriction, rather it only requires that any geographic restriction be reasonable. Here, despite the non-compete not having a geographic restriction, the covenant only restricted the contractor from engaging in post-termination competitive activities with those customers with whom he had dealt. In Judge Ray’s view, this was a reasonable restriction and “the lack of a geographic area restriction is of no consequence.” Judge Ray noted that Carpetcare’s non-compete allowed the independent contractor to work in his line of business in any territory as long as he was not working for customers he dealt with. In his view, the former employer could have drafted the non-compete significantly more broadly such and the majority’s holding was therefore “not a reasonable outcome.”

Given the divided court, this decision has limited precedential value. However, it does shed light on how certain judges on the Court of Appeals interpret aspects of the new non-compete statute. Practitioners that draft non-competes should be aware: Non-competes that limit prohibiting competitive services to former customers could be subject to attack without a reasonable territory. The fact that two of the three justices construed the statute narrowly is not surprising given that the statute is in derogation of the common law.

Notably the Court of Appeals did not address whether the non-compete could have been saved through “blue penciling,” as the trial court’s ruling on this issue was not part of the appeal. At the time of this blog entry, it is unknown whether the employer intends to seek certiorari from the Georgia Supreme Court.

BFV Perspectives, Noncompete & Trade Secrets, | Oct 11, 2018
Neal F. Weinrich
Neal F. Weinrich

Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.