Georgia Court of Appeals Confirms Restrictive Covenants in Independent Contractor Agreements are Subject to Strict Scrutiny

Posted by Neal F. Weinrich on

In Paragon Technologies, Inc. v. InfoSmart Technologies, Inc., —S.E.2d —, 2011 5382035 (Ga. App. Nov. 9, 2011), the Georgia Court of Appeals confirmed that strict scrutiny applies to restrictive covenants in independent contractor agreements.

InfoSmart Technologies, Inc. (“InfoSmart”) had entered into an independent contractor agreement with Paragon Technologies, Inc. (“Paragon”).  Under the agreement, InfoSmart agreed to provide employees for staffing in the information technology industry to a specific client of Paragon.  The agreement contained a restrictive covenant which stated in pertinent part that “Contractor and its employees and agents agree that it will not interfere with Company’s on-going business relationship with its Client and will not accept directly or indirectly an offer to provide further services to that Client … for a period of twelve (12) months following completion of the project or other termination of the project …”.  The agreement was signed in March of 2007 and was therefore governed by the Georgia common law existing prior to Georgia’s new Restrictive Covenants Act taking effect.

InfoSmart accepted the project with Paragon’s client on January 30, 2008 and provided services under the agreement through April 5, 2010.  InfoSmart then began providing services directly to the client.  Paragon subsequently refused to pay InfoSmart for unpaid invoices for the staffing InfoSmart had provided.

InfoSmart brought suit on the unpaid invoices.  Paragon counterclaimed for, among other things, breach of contract based on the restrictive covenant in the agreement.  The trial court granted summary judgment to InfoSmart on Paragon’s counterclaim finding that the restrictive covenant was unenforceable.

On appeal, both parties acknowledged that the restrictive covenant would fail strict scrutiny if that standard of scrutiny applied.  However, Paragon argued that the covenant should not be subjected to strict scrutiny because it was entered into by two independent corporations with equal bargaining power.  That is, it was not between an employer and an employee and therefore lesser scrutiny was appropriate, according to Paragon.

The Georgia Court of Appeals rejected Paragon’s argument, noting that the Georgia Supreme Court has held that restrictive covenants in contracts for services by independent contractors should be treated like restrictive covenants ancillary to employment contracts.  The Georgia Court of Appeals therefore found that “because the restrictive covenant at issue in this case was included in the independent contractor agreement, it is subject to strict scrutiny.”

As the covenant precluded InfoSmart from accepting unsolicited work, under strict scrutiny it was unreasonable and unenforceable.  The Court of Appeals therefore affirmed the grant of summary judgment in InfoSmart’s favor.