Georgia Court of Appeals Holds Lesser Scrutiny Applicable to Restrictive Covenants of Former Minority Owner

Posted by Benjamin I. Fink on

American Control Systems, Inc. v. Boyce, — S.E.2d –, 2010 WL 1172996 (Ga. App. March 29, 2010), is an important case to consider when determining what level of scrutiny will govern the enforceability of restrictive covenants in an employment agreement entered into ancillary to the sale of a business. In American Control, the trial court applied strict scrutiny and concluded that the restrictive covenants at issue were unenforceable. The Court of Appeals reversed the trial court, holding that a lesser scrutiny should apply because the covenants were ancillary to the sale of the business. Under lesser scrutiny, the covenants were enforceable.

Defendant Boyce co-owned and co-operated American Control Systems, Inc. (“ACS”), a computer services company. He and his co-owner collectively sold a fifty-one percent interest in ACS to another individual whom Boyce and his co-owner sought to have join ACS. Boyce and the co-owner each retained a twenty-four and a half percent interest in ACS. At the same time that they entered into the stock purchase agreement for this sale, Boyce signed an employment agreement with ACS which contained certain restrictive covenants.

Boyce later resigned from ACS and began working for his wife’s information technology company. When two ACS clients cancelled their contracts and entered into contracts with the company owned by Boyce’s wife, ACS brought suit against Boyce for breach of the restrictive covenants in his employment agreement.

The trial court applied strict scrutiny to the covenants, found that they were unenforceable, and entered summary judgment in Boyce’s favor. On appeal, the Court of Appeals found that Boyce’s bargaining capacity in negotiating the stock purchase agreement and the employment agreement containing the restrictive covenants at issue was significantly greater than that of a mere employee. The Court of Appeals therefore concluded that the restrictive covenants were ancillary to the sale of a business and subject to much less scrutiny than those ancillary to an employment contract.

Analyzing the non-competition covenant in Boyce’s employment agreement under lesser scrutiny, the Court of Appeals rejected Boyce’s argument that the scope of activity he was restricted from engaging in was indefinite and therefore overbroad and unenforceable. Even though the employment agreement did not contain a defined, prohibited scope of activity, because sale of business scrutiny applied, the Court of Appeals held that it could look to the description of the nature of ACS’s business in the stock purchase agreement to supply this “missing term” and thus alleviate any concerns regarding the definiteness of the restricted scope of activity. The Court of Appeals therefore held that Boyce’s non-competition covenant was enforceable and reversed the trial court’s grant of summary judgment on ACS’s claim for breach of this covenant.

The Court of Appeals also reversed the trial court’s finding that the non-solicitation covenant was unenforceable. Because the trial court had applied strict scrutiny, it found that the non-solicitation covenant was unenforceable based on the rule that if one covenant ancillary to an employment agreement is unenforceable, the others in the agreement are unenforceable as well. Given the Court of Appeals’ holding that lesser scrutiny applied, this rule did not apply. However, even though the Court of Appeals held that Boyce’s non-solicitation covenant was enforceable, it still affirmed the trial court’s grant of summary judgment on ACS’s claim for breach of this covenant, agreeing that ACS had not produced any evidence to support its claim that Boyce breached this covenant.