Loan Agreement Restrains Trade

Posted by Benjamin I. Fink on

In a recent decision, a loan agreement was found to have restrained trade by calling for a $10,000 penalty triggered simply by the fact of competition. Wind Logistics Professionals LLC v Universal Truckload, Inc., 2019 WL 4600055 (N.D. Ga., Sept. 23, 2019).

In the case, an independent contractor who coordinated transportation between Universal and a business unit of General Electric Company, entered into a loan agreement under which Universal loaned the contractor $85,000 in exchange for which he agreed to represent only Universal for five years. Universal also agreed to forgive one-fifth of the loan each year for five years. The contractor agreed to repay the loan if he failed to meet certain revenue goals or began competing with Universal within five years.

The Court held that “the purpose of this provision was to make it difficult for [the contractor] to compete with Universal or at least to give them pause before deciding to do so. They would have had to weigh the cost of paying the $10,000 ‘penalty’ and of immediately repaying a note that they would not otherwise have had to pay for five years against their desire to compete with Universal either directly or by affiliating with another company.” The Court further noted that without this provision, the contractor would have been free to compete without having to buy that right through the acceleration of the note and the penalty. Thus, the Court found the provision constituted a non-compete and was governed by Georgia’s Restrictive Covenant Act.

In applying the statute, the Court found the provision to be unenforceable because the promissory note contained no geographic restriction, no list of prohibited companies and a five-year prohibition. The Court further found that the agreement prevented the contractor from not only soliciting former Universal clients, it also prevented him from accepting work from Universal clients who might first contact him. In doing so, the Court found the agreement provided Universal more protection than Universal could expect under the law and also adversely impacted innocent third parties, depriving them of leaving Universal to work with the contractor. This would adversely impact other companies with no prior relationship with Universal by preventing the contractor from offering services to them in competition with Universal. Thus, the Court found the agreement failed in nearly every respect and Universal provided no legal support to overcome the presumptions of unreasonableness under the statute.

In sum, the Court found the repayment provision had no geographical limitation and did not list competitors for whom the contractor could and could not work. The Court found that adding these restrictions would be adding a material term which the Court could not do. As a result, the Court found that requiring repayment upon leaving to compete is an unreasonable restraint on trade and, thus, unenforceable.

This case holds lessons for any company entering into a similar type of loan forgiveness agreement with an independent contractor, employee or otherwise.