Middle District of Georgia Judge Strikes Down In-Term Restrictive Covenant in Distributorship Agreement

Posted by Neal F. Weinrich on

The facts and claims at issue in B & F System, Inc. v. Leblanc, Civil Action No. 7:07-CV-192 (HL), 2011 WL 4103576 (M.D. Ga. Sept. 14, 2011), are very detailed and complex.  One ruling in Judge Lawson’s lengthy opinion is of particular interest to this blog.

Some of the parties to the lawsuit had entered into a distributorship agreement for the sale of imported products, including electronics, cookware, cutlery, jewelry and cleaning apparel.  When the parties’ relationship disintegrated, the wholesale distributor filed suit against the retail distributor and others, bringing claims for breach of an in-term restriction against competition in the parties’ distributorship agreement, among other claims.

Relying on Atlanta Bread Co. Int’l., Inc. v. Lupton-Smith, 285 Ga. 587, 589, 679 S.E.2d 722, 724 (2009), Judge Lawson of the Middle District of Georgia found that in order to be enforceable, the in-term non-competition covenant had to be reasonable as to time, territory and scope.  Judge Lawson thus rejected the plaintiff’s argument that the covenant should be subjected to a lesser scrutiny similar to the scrutiny applied in cases involving exclusivity provisions in commercial business leases.  Judge Lawson found that the situation was more analogous to that in Atlanta Bread, which involved a franchise agreement.

Applying Atlanta Bread, Judge Lawson found that the in-term non-competition covenant in the distributorship agreement was unenforceable because it lacked a territory.  He therefore found that the defendants were entitled to summary judgment on the plaintiff’s claim for breach of contract with respect to that covenant.

Judge Lawson’s decision reaffirms that, in order for in-term restrictive covenants which are not being scrutinized under Georgia’s new Restrictive Covenant Act to be enforceable, they must generally be reasonable as to time, territory and scope of activities.  See, generally, O.C.G.A. section 13-8-56(4).