Several opinions from the Georgia appellate courts, as well as several decisions from the federal courts in Georgia, have addressed whether restrictive covenants entered into at the time that an owner of a business sells his or her ownership interest should be subjected to strict scrutiny or should be subjected to a lesser scrutiny. Hix v. Aon Risk Services South, Inc., Civil Action No. 1:11-CV-3141-RWS, 2011 WL 5870059 (N.D. Ga. Nov. 22, 2011), is a recent case addressing this issue.
Mr. Hix worked for Allied North American Insurance Brokerage of Georgia, Inc. (“Allied of Georgia”) prior to December of 2009. Allied of Georgia was an affiliate of Allied North America. Mr. Hix also owned twenty five percent of Allied of Georgia.
Aon Risk Services South, Inc. (“AON”) entered into an agreement to purchase Allied North America. In anticipation of that deal, Mr. Hix sold his interest in Allied of Georgia to Allied Group Holdings, LLC. In the purchase agreement memorializing the sale, Mr. Hix agreed to certain restrictive covenants. Mr. Hix also entered into an employment agreement with Allied Group Holdings, LLC. This agreement contained a separate set of restrictive covenants, including a covenant not to compete. Whereas the covenants in the purchase agreement were to remain in force through December 31, 2011, the restrictive covenants in his employment agreement were to remain in force for two years following the termination of his employment.
On August 16, 2011, Aon terminated Mr. Hix’s employment. When Aon indicated that it would seek to enforce the restrictive covenants in his employment agreement, Mr. Hix filed a lawsuit seeking a declaration that the restrictive covenants in his employment agreement (but not the purchase agreement) were unenforceable. He alleged in his Complaint that he is unemployed but wishes to continue working in the insurance business and anticipates that former customers will seek to do business with him again. He sought a preliminary injunction stopping Aon from seeking to enforce the restrictive covenants in his employment agreement, so as to remove any obstacle to his engaging in gainful economic activity without any uncertainty about his rights.
In analyzing whether Mr. Hix had carried his burden of showing he was substantially likely to succeed on the merits of his claim for a declaratory judgment that the restrictive covenants in his employment agreement were unenforceable, Judge Story first noted that he would apply Georgia law, notwithstanding the choice-of-law provision in the agreement which called for Illinois law to apply. Disregarding the Illinois choice-of-law provision was consistent with Georgia precedent requiring courts to ignore choice-of-law provisions when upholding them would result in the enforcement of restrictive covenants which are repugnant to Georgia public policy. Indeed, the parties appear to have agreed that Georgia law would apply, and Aon does not appear to have argued that Georgia’s recent change in public policy impacted Judge Story’s analysis of whether to uphold the choice-of-law provision. Aon may have chosen not to make this argument because, although the issue is not settled, Judge Story had already carefully considered and rejected the argument that choice-of-law provisions should now be upheld in light of Georgia’s new public policy favoring enforcement of restrictive covenants. See Boone v. Corestaff Support Services, Inc., 2011 WL 3418382 (N.D. Ga. Aug. 3, 2011) (granting motion for reconsideration and reversing his ruling in 2011 WL 2358666).
Given that Georgia law applied, the decisive question in Hix was whether strict or lesser scrutiny governed the enforceability of the restrictive covenants in the employment agreement. Aon argued that the agreement was entered into ancillary to the sale of a business and the covenants therefore should be subjected to lesser scrutiny than those that are merely conditions to employment. Aon also argued that the purchase agreement and employment agreement were part of a single integrated transaction by which Mr. Hix received compensation for the sale of his shares of Allied of Georgia in exchange for, among other things, the restrictive covenants in the employment agreement. Mr. Hix, however, argued that where as part of a business sale parties enter into a contract for the sale of the business and a separate employment contract, and both contracts contain restrictive covenants, then the restrictive covenants in the employment agreement are subject to strict scrutiny.
Judge Story carefully examined the Georgia cases which had analyzed what scrutiny to apply in very similar factual situations to the situation at bar. Having examined the cases, he concluded Mr. Hix’s analysis was correct. That is, where there are two separate agreements which each contain restrictive covenants, the covenants in the purchase agreement must be treated as part of the consideration given by Mr. Hix in exchange for the purchase of his stock. The covenants in the employment agreement, on the other hand, must be treated as part of the consideration given by him in exchange for his continued employment. Therefore, the latter covenants are subject to strict scrutiny.
Applying strict scrutiny, Judge Story quickly concluded that the covenants were invalid. He therefore granted Mr. Hix’s motion for a preliminary injunction and enjoined Aon from seeking to enforce the restrictive covenants in his employment agreement.
Hix is thus highly instructive on the facts and circumstances bearing on what level of scrutiny a court is likely to apply to covenants agreed to by a seller of a business who continues to be employed by the business. Hix is also an excellent resource given that in the opinion, Judge Story collected many of the cases which have previously addressed this issue.
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.
