Northern District of Georgia Judge Invalidates Restrictive Covenants in Independent Contractor Agreement

Posted by Neal F. Weinrich on

Matthew Focht Enterprises, Inc. v. Lepore, 2013 WL 4806938 (ND Ga., Sept. 9, 2013), involved the validity of restrictive covenants in an independent contractor agreement.

Matthew Focht Enterprises, Inc. (“MFE”) processes credit card, debit card, gift card, loyalty card, leasing and ACH payments, for merchants.  Lepore markets services to business entities that accept credit cards and other payment methods for goods and services.  The parties had entered into an independent contractor agreement in which Lepore agreed to market MFE’s payment services for a fee.  The agreement contained restrictive covenants prohibiting certain competitive activities by Lepore.

In Spring of 2012, Lepore informed MFE that other credit card processing firms were compensating their sales personnel at higher rates than MFE was paying.  MFE contends that after this communication, Lepore began to violate his covenants by soliciting MFE’s customers for one of its competitors.

MFE filed suit against Lepore asserting a number of claims.  Lepore sought summary judgment on MFE’s claims for breach of contract, tortious interference and injunctive relief.

MFE’s claim for breach of contract was based on three restrictive covenants in the parties’ agreement.  Two of these covenants restrict Lepore’s activities during the term of the agreement and for five years thereafter.  One of those two covenants prohibited him from soliciting or providing services that compete with MFE’s services, interfering with MFE’s relationships with its customers, and from soliciting or marketing any service that is directly or indirectly provided to a customer by MFE, including services outside of those covered by the agreement.  The other covenant prohibits Lepore from soliciting or marketing to MFE’s customers, or calling or soliciting or taking away any of MFE’s customers, referral partners, affiliates, agents and vendors on whom MFE called or with whom MFE became acquainted during the vendor’s contractual relationship with MFE.

Judge Duffey struck these two covenants for several reasons.  Regarding the duration of the covenants, the Court noted that Georgia courts typically hold that the duration of a restrictive covenant in an independent contractor agreement is reasonable if the restricted period does not exceed two years after the contract’s termination.  As these two covenants applied during the term of the agreement and for five years thereafter, and there had not been a showing justifying the lengthy post-termination duration, the Court find the duration was unreasonable.

The Court also found that the scope of the activities in which Lepore was prohibited from engaging was ill-defined and ambiguous. One of the covenants restricted Lepore from providing services which he did not even provide to MFE.  It also restricted him from providing services other than those provided by MFE.  The scope also included customers with whom Lepore had not had contact, as well as customers who contacted him unsolicited.  For these additional reasons, the Court found that these two covenants were unenforceable.

The Court further found that these two covenants failed because they lacked a territorial limitation.

The Court also considered the enforceability of the in-term covenant in the independent contractor agreement.  This covenant restricted Lepore from soliciting MFE’s customers on behalf of its competitors only during the term of the agreement.  The Court found that the general rules of reasonableness apply to this covenant even though it applied “in-term”.  The Court further found that because the covenant did not have a territorial limit and was not limited to the customers Lepore serviced, it was unenforceable.  The Court also noted that, regardless of the fact that the in-term covenant was unenforceable on its face, it was rendered unenforceable by the fact that the other covenants in the agreement were unenforceable.  The Court thus found that Lepore was entitled to summary judgment on MFE’s breach of contract claim.

The Court also found that Lepore was entitled to summary judgment on MFE’s claim for tortious interference with contractual relations.  This claim was based on MFE’s allegation that Lepore interfered with its customer relationships.  The Court noted that “absent a non-compete or non-solicit covenant, a former employee may go to customers whom he procured for the old employer and endeavor to persuade them to change their trade to his advantage.”  The Court further found that Lepore did not engage in any wrongful conduct to cause any customers to change their business.  The Court therefore concluded that “no reasonable juror could find that [Lepore] tortiously interfered with [MFE’s] contractual relations with [its] customers.”  The Court thus granted summary judgment on MFE’s tortious interference claim.

Having held that the restrictive covenants to be unenforceable and having granted summary judgment on MFE’s claims for breach of contract and for tortious interference, the Court found that there were no grounds for injunctive relief and granted summary judgment with respect to that claim as well.