Northern District of Georgia Judge Rules Restrictive Covenants are Severable and Denies Motion to Dismiss

Posted by Neal F. Weinrich on

Advanced Technology Services, Inc. v. KM Docs, LLC, Civil Action File No. 1:11-CV-3121-TWT, 2011, WL 5870545 (N.D. Ga. Nov. 21, 2011), involved a dispute between two companies who provide document imaging software. 

 The plaintiff, Advanced Technology Services, Inc.(“ATS”), sells a program called OptiDoc, which is a document management program that integrates with other software packages.  In June and July of 2010, two of ATS’ employees resigned.  In July of 2010, the employees announced that they had formed KM Docs, LLC (“KMD”) and that it would sell software called DocUnity and DocDNA.  These products would compete with OptiDoc. 

 ATS brought suit against the two former employees and KMD.  ATS’ Complaint alleges that the Defendants conspired to misappropriate the OptiDoc software.  According to ATS’ Complaint, KMD’s document management programs are similar in look and function to OptiDoc.

 After the defendants removed the lawsuit to federal court, they filed a motion to dismiss.  Their motion sought, among other things, to dismiss one of ATS’ claims for breach of contract against ATS’ former employee, Miles Waldron.  Mr. Waldron was a software engineer who had access to the source code for OptiDoc.  He had executed a non-competition, non-solicitation and non-disclosure agreement with ATS.  He also had executed a trade secrets agreement with ATS.  The defendants’ motion only sought to dismiss ATS’ claims based on the former agreement.

 The defendants argued that because Mr. Waldron’s non-competition covenant was overbroad, the non-solicitation covenant and the non-disclosure covenant in the same agreement were also unenforceable.  Judge Thrash agreed that the non-competition covenant was overbroad and dismissed ATS’ breach of contract claim with respect to that covenant.  However, Judge Thrash noted that the agreement contained a severability provision and found that the non-solicitation and non-disclosure covenants could stand on their own as separate agreements.  He therefore denied ATS’ motion to dismiss with respect to the non-solicitation covenant and the non-disclosure covenant.  Judge Thrash also found that ATS’ fraud, RICO, breach of fiduciary duty claims should survive the defendants’ motion to dismiss.

 This case involved an agreement governed by Georgia’s old common law and not by Georgia’s new Restrictive Covenant Act (the “Act”).  Therefore, Judge Thrash was not authorized to blue pencil Mr. Waldron’s agreement under O.C.G.A. section 13-8-53(d) of the Act. 

Furthermore, while it is settled under the old Georgia law that an otherwise enforceable non-disclosure covenant can survive despite the presence of an unenforceable non-competition covenant in the same agreement, it is also settled that an unenforceable non-competition covenant renders a non-solicitation covenant in the same agreement unenforceable, even if the agreement contains a severability provision.  See, e.g., Advance Tech. Consultants, Inc. v. RoadTrac, LLC, 250 Ga. App. 317, 320, 551 S.E.2d 735, 737 (2001) (“… regardless of whether they are individually or collectively categorized as nonsolicit or noncompete covenants, Georgia law is clear that if one of them is unenforceable, then they are all unenforceable”); see alsoSunstates Refrigerated Services, Inc. v. Griffin, 215 Ga. App. 61, 63, 449 S.E.2d 858, 860 (1994) (“Georgia’s rejection of the ‘blue-pencil theory of severability’ does not require invalidation of the provisions concerning return of documents, disclosure of confidential business information and interference with employees’ contractual relations”); see also, generally, Larkins, John, Jr., Georgia Contracts: Law and Litigation § 8-6 (“As to the severability of various types of covenants, it is established that non-compete and non-customer solicitation provisions are not severable from each other—i.e., that the failure of one will result in the failure of the other—but that nondisclosure covenants are severable from invalid non-compete or non-solicit covenants”).  It is unclear what authorities the Court relied upon in refusing to dismiss ATS’ claim for breach of the non-solicitation covenant.