In response to a former employer's appeal of a trial court's whittling down of its noncompete agreement, in its decision in Baldwin v. Express Oil Change dated December 6, 2023, a Georgia appeals court upheld the noncompete - but only in part.
What Happened in Baldwin
In this case, defendant Baldwin was a high-level manager of several franchisees of Express Oil Change, LLC, a national automotive service chain, and as the company grew, so did his responsiblities, as a result of which he saw both a bump in salary and an award of equity in the company, in the event it would be sold, which is what ultimately occurred when Mavis, a signficantly larger, and national automotive tire chain, bought out Express.
As part of the sale - and in order to collect on his equity buy-out - Baldwin was compelled to sign a noncompete that purported to limit his ability to work for or otherwise be involved in competing automotive service businesses, in large part because in his view, “80 percent of [his] retirement [was] hanging in the balance,” and he couldn't afford not to sign it. After all, the total he received was approximately $2 million.
The agreement defined a competing business as "an automotive repair or service business . . . which promotes as one or more of its services any form of retail sales of new tires and/or tire-related services, tire rotation, balancing and alignment, oil change services, quick lube services, brake repair or replacements services, transmission repair or service, automotive repairs or similar service.” The agreement further provided that the restricted territory to include all of Georgia and Alabama, as well as “a five (5) mile radius of any automotive repair or service facility business operated by Purchaser in the continental United States.”
After the sale, things between Baldwin and his supervisors went south, and Baldwin resigned. Since he was still relatively young (in his early 50's), he sought other gainful employment, and asked Express to grant him a waiver to purchase and run a small repair shop just under 5 miles from one of the Express locations. Express refused, and then Baldwin sued seeking a judicial declaration that his restrictive covenant was unenforceable. More specifically, Baldwin asserted that the noncompete included unreasonable restrictions both in terms of geographic scope and duration, and was therefore unenforceable under the Georgia Restrictive Covenants Act (“GRCA”).
What the Appellate Court Held
In reversing in part the trial court's holding in Baldwin's favor, the 11th Circuit Court stated at the outset of its more than 40-page opinion that "We agree that the covenant’s geographic scope is unreasonable (and thus unenforceable) under the GRCA. But the district court applied the wrong presumption when it concluded that the covenant’s duration was unreasonable under the GRCA."
The appellate court provided some background to its reasoning, beginning with the GRCA.
Georgia's Statutory Scheme Pertaining to Noncompete Agreements
The Georgia Restrictive Covenants Act, O.C.G.A. § 13-8-50 et seq. allows noncompete agreements “so long as such restrictions are reasonable in time, geographic area, and scope of prohibited activities.” O.C.G.A. § 13-8-53(a). On the other hand, a covenant that is unreasonable in scope, duration, or geographic area and thus violates § 13-8-53(a) “is unlawful and void,” id. § 13-8-53(d), and “shall not [be] enforce[d],” id. § 13-8-54(b). See Motorsports of Conyers, LLC v. Burbach, 892 S.E.2d 719, 726 (Ga. 2023); Belt Power, LLC v. Reed, 840 S.E.2d 765, 771 (Ga. Ct. App. 2020) (“[U]nreasonable restrictive covenants are against Georgia public policy.”).
Like New York (and several other states), the Georgia courts may "blue-pencil," or modify on its own certain overbroad provisions, and are not required to reject wholesale these agreements. Id. § 13-8-53(d).
Critically, Sections 13-8-56(2) and § 138-57 lay out a series of rebuttable presumptions in making the determination as to whether the territorial and durational restrictions are reasonable, stating:
Section 13-8-56(2): A geographic territory which includes the areas in which the employer does business at any time during the parties’ relationship, even if not known at the time of entry into the restrictive covenant, is reasonable, provided that: (A) The total distance encompassed by the provisions of the covenant also is reasonable; (B) The agreement contains a list of particular competitors as prohibited employers for a limited period of time after the term of employment or a business or commercial relationship; or (C) Both subparagraphs (A) and (B) of this paragraph."
O.C.G.A. § 13-8-57(b). A court must “presume to be reasonable in time any restraint two years or less in duration and . . . presume to be unreasonable in time any restraint more than two years when (b) In the case of a restrictive covenant sought to be enforced against a former employee and not associated with the sale or ownership of all or a material part of: (1) The assets of a business, professional practice, or other commercial enterprise; (2) The shares of a corporation; (3) A partnership interest; (4) A limited liability company membership; or (5) An equity interest or profit participation, of any other type, in a business, professional practice, or other commercial enterprise[.]
O.C.G.A. § 13-857(d):On the other hand, the presumptive time period increases to 5 (five) years when
(d) In the case of a restrictive covenant sought to be enforced against the owner or seller of all or a material part of: (1) The assets of a business, professional practice, or other commercial enterprise; (2) The shares of a corporation; (3) A partnership interest; (4) A limited liability company membership; or (5) An equity interest or profit participation, of any other type, in a business, professional practice, or other commercial enterprise[.]
In affirming this branch of the trial court's ruling that the territorial restriction was unreasonable (and therefore unenforceable), the appellate court stated that
"The covenant’s prohibition on competition by Baldwin within a five-mile radius of any location operated by Express or its affiliates does not satisfy any of § 13-8-56(2)’s three prongs; thus, it is not presumptively reasonable ... [T]he mismatch between Express’s interests and the scope of the geographic restrictions the covenant imposes on Baldwin supports the conclusion that the “total distance encompassed by the provisions of the covenant” is not “reasonable.” O.C.G.A.§ 13-8-56(2)(A) ...
"Taking our cue from the Georgia Court of Appeals, we likewise determine whether the “total distance encompassed by the provisions of the covenant” is or is not “reasonable,” O.C.G.A. § 13-856(2)(A), by considering the territorial restriction in light of the business interest it protects, see CSX Transp., Inc. v. Trism Specialized Carriers, Inc., 182 F.3d 788, 791 (11th Cir. 1999) ... we conclude the district court’s relevant findings—that Express’s legitimate business interest is in preventing Baldwin from “luring away its technicians and, vicariously, its customers” and that the geographic “restrictions on Baldwin go much further than that”— are not clearly erroneous and support the district court’s conclusion that the geographic reach of the covenant is unreasonable under the GRCA. Doc. 30 at 23–24."
On the other hand, the appellate court found that the trial court erred as a matter of Georgia law in holding unduly long the duration of the restrictive covenant, stating:
"Express argues that the district court abused its discretion because it applied the wrong GRCA presumption to determine whether the covenant’s four-year duration was unreasonable. Here, we agree with Express. The district court should have applied the five-year rebuttable presumption of reasonableness contained in O.C.G.A. § 13-8-57(d) and not the twoyear presumption contained in O.C.G.A. § 13-8-57(b). Because a district court abuses its discretion when “it applies an incorrect legal standard,” Jysk, 810 F.3d at 773–74 (internal quotation marks omitted), or commits an “error of law,” Managed Care Advisory Grp., 939 F.3d at 1153 (internal quotation marks omitted), we partly vacate the preliminary injunction."
The Takeaways
First - and foremost - this decision serves as an important reminder that even if part of a restrictive covenant is overly broad, you should not assume that a court will inherently deem unenforceable the agreement in its entirety; rather, in many cases, the court would be obliged (whether by case law or statutory law, as was the case here) to "blue-pencil" the offending portions of the agreement, and leave the rest of the agreement intact.
Second, and at the risk of stating the obvious, the importance of knowing the particular legal scheme pertaining to noncompete agreements in the relevant jurisdiction cannot be overstated, and on that score, it is critical to get a good handle on that in order to know where you stand before undertaking any actions that could have significant consequences down the road.
