Antitrust Law Daily Wrap Up, ANTITRUST—Ga. Sup. Ct.: Geographic scope of restrictive covenant need not be expressly stated, (Sep 5, 2024)

By Wendy Biddle, J.D.

Reasonableness in a geographic area is not dependent on whether its geographic scope is expressly stated but, rather, on the facts and circumstances of the case.

Two insurance agents challenged a restrictive covenant against poaching employees from their former employer. The Georgia Business Court and Court of Appeals both held that the restrictive covenant was unenforceable because it did not contain an express geographic region. However, the Georgia Supreme Court held that an express geographic region was not necessary if the restriction was deemed reasonable in time, geographic area, and scope of prohibited activities based on the facts and circumstances of the case. The court remanded the case back to the court of appeals to reverse itself and remand the case back to the Business Court to determine the reasonableness of the restriction (North American Senior Benefits, LLC v. Wimmer, No. S23G1146 (Ga. Sup. Ct. Sept. 4, 2024)).

North American Senior Benefits, LLC (NASB) is an insurance marketing organization that contracts with insurance agents. The defendants each entered into employment contracts with NASB and each contract contained a restrictive covenant that prohibited the defendants from directly or indirectly recruiting or hiring an employee or independent contractor of NASB for two years following termination of the defendants’ employment relationship with NASB.

The defendants and NASB parted ways in 2021. NASB then asserted that the defendants started a competing business and recruited NASB employees or contractors in violation of the restrictive covenant. NASB filed action with the Statewide Business Court who granted the defendants motion for judgment on the pleadings. The insurance agents argued that the non-recruitment provision was unenforceable because it did not contain an express description of a geographic area in which the provision applies. The court agreed, as did the Georgia Court of Appeals when it affirmed the business court’s ruling, finding that in order to be reasonable under Georgia state law, a restrictive covenant must include an express geographic term. NASB appealed the decision.

Court of appeals in CarpetCare. The Court of Appeals primarily used CarpetCare Multiservices v. Carle, 347 Ga. App. 497 (2018) as a guide for its reasoning and the Court of Appeals adopted that reasoning in the instant case. CarpetCare was concerned with restrictive covenants prohibiting an independent contractor from working with former customers providing the same services. The CarpetCare court held that a restrictive covenant must contain an express geographic term in order to comply with OCGA § 13-8-53 (a). The CarpetCare court reasoned that because subsection (b) expressly authorized enforcement of customer non-solicitation provisions that do not contain an express geographic reference, then subsection (a) must implicitly forbid enforcement of all other restrictive covenants if they do not contain an express geographic reference.

One judge did dissent in CarpetCare, noting that prior to the GRCA, non-recruitment provisions that did not include an express geographic limitation were frequently upheld and that in the context of employee-poaching, it does not matter where the employee is hired away to, the harm on the employer is the same. Additionally, the dissent opined that the GRCA provides that whenever a geographic area is required, any description that provides fair notice of the maximum reasonable scope of the restraint would satisfy such a requirement.

Analysis of restrictive covenant. The Georgia Supreme Court noted that the case depends on the meaning of the first sentence of the OCGA § 13-8-53 (a), which provides that “enforcement of contracts that restrict competition during the term of a restrictive covenant, so long as such restrictions are reasonable in time, geographic area, and scope of prohibited activities, shall be permitted.” The court noted that statutory text cannot be read in a vacuum, but must be considered in light of the surrounding text and statute’s context.

The court concluded that subsection (a) established a general standard of enforceability for contracts that restrict competition and that requires those restrictions to be reasonable in time, geographic area, and scope of prohibited activities. To be enforceable, a restrictive covenant must comply with all three: reasonableness in time, geographic area, and scope of prohibited activities. The plain text of the statute requires the geographic restrictions be reasonable, regardless of whether the restriction is express or implied, concluded the court.

The court also concluded that the statute was clear that the description of the covenant’s geographic area was not always required because it referred to a subset of circumstances in which a description of geographic area is required. The court then looked at the broader context of the statute and concluded that the GRCA plainly contemplated that the restrictive covenant’s geographic scope can be described in ways that do not involve geographic terms.

Here, instead of listing employers the insurance agents may not work for, the restrictive covenant named the employer (NASB) that the agents may not recruit employees from and it confined that restriction to two years after the agents’ termination. “It would be oddly incongruous to conclude that the non-recruitment provision, though stated in similarly narrow terms as covenants deemed presumptively reasonable in geographic area under OCGA § 13-8-56, is categorically unreasonable because it lacks an express geographic term,” held the court.

Lastly the court evaluated the decisional law that was the backdrop of the GRCA and concluded that it would unrealistic in the modern business world to require an express geographic territorial description in all cases as long as the restrictive covenant’s reasonableness was assessed in light of its duration, territorial coverage, and scope of restrictions. The court held that a trial court must assess whether the provision’s geographic scope is reasonable in light of the totality of the circumstances including, but not limited to, the total geographic area encompassed by the provision, the business interests justifying the restrictive covenant, the nature of the business involved, and the time and scope limitations of the covenant.

The Georgia Supreme Court reversed the decision of the Court of Appeals and sent the case back to the Business Court so it may assess whether the non-recruitment provision was reasonable.

The Case is No. S23G1146.

Judge: Bethel, C.

Attorneys: Valentine Leppert (King & Spalding LLP) for North American Senior Benefits, LLC. Justin Beecher Connell (Elarbee Thompson Sapp & Wilson, LLP) for Alisha Wimmer.

Companies: North American Senior Benefits, LLC

MainStory: TopStory Antitrust GeorgiaNews