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Georgia Case Upholds Non-Compete and Non-Solicitation Agreements

Non compete clauses or non-solicitation clauses are governed by O.C.G.A. 13-8-50 to 59. Under Georgia law, restrictive covenants in employment agreements are subject to strict scrutiny and will be enforced only if they are reasonable as to the duration, territorial coverage, and scope of activity of the covenant.

In H&R Block v. Morris, No. 09-11184 (11th Cir. 2010), the Eleventh Circuit addressed a dispute between the well-known tax services company and a former employee who allegedly violated the terms of her employment agreement. The employment agreement contained two restrictive covenants–a non-competition clause and non-solicitation clause. A restrictive covenant in an employment contract, whether a non-solicitation covenant or a non-competition covenant, is considered to be in partial restraint of trade and will be enforced only if it (1) is reasonable, (2) is supported by consideration, (3) is reasonably necessary to protect the restraining party’s interest, and (4) does not unduly prejudice the interests of the public.

Georgia courts apply strict scrutiny to restrictive covenants in employment contracts, and the determination of the provision’s reasonableness is a question of law to be determined by the court which considers the nature and extent of the trade or business, the situation of the parties and all other circumstances.” “A three-element test of duration, territorial coverage, and scope of activity has evolved as a helpful tool in examining the reasonableness of the particular factual setting to which it is applied.” If the court determines that either the non-solicitation or non-competition covenant is too broad, all other covenants restricting solicitation or competition in the employment agreement will not be enforced either. This reflects the idea that restrictive covenants may not be “blue penciled” if they are found to be too broad.

Non- Competition Provision:
The non-competition clause contained in the employment contract in the H.R. Block case provided that an employee may not, for a period of two years following the termination of employment, prepare tax returns, file tax returns electronically, or provide any alternative or additional service or product that the employee provided or offered as an employee of the employer to any of the company’s clients. The restrictions listed were limited only to the district of the employer and the surrounding 25-mile radius of the employer’s location. “Company Clients” were defined as only those clients/ entities the employee had contact with when preparing taxes or performing services for, while employed at the company.

In examining the non-competition clause the court’s analysis focused on the reasonableness of the duration, territorial coverage and the narrowness of the prohibited activity. After applying the three-part test of duration, territorial coverage, and scope, the court held that the non-competition provision was enforceable as a matter of law. The Court held that because the non-competition clause was limited in duration (two years), that the territory was only limited to a 25-mile radius from the employer’s location, and the prohibited activities were narrow in scope, the non-competition provision was reasonable.

First, the Court examined the two-year duration of the non-competition provision. The 2-year duration was held to be reasonable, citing cases where both two-year and five-year limitations had been held to be reasonable. Turning to the geographic limitation, the Court noted that a restrictive covenant subject to strict scrutiny may apply to the territory in which the employee served. A key inquiry was whether the employee was on notice of what specifically would violate the restriction. The opinion stated that in order to determine whether a non-competition covenant satisfies this requirement, “a court must examine the ‘interplay between the scope of the prohibited behavior and the territorial restriction.” In illustration, the court stated that a sufficiently broad territorial limitation may be reasonable if the scope of the prohibited behavior is sufficiently narrow. The Court’s analysis focused on the interplay between the employee’s prohibited activities within the restricted territory. First, the employer pointed out that the employee serviced clients on the outer edges of the 25-mile radius, and second, that the prohibited activity applies only to clients served by the employee, and only covers territory in which she actually worked. The court determined that the territorial restriction was thus reasonable under the circumstances.

The third element of the test focused on the scope of the prohibited activities that the employee was not able to perform upon termination of employment. A non-competition provision “must balance an employee’s right to earn a living without unreasonable restrictions, and an employer’s right to protection from the former employee’s possible unfair appropriation of contacts developed while working for the employer.” The Court stated that because the limitation was only to those clients that the employee had contact with during her employment with the company, that the scope was sufficiently narrow, in that, the employee would still be able to earn a living by completing tax work for the general public or other clients of her employer that she did not personally have contact with. After applying the three-part test to the non-competition provision, the court found the non-competition to be reasonable and enforceable.

Non-solicitation Provision:
Having found the non-competition covenant to be enforceable, the Court next analyzed the enforceability of the non-solicitation covenant on its own merits.
The non-solicitation provision in the employment contract at issue in H.R. Block Eastern Enters. Inc, provided that an employee may not, for a period of two years following the termination of employment, solicit or intend to solicit any of the employer’s clients in order to prepare tax returns, file tax returns electronically, or provide any alternative or additional service or product that the employee provided or offered as an employee of the employer.

A non-solicitation covenant, “which is designed primarily to protect the employer’s investment of time and money in developing customer relationships, prohibits an employee from soliciting the employer’s clients for a limited time and only requires a territorial restriction if the forbidden clients include the clients with whom the employee did not have a relationship prior to his departure.” The Court did recognize, however, that a non-solicitation provision may not prevent the employee from accepting unsolicited business.

The Court stated that the non-solicitation provision was enforceable because the duration was reasonable, the scope of prohibited activity was narrow, and that it did not preclude the employee from accepting unsolicited business. The court referenced a prior case that held a two-year duration as reasonable and enforceable. Next, it was noted that because the non-solicitation provision only restricted the employee from working with clients that she had contact with during her employment with the company, that a geographic limitation was not needed. The opinion stated that because the prohibited acts included only those services that the employee performed while working for the company and the acts were limited only to her former employer’s clients, the scope was reasonable and the non-solicitation provision was upheld.

Severance Package Enforceability:
Severance packages are typically given to terminated employees as an act of good will, in order to show some appreciation for the employee’s work and to aid in the transitional period while the terminated employee pursues other jobs. Despite the good intentions, the main point of providing severance packages to terminated employees is to have the employee leave “quickly and as quietly as possible.” Severance packages will usually contain a number of things that the terminated employee will give up or “release,” in exchange for the consideration in the form of additional money or other benefits. Non-competition clauses are common in severance packages.

Generally, if a terminated employee receives some type of compensation in exchange for signing a severance agreement and the employee signs the agreement, without pressure or coercion, after having the opportunity to review the severance agreement and/or have an attorney review it, a severance agreement is enforceable.
The First Circuit Court of Appeals recently held a severance agreement to be enforceable when the agreement required an employee to waive her Title VII rights against the employer. The Court held that by the employee signing the agreement, the employee knowingly and voluntarily waived her Title VII rights, despite the employee’s contentions otherwise. The First Circuit has also held that an employee’s waiver of ADA, and ERISA rights in exchange for signing severance agreements have also been enforceable against former employees.

In 2006, the Eleventh Circuit faced a similar issue when McDonald’s underwent a nationwide restructuring program that called for the termination of a number of employees. McDonalds gave an incentive to terminated employees to accept additional consideration in exchange for signing an agreement that, in effect, required the terminated employees to waive any claims they had against the employer, including claims for age discrimination (ADEA).

Although the case focused on whether McDonald’s had complied with federal regulation, the Court found for the employer, having the subsequent impact of finding enforceable the employees’ waiver of their rights to any potential claims they had when they signed the severance agreements, including the ADEA claims.

Robert J. Fleming has been handling business litigation cases for more than 20 years. In additional to a law degree from Emory University, he holds and MBA in Finance and has acted as general counsel to a number of companies. He practices in and around the Atlanta area including handling lawsuits in Fulton, DeKalb, Clayton, Gwinnett, Cobb and other counties and nearby cities including Alpharetta, Austell, Avondale Estates, Chamblee, College Park, Conyers, Duluth, Decatur, Doraville, Hapeville, Johns Creek, Jonesboro, Lawrenceville, Norcross, Peachtree City, Riverdale, Roswell, Sandy Springs, Stone Mountain, and Smyrna. If you would like quality legal representation regarding a business dispute, contact Robert J. Fleming directly on (404) 525-5150 or contact us online.