Prior to the enactment of the Georgia Restrictive Covenant Act (“RCA”), Georgia courts interpreted noncompete provisions entered into in the context of selling a business differently than they did between employers and employees. Indeed, under prior law, courts were allowed to “modify”—strike out and narrow, but not supply entirely missing terms—an otherwise overbroad noncompete in the “sale of business” context, but could not modify one in the employer-employee context.
Fast forward to Baldwin v. Express Oil Change (11th Circuit December 2023), a 40-page decision where the Eleventh Circuit addressed the reasonableness of a “sale of business” noncompete under the RCA. In Baldwin, Express Oil sought to acquire 29 auto repair/service stores from entities in which Baldwin was a part-owner. As part of the asset purchase agreement, Baldwin agreed that he would not, for a four-year period post-sale, work for a competing business in Georgia and Alabama and within a five-mile radius of any facility operated by Express Oil in the United States (Express Oil had 1,100 stores in the U.S.). After the sale closed, after Baldwin and Express Oil could not agree on a continuing role at Express Oil for him, and after Express Oil informed Baldwin that it would seek to enforce the noncompete against him, Baldwin filed for a declaration with the court to declare his noncompete unenforceable. In response, Express Oil sought a preliminary injunction to enjoin Baldwin from violating his noncompete.
After a preliminary injunction hearing, the lower court found that the scope of the geographic restrictions—two states and the five-mile radius surrounding more than 1,100 franchised locations—was greater than necessary to protect Express Oil’s interest in retaining its technicians and customers. It also found that the time restriction—four years—was presumptively unreasonable under OCGA §13-8-57(b), which provides restrictions are presumptively unreasonable if longer than two years for a noncompete between an employer and an employee and not part of the sale of a business. The district court then modified the noncompete to render it enforceable. Specifically, it reduced the four-year restriction to two years. It then re-wrote the existing territory by eliminating the states of Georgia and Alabama and amending the five-mile radius provision so that it only applied to those Express locations Baldwin previously had overseen.
On appeal, the Eleventh Circuit upheld the modification of the territory but struck down the lower court’s ruling on the time restriction. As to the territory, relying on OCGA §13-8-56(2)—which defines a reasonable territory—the court upheld the lower court’s decision that “the total distance encompassed by the provisions of the covenant” was not “reasonable.” Based on the testimony it heard at the preliminary injunction, the court recognized that, while Express Oil had a legitimate interest in preventing Baldwin from luring away its technicians and customers, it did not have a legitimate interest in protecting relationships “in service areas where Baldwin did not previously operate and has no apparent relationships with [Express Oil’s] technicians or customers.”
In so doing, it relied on a pre-RCA Georgia Supreme Court case that explained that territorial restrictions on competition outside of the territory in which the employee was employed generally require a showing by the employer of the legitimate business interests sought to be protected. The Eleventh Circuit also adopted the pre-RCA Georgia Supreme Court “blue pencil” rule in terms of how a court may modify an overbroad noncompete.
On the other hand, it rejected the lower court’s reduction of the noncompete to two years. It held that the district court should have applied the five-year rebuttable presumption of reasonableness contained in OCGA §13-8-57(d) (sale of business context) and not the two-year presumption contained in Section 13-8-57(b) (employer-employee context). Analyzing the RCA, it concluded that Baldwin was a “seller” because he was “an executive employee of the business who receive[d], at a minimum, consideration in connection with the sale.” Baldwin received nearly $2 million because of the sale, and the compensation he received included a premium for the restrictive covenant.
The Bottom Line
When crafting noncompete provisions, even in the context of a “sale of business,” Georgia employers would be wise to tailor the territory to reflect the nature of the company’s business and the location where the employee performed services on behalf of the company. And remember that Georgia’s prior common law still comes into play when courts look to interpret the RCA.
