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Courts in US state of Georgia cannot extend non-compete beyond its terms

Written by
FordHarrison LLP, nationwide U.S. law firm with a singular focus on HR law.
Authors
Jeffrey D. Mokotoff
Partner - United States
FordHarrison LLP
United States
05.11.21
2
The Court of Appeals in the US state of Georgia has ruled that the courts cannot extend a non-compete provision beyond its contractual terms.

The more things change, the more they stay the same. That adage is apparent in Georgia’s non-compete law, which had a major overhaul in May 2011, when Georgia’s Restrictive Covenant Act (RCA) became effective.

The RCA applies to restrictive covenant agreements entered into after May 2011, whereas Georgia’s well-developed common law applies to agreements entered into prior to that date. Nevertheless, prior common law themes play out time and again in Georgia courts’ interpretation of the RCA. One such theme is that a court is not allowed to extend a non-compete provision beyond the terms drafted in the agreement. Recently, in Daneshgari v. Patriot Towing Services, the Court of Appeals addressed a court’s extension of a non-compete provision.

Background

On 22 June 2016, Patriot Towing Services (PTS) purchased the assets belonging to D&D Autow’s Inc., a full-service emergency towing company operated by Daneshgari. As part of the purchase agreement, Daneshgari agreed not to compete with PTS for a four-year period (O.C.G.A. s13-8-57(d)(5) allows for non-compete time restrictions greater than two years in sale-of-business context non-competes) within a 150-mile radius of its address. Accordingly, under the terms of the agreement, the non-compete expired on 22 June 2020.

Within a month of the sale, Daneshgari and the other defendants began operating another towing business. In 2018, PTS filed a lawsuit against Daneshgari. The court entered a preliminary injunction against Daneshgari and the other defendants, preventing them from continuing to violate the non-compete. Despite the court’s order, the defendants continued to violate the non-compete and, accordingly, PTS filed contempt motions against the defendants. In August 2020, after the four-year non-compete term expired, the court held a contempt hearing at which, among other remedies, PTS sought to extend the non-compete provision. At the close of the hearing, the court found Daneshgari in contempt, entered a default judgment against him and ordered him to pay PTS’ lawyers’ fees. Additionally, the order extended the injunction, prohibiting Denshgari from violating the non-compete provision ‘until further order of this Court.’

The Court of Appeals ruling

On appeal, the Court of Appeals reversed this ruling. The court first recognised that, under the terms of the agreement, the non-compete provision expired on 22 June 2020.

It then reviewed pre-existing Georgia law that rejected the idea that ‘equity permits a court to extend the period of a non-compete agreement.’ Relying on cases decided both before and after the RCA’s passage, the court vetoed the argument that when a party sues to enforce a non-compete agreement, the litigation itself should stop the clock on (‘toll’) the terms of the agreement. Instead, it reiterated the reasoning that ‘courts should hesitate to rewrite private contracts’ and ‘[j]udicially providing a tolling provision would effect such a rewrite.’

Bottom line

Under the RCA, courts expressly are allowed to ‘modify’ overbroad covenants to make them enforceable. However, courts may not modify them to ‘render the covenant more restrictive . . . than as originally drafted by the parties.’

While the RCA expresses a sea change from prior law, many of Georgia non-compete law’s guiding principles remain in effect. And Georgia courts’ reluctance to toll or extend a contract as written is one of them.