Belt Power, LLC v. Reed

354 Ga.App. 289

840 S.E.2d 765

BELT POWER, LLC et al.

v.REED et al.

A19A1824

Court of Appeals of Georgia.

March 10, 2020

Benjamin E. Fox, Atlanta, Benjamin Williams Thorpe, for Appellant.

David A. Roberts, Thomas Wyatt Cox, Brian S. Abrams, Atlanta, for Appellee.

Miller, Presiding Judge.

This case presents us with issues of first impression concerning the scope and application of Georgia’s recently enacted Restrictive Covenants Act ( OCGA § 13-8-50 et seq. ). Belt Power, LLC and Shorehill Belt Power, LLC (collectively "Belt Power") seek review of the trial court’s final summary judgment order declaring void and unenforceable various restrictive covenants in their contracts with former employees Steve Reed and Jeffrey Harrington and dismissing their counterclaims for breach of those restrictive covenants. Belt Power argues on appeal that (1) the trial court erred when it concluded that the 2014 agreements between the parties completely superseded and replaced their prior 2008 agreements; (2) the trial court erred by applying strict scrutiny to analyze the reasonableness of the restrictive covenants; (3) the trial court erred by applying Georgia common law instead of the Restrictive Covenants Act; (4) the trial court erred by failing to apply a choice of law provision; and (5) the trial court erred by declining to modify or "blue pencil" the agreement so that it was enforceable.

We determine that the trial court correctly concluded that the 2014 contracts between the parties superseded and replaced their earlier 2008 contracts. We further conclude that Georgia’s Restrictive Covenants Act applies to these restrictive covenants and that the trial court did not abuse its discretion in declining to use the Act’s "blue pencil" provision to modify the restrictive covenants, and it correctly declined to apply the choice of law provision in the contract. We therefore affirm the trial court’s final judgment declaring that the restrictive covenants were unenforceable, and we affirm the trial court’s order dismissing Belt Power’s counterclaims for breach of those restrictive covenants.

Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. A de novo standard of review applies to an appeal from a grant of summary judgment, and we view the evidence, and all reasonable conclusions and inferences drawn from it, in the light most favorable to the nonmovant.

(Citation omitted.) Crouch v. Bent Tree Community, Inc. , 310 Ga. App. 319, 713 S.E.2d 402 (2011).

Belt Power is a company that is primarily engaged in making and distributing conveyor belts and conveyor belt components. Reed and Harrington were employees of Belt Power and were both engaged as territory managers. In 2008, Reed and Harrington each purchased a small minority equity share of Belt Power pursuant to an "LLC Interest Purchase and Restriction Agreement" with Belt Power that each separately signed. This agreement included restrictive covenants providing that, for a certain period after their employment ends, Reed and Harrington would not (1) solicit business from any of Belt Power’s customers; (2) compete with Belt Power in any state in which it operates; (3) solicit any of Belt Power’s employees to join their business; (4) hire any of Belt Power’s employees; or (5) disclose any trade secrets or confidential information.

In 2014, Reed and Harrington each separately sold their minority shares back to the company pursuant to a "Confidentiality, Non-Competition and Non-Solicitation Agreement" with Belt Power that also included certain restrictive covenants. Among other restrictions, the agreement stated that Reed and Harrington would not recruit or hire, or attempt to recruit or hire, any of Belt Power’s employees for a period of five years after the sale of their shares.

Reed stopped working for Belt Power in 2015, and Harrington left the company in 2017. In 2017, Harrington and Reed created Sitka Belt, LLC, for the purpose of "marketing and selling industrial belts for conveyors and other applications." Reed and Harrington brought this action for a declaratory judgment that the restrictive covenants contained in the parties’ 2008 and 2014 agreements were void, and they asked for a permanent injunction enjoining Belt Power from enforcing the covenants. Belt Power counterclaimed for breach of the restrictive covenants, alleging that Harrington violated the 2008 agreement by soliciting Belt Power’s customers and that Reed violated the 2014 agreement by inducing Harrington to leave Belt Power and join Sitka. Reed and Harrington then filed a motion for the entry of a declaratory judgment and a permanent injunction.

Following a hearing, the trial court granted the motion for a declaratory judgment, concluding that the restrictive covenants were void and unenforceable. The trial court also entered a permanent injunction enjoining Belt Power and any other entity from enforcing the restrictive covenants in the parties’ agreements, and it dismissed Belt Power’s counterclaims for breach of contract. Belt Power then appealed.

1. Belt Power first argues that the trial court erred in concluding that the 2008 agreement (and the restrictive covenants contained therein) was superseded and replaced by the 2014 agreement (and its restrictive covenants). We conclude that the trial court correctly construed the 2014 agreement’s merger clause so as to conclude that the 2014 agreement superseded and replaced the 2008 agreement.

The interpretation of a contract is normally a question of law to be resolved by the court, and the [order] of the lower court in this case [is] therefore subject to de novo review. This review requires us first to decide whether the contract provisions at issue are ambiguous. If there is no ambiguity, then we simply enforce the contract according to its terms.

(Citations omitted.) Willesen v. Ernest Communications, Inc. , 323 Ga. App. 457, 459 (1), 746 S.E.2d 755 (2013).

The 2014 agreement contained a merger clause which stated that the agreement "[set] forth the entire understanding with respect to the subject matter hereof and supersedes any prior or contemporaneous understandings with respect thereto, written or oral." "We conclude that the language of the superseding-agreement clause is clear and unambiguous: the later-entered agreement replaces in their entirety all earlier-entered agreements that concerned a similar subject matter." MAPEI Corp. v. Prosser , 328 Ga. App. 81, 86 (4), 761 S.E.2d 500 (2014).

The differing covenant obligations contained in the two agreements do not create any ambiguity in the application of the merger clause. The 2008 and 2014 agreements clearly concerned similar subject matters: the primary basis for the 2008 agreements was the purchase by Reed and Harrington of minority shares of Belt Power, and the primary basis of the 2014 agreements was the sale of those same shares back to the company. It is entirely logical that the parties would agree to have Reed and Harrington be subject to more stringent covenant obligations once they became partial owners of the company and that such obligations would no longer apply once they ceased to be partial owners. Thus, the trial court correctly concluded that the 2014 agreement superseded the 2008 agreement.

2. Belt Power also argues¹ that the trial court erred in concluding that Georgia’s Restrictive Covenants Act did not apply to the employee no-hire and employee no-solicitation covenants in the 2014 agreement and by instead applying Georgia common law to analyze the enforceability of the covenants. Upon a close reading of the entire statute, we conclude that the restrictive covenants at issue do fall within the ambit of the Act. We nevertheless conclude that the trial court did not abuse its discretion in declining to apply the "blue pencil" provision in the Act to modify the terms of the covenants.

"On appeal, we review the lower court’s interpretation of a statute de novo, as statutory interpretation is a question of law." (Citation omitted.) Hill v. First Atlantic Bank , 323 Ga. App. 731, 732, 747 S.E.2d 892 (2013). "The fundamental rules of statutory construction require us to construe a statute according to its terms, to give words their plain and ordinary meaning, and to avoid a construction that makes some language mere surplusage." (Citation and punctuation omitted.)

Couch v. Red Roof Inns, Inc. , 291 Ga. 359, 362 (1), 729 S.E.2d 378 (2012). "[S]tatutes in derogation of the common law must be limited strictly to the meaning of the language employed, and not extended beyond the plain and explicit terms of the statute." (Citation and punctuation omitted.) Id. at 364 (1), 729 S.E.2d 378. On the other hand, when we interpret a statute, "we do not look at the text in isolation. Rather, to determine its meaning, we also consider its context. For context, we may look to the other provisions of the same statute, the structure and history of the whole statute, and the other law ... that forms the legal background of the statutory provision in question." (Citations omitted.) Plummer v. Plummer , 305 Ga. 23, 26-27 (2), 823 S.E.2d 258 (2019).

(a) The Restrictive Covenants Act Applies to these Restrictive Covenants

The trial court here first concluded that the Restrictive Covenants Act does not apply to the employee no-hire and employee no-solicitation covenants in the 2014 agreement based upon its review of OCGA § 13-8-53, the main enforcement provision, which does not explicitly mention the covenants at issue in this case. Because we are required to view the statute as a whole, however, we do not end our inquiry at this one provision.

We first turn to the Act’s list of definitions. The Act defines the term "restrictive covenant" in part as

an agreement between two or more parties that exists to protect the first party’s or parties’ interest in property, confidential information, customer good will, business relationships, emp

...