N. Am. Senior Benefits, LLC v. Wimmer

368 Ga.App. 124

889 S.E.2d 361

NORTH AMERICAN SENIOR BENEFITS, LLC v. WIMMER et al.

A23A0162

Court of Appeals of Georgia.

June 13, 2023

Bendin Sumrall & Ladner, David Van Hayes, Thaddeus David Wilson, King & Spalding, Zachary Andrew McEntyre, Atlanta, Valentin Leppert, Andrew Jacob Chinsky, Atlanta, for Appellant.

FordHarrison, Jeffrey David Mokotoff, Abigail Jane Larimer, Leslie B. Hartnett, Atlanta, Benjamin Fryer, for Appellee.

McFadden, Presiding Judge.

This case calls upon us to construe Georgia's Restrictive Covenants Act, OCGA § 13-8-50 et seq. At issue is the enforceability of a restrictive covenant that operates after the end of the parties’ business relationship that undertakes to prohibit solicitation of employees, but that lacks an explicit geographic limitation. We hold that it is not enforceable.

Under the Act, "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." OCGA § 13-8-53 (a). But "[a]ny restrictive covenant not in compliance with the provisions of this article is unlawful and is void and unenforceable" unless it can be cured under the blue-pencil provisions. OCGA § 13-8-53 (d). Cf. OCGA § 13-8-56 (4) (setting out a different rule for restrictions that operate during the term of a business relationship). And, as detailed below, the restrictive covenant before us today cannot be so cured.

The Act sets out two exceptions to the requirement that restrictive covenants that operate after the end of the parties’ business relationship must contain a geographic limitation. Those exceptions apply to restrictions on efforts to solicit a former "employer's customers," OCGA § 13-8-53 (b), and to trade secrets. OCGA § 13-8-53 (e). Subsections (b) and (e) go on to specify requirements the General Assembly deemed appropriate for those types of restrictions.

The General Assembly did not set out an exception for restriction on solicitation of a former employer's employees. So it is not within our purview to create one.

The restrictive covenant before us today prohibits Alisha and Ryan Wimmer from soliciting employees of their former employer, North American Senior Benefits, LLC ("NASB"). The Wimmers argue that it is unenforceable because it does not contain an express geographic limitation in scope.

The State-wide Business Court found the restrictive covenant to be unenforceable as to the Wimmers’ conduct after the termination of their contracts. We agree. We also hold that the court did not err in declining to modify the restrictive covenant to make it enforceable. So we affirm.

We note that the State-wide Business Court "emphasize[d] that its ruling ... only applie[d] to the [n]on-[s]olicitation [p]rovision's validity and enforceability ‘post association’ and [was] in no way to be construed as a ruling on the [n]on-[s]olicitation [p]rovision's enforceability related to [d]efendants’ conduct prior to the termination of the Wimmers’ ... [c]ontracts." (Emphasis omitted.) That fact merits emphasis because the Act distinguishes "contracts that restrict competition after the term of employment" from those that operate during the term of employment. See OCGA § 13-8-53 (a). Likewise, our opinion today addresses the enforceability of the covenant only insofar as it applies to post-association conduct.

1. Facts and proceedings below.

NASB is an independent marketing organization that operates in the insurance field. The Wimmers entered contracts with NASB to serve as insurance agents. The contracts contained non-solicitation-of-employees restrictive covenants that prevented the Wimmers, during the terms of their contracts and for two years after termination, from employing any employee of NASB. The Wimmers terminated their contracts in June 2021, and at some point, formed Freedom & Faith, Inc., which operates in the same industry as NASB.

NASB filed suit against the Wimmers and Freedom & Faith, asserting claims for tortious interference with contractual and business relations; breach of contract; and breach of the covenant of good faith and fair dealing. The defendants answered the complaint and asserted class action counterclaims, alleging breach of contract, fraud, and negligent misrepresentation, and seeking a declaration that the non-solicitation-of-employees restrictive covenant is invalid and unenforceable. The defendants filed a motion for declaratory relief, or in the alternative, for judgment on the pleadings.

After a hearing, the State-wide Business Court found that the non-solicitation-of-employees restrictive covenant was void and unenforceable as applied to the Wimmers’ conduct after the termination of their relationship with NASB because the covenant contains no territorial restraint whatsoever. The court then held that modifying or "blue-penciling" the provision to repair the deficiency would materially alter the provision. So the court granted the defendants’ motion for declaratory relief in part as it related to the covenant's enforceability regarding the Wimmers’ conduct that occurred after the termination of their contracts. The court also permanently enjoined NASB from attempting to enforce the covenant as to post-termination conduct.

The court then granted the defendants’ motion for judgment on the pleadings on NASB's claims for tortious interference with contractual and business relations, breach of contract, and breach of the covenant of good faith and fair dealing to the extent those claims were based on alleged covenant violations that occurred after the Wimmers had terminated their contracts with NASB. NASB filed this appeal.

2. The non-solicitation-of-employees restrictive covenant is unenforceable as to the Wimmers’ conduct after termination of their contracts.

The parties agree that the restrictive covenant before us is governed by Georgia's Restrictive Covenants Act, OCGA § 13-8-50 et seq. The Act applies to "contracts and agreements between or among ... [e]mployers and employees[.]" OCGA § 13-8-52 (a) (1). And although the parties’ contracts designate the Wimmers as independent contractors, the Act defines "employee" to include independent contractors. OCGA § 13-8-51 (5) (C). See also Belt Power v. Reed , 354 Ga. App. 289, 293-294 (2) (a), 840 S.E.2d 765 (2020) (restrictive covenants prohibiting former employees from soliciting or hiring their former employer's employees "fall within the scope of the Restrictive Covenants Act, and the enforceability of those covenants should be analyzed under the provision of the Act.").

Under the Act, no contract provision that "restrict[s] competition" can be enforced unless it is "reasonable in time, geographic area, and scope of prohibited activities." OCGA § 13-8-53 (a). The non-solicitation-of-employees restrictive covenant before us does not contain an expressly stated geographic area.

NASB argues that the statute should be read to require only that any geographic restrictions be reasonable under the circumstances, that the provision at issue is reasonable, and so that it should be deemed enforceable. We cannot agree.

We review de novo the State-wide Business Court's ruling that the non-solicitation-of-employees restrictive covenant is unenforceable as to post-termination conduct as a matter of law. See Junior v. Graham , 313 Ga. 420, 423 (2) (a), 870 S.E.2d 378 (2022) (statutory interpretation involves questions of law and is reviewed de novo).

The restrictive covenant before us specifies its duration and the scope of prohibited activities, but it does not specify the geographic area covered. It states:

13. Non-Solicitation of Employees and Independent Contractors : During the term of the Licensed Agent's contract with NASB and for a period of two (2) years following termination of said contract, Licensed Agent shall not, directly or indirectly: (a) solicit for the provision [of] services or employment any employee, agent or independent contractor of NASB, (b) advise or recommend to any other person that they employ or solicit for provision of services any employee or independent contractor for NASB, (c) encourage or advise such employees, agents or independent contractors to sever, discontinue or not renew any agreement or relationship to NASB, or (d) otherwise establish or seek to establish any business relationship with any such employee, agent or independent contractor relating to the sale of insurance products.

In CarpetCare Multiservices v. Carle , 347 Ga. App. 497, 819 S.E.2d 894 (2018) (physical precedent only), we addressed the enforceability of a non-compete covenant that, like the non-solicitation-of-employees restrictive covenant before us today, was governed by OCGA § 13-8-53 (a). The non-compete covenant before us in CarpetCare did not contain a geographic limitation. We held that a geographic limitation is required by OCGA § 13-8-53 (a). So we concluded that the covenant was unenforceable.

Mindful of our duty to "afford the statutory text its plain and ordinary meaning," CarpetCare , 347 Ga. App. at 499, 819 S.E.2d 894 (citation and punctuation omitted), and noting that "this same geographic restriction was excluded from OCGA § 13-8-53 (b) pertaining to [restrictive covenants for the] non-solicitation [of business from an employer's customers]," id., we reasoned that covenants governed by OCGA § 13-8-53 (a) must set out some kind of geographic limitation. Id. at 500, 819 S.E.2d 894. We held that "[b]ecause the non-compete covenant [at issue] did not contain any reference to a geographic area limitation, it failed to comply with OCGA § 13-8-53 (a), and, thus,... was void and unenforceable." Id.

The version of Court of Appeals Rule 33.2 (a) then in effect provided that, because one judge dissented, CarpetCare was physical precedent rather than binding precedent. But we find its reasoning persuasive and now adopt it.

Our conclusion...