Since the passage of the Georgia Restrictive Covenants Act (OCGA Sections 13-8-50 et seq.) In May 2011, there has been a degree of uncertainty about how far a court can change a “blue pen” or otherwise unenforceable agreement, including the question whether a court can extend the limitation period of a non-compete clause after May 2011. With the recent ruling in Daneshgari v Patriot Towing Services, LLC, employers have a little more clarity, but with a remaining uncertainty, as the Georgia Court of Appeals ruled that a court mistakenly extended an injunction beyond the contractual deadline Duration of a non-compete clause.
Patriot Towing Services (PTS) purchased the assets of a towing company owned and operated by Khosrow Daneshgari on June 23, 2016, with a non-compete agreement with a four-year limitation period that should expire on June 22, 2020 with the owner or seller all or a substantial portion of the assets of a corporation, professional practice, or other commercial enterprise.) Daneshgari began operating a competing business within one month of the conclusion of the agreements.
PTS filed a lawsuit against Daneshgari for breach of the non-compete clause, and on June 26, 2018, the court issued an injunction ordering Daneshgari to cease the non-compete infringement. Daneshgari broke the non-compete clause even after the injunction, and PTS filed a motion for contempt as a result. The court found that Daneshgari was deliberately disregarded and ordered that he be detained until he paid PTS 20,000 in legal fees. After making the payment and being released from custody, Daneshgari broke the non-compete clause again. PTS filed a second motion for contempt, and on September 3, 2020, the court found Daneshgari contemptuous, proposed his response, defaulted judgment on him, and extended the injunction of the 26th non-competition order ‘pending further decision by that court’ . ”Daneshgari appealed the judgment of the first instance court to the Court of Appeals of Georgia.
The Court of Appeal’s analysis
The appeals court applied the Georgia Supreme Court’s implicit rejection of “the idea that ‘justice allows a court to extend a non-compete period'” and relied primarily on two holdings under the Restrictive Covenants Act: Coffee System of Atlanta v Fox, published 1971, and Electronic Data Systems Corp. v. Heinemann, published 1997. In Coffee System, the Georgia Supreme Court dismissed the employer’s argument that litigation prevented a non-compete agreement on the grounds that “[c]our customers do not conclude any contracts for the parties “and that”[s]Such an extension would de facto rewrite the … agreement. “In Heinemann, the Georgia Supreme Court” again dismissed the argument that if a party sues for non-compete enforcement, the litigation itself should end the terms of the agreement, “reiterating that “”[t]The courts should be reluctant to rewrite private contracts ‘”because”‘[j]the judicial provision of a toll regime would result in such a revision. ‘”Accordingly, the appellate court found that the court had essentially rewritten the parties’ non-compete clause and exceeded its powers in indefinitely prohibiting Daneshgari from applying the non-compete clause after the limitation period had expired .
The central theses
The involvement in the Daneshgari case serves as a reminder that, despite the business-friendly provisions of the Restrictive Covenants Act, such as “Some stocks of common law prior to the passage of the Restrictive Covenants Act are still very much alive. In light of Daneshgari, employers may wish to carefully tailor restrictive covenants to include carefully crafted toll regulations and review existing restrictive covenants to meet expectations in the event of a breach. If Daneshgari’s non-compete clause had included an enforceable toll regime, PTS might have argued in favor of extending the restrictive agreement. In the absence of such a toll regulation, however, parties who want to enforce restrictive agreements can be at risk if the violating party challenges the enforceability of the agreement in court, which can often take years to enforce in court.