Can Inclusion Of A Boilerplate Duty Of Loyalty Provision Invalidate Your Covenant Not To Compete: The Early v. MiMedx Decision

April 2, 2015

On February 10, 2015, the Georgia Court of Appeals held that a provision in a consulting agreement requiring an employee to devote her full working time to the performance of her duties for the employer was not a loyalty clause but, instead, constituted an illegal restraint on trade. See generally Early v. MiMedx Grp., Inc., Case No. A14A2141, 2015 WL 522592, at *1 (2015). In and of itself, the decision in Early is interesting and will undoubtedly affect how employers draft their duty of loyalty provisions. Perhaps a less obvious consequence of this decision, however, is that by reading a loyalty clause as a restrictive covenant, the Court has now placed employers in jeopardy of having their otherwise valid, and properly tailored, restrictive covenants invalidated if they are contained in an agreement signed prior to May 11, 2011.

Sometime in January 2011, MiMedx Group, Inc. (“MiMedx”), a developer and manufacturer of patent protected bio-material based production, began discussing a potential business relationship with Ms. Ryanne Early. Early, 2015 WL 522592, at *1. As part of these discussions the parties entered into a Mutual Confidentiality and Nondisclosure Agreement (the “Nondisclosure Agreement”) which “prohibit[ed] Early from disclosing trade secrets and confidential information, which might be revealed to her during negotiations with MiMedx.” Id. Shortly thereafter MiMidex and Ms. Early entered into a Consulting Agreement, whereby Ms. Early’s company ISE Professional Testing and Consulting Services (“ISE”) agreed to provide certain consulting services to MiMidex (the “Consulting Agreement”). Id.

As part of the Consulting Agreement, Ms. Early was required to “devote her full working time (not less than forty (40) hours per week) to [the] performance of Consultant’s duties . . .” (the “full working time provision”).[1] The Consulting Agreement was subsequently terminated and MiMidex filed a complaint against Ms. Early and her company seeking damages and specific performance under the Consulting Agreement and the Nondisclosure Agreement.[2] Ms. Early filed a motion for judgment on the pleadings “contending . . . among other things that the full-time working provision of the Consulting Agreement was void and unenforceable as either a general or partial restraint of trade.” Id. at *2. The primary issue considered on appeal involved the enforceability of the full-working-time provision. Id. at *4.

In assessing the issue, the Georgia Court of Appeals determined that the full-time-working provision required that “Early would devote any working time to MiMedx's business, whether or not that working time was related in any way to the type of enterprise in which MiMedx is engaged.” Id. at *4. In fact, the parties agreed that Early would be prohibited from even doing jobs such as babysitting on the weekends or working at a bookstore. Id. at *4, n. 10. Looking to its earlier decision in Atlanta Bread[3], the Court held that a provision that requires an employee to spend all her working time on the employer’s business, regardless of the type of job, is a “partial restraint of trade designed to lessen competition. ”Id. (quoting Atlanta Bread Co. Intl., Inc. v. Lupton–Smith, 285 Ga. 587, 589(2) (2009)). Accordingly, the Georgia Court of Appeals deemed the full-working-time provision “a restraint of trade, rather than a loyalty provision.” Id. at *5. The Court went on to find the provision unenforceable as it was not limited in time, territory or scope. Id.

This decision threatens to void restrictive covenants in many pre-May 2011 employment agreements. On May 11, 2011, the Governor of the State of Georgia signed into law a favorable statute with respect to restrictive covenants, which allows far more flexibility in the enforcement of restrictive covenants. See O.C.G.A. § 13-8-56. This new statute, however, applies only to those agreements that were entered into after May 11, 2011. See O.C.G.A. § 13-8-50. As such, agreements entered into prior to May 11, 2011, such as the Consulting Agreement in Early, are governed by the more strict law applied by the courts prior to the enactment of O.C.G.A. § 13-8-50 et. seq.

Further, Georgia courts have explicitly held that where an agreement entered into prior to May 11, 2011 contains two non-compete covenants, the courts “will not sever or ‘blue pencil’ an unenforceable non-compete covenant and enforce reasonable restrictions in other non-compete covenants, but will declare all the non-compete covenants unenforceable.” See Lapolla Indus., Inc. v. Hess, 325 Ga. App. 256, 263 (2013) (emphasis supplied); see also Advance Tech. Consultants, Inc. v. Roadtrac, LLC, 250 Ga. App. 317, 320 (2001) (holding that with respect to covenants not to compete “Georgia law is clear that if one of them is unenforceable, then they are all unenforceable.”)[4] The Early decision’s interpretation of a full working time provision as a restrictive covenant thus threatens the validity of other properly tailored restrictive covenants within the same agreement, as the courts will consider all non-compete provisions in the same agreement unenforceable if one is deemed to be invalid.

The Early decision, therefore, requires employers not only to be cognizant of the “duty of loyalty” provisions contained within their employment agreement and the scope of such provisions, but also to reevaluate the otherwise valid non-compete provisions contained within the same pre-May 2011 agreements. Going forward employers should ensure that loyalty provisions requiring that an employee dedicate their full working time to the employer are properly tailored to restrict only the type of activity performed by the employee to the type of enterprise in which the employer is engaged. The provision will also arguably need to be limited temporally and geographically. More importantly, however, employer’s should review their pre-May 2011 agreements to determine if they should amend or modify these agreements to cure any defect in a perceived duty of loyalty or full time working provision that might now invalidate other post-employment restrictions intended originally to protect the employer’s legitimate business interest.

For more information regarding the implications of the Early decision, please contact one the authors of the client alert or a member of the Commercial Litigation or Labor and Employment Client Service Group.

 

[1] The full provision reads: 

Duties. In conjunction with designated MiMedx staff and under the direction and control of John Daniel, the Consultant shall provide consulting services to MiMedx. The nature and scope of the consulting services relate to product and research and development management related to amnion products. Ryanne [Early] shall devote her full working time (not less than forty (40) hours per week) to [the] performance of Consultant's duties hereunder.

Id. at *4 (emphasis added).

[2] The Consulting Agreement in this case contained no specific non-compete or non-solicitation provisions.

[3] In Atlanta Bread, the Court considered an action brought by a franchisor against its franchisee for wrongful termination of a franchise agreement. Atlanta Bread Co. Int'l v. Lupton-Smith, 285 Ga. 587, 588 (2009). The franchise agreement contained a loyalty provision restricting the franchisee from acquiring any financial or beneficial interest in any other corporations or businesses similar to those of the franchisor. Id. at 587. The Court held that this provision was not a loyalty provision but instead “prohibits the franchisee from engaging in a certain type of business during the term of the parties' agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.” Id. at 589.

[4] Under the 2011 Georgia non-compete statue, courts may now sever or blue-pencil one invalid provision from others that are properly drafted. See O.C.G.A. § 13-8-53(d).