Saturday, August 29, 2009

In-Term Non-Compete Clause In Franchise Agreement Held Void (Atlanta Bread Co. v. Lupton-Smith)

There are two rules you can generally count on in most states:

(1) Non-compete clauses in franchise agreements generally will be subject to lower scrutiny than those in employment contracts; and

(2) In-term covenants are far less problematic than post-term restraints.

However, these rules do not apply when Georgia law is at issue.

In Atlanta Bread Co. v. Lupton-Smith, the Supreme Court of Georgia held that a covenant not to compete contained within a franchise agreement which barred a franchisee from acquiring any interest in another bakery/deli business while the agreement was still in effect failed to pass muster under the strict scrutiny standard applicable to employment non-compete agreements.

Effectively, the Court held there is no distinction in the test to be applied to covenants in franchise arrangements and employment contracts. Most courts would disagree - reasoning that no franchisor would enter into such a relationship unless its business goodwill were protected for a period of time following expiration of the agreement.

The aspect of the case that is even more unique is the lack of any distinction under Georgia law between in-term and post-term covenants. Clauses which bar someone from competing during the term of a franchise (or employment) contract are usually far less problematic, and are somewhat derivative of general agency or fiduciary duty law. In fact, some courts do not even consider them restraints at all.

In Georgia, there is no functional difference. To be fair, the Supreme Court was somewhat hamstrung in this case as past precedent set forth a fairly clear, well-established rule that in-term covenants followed the strict scrutiny standard applicable to post-term restraints.

As readers may know, Georgia statutory law has changed to allow for more equitable application of non-compete agreements, particularly the blue-pencil doctrine. Still, because Georgia's constitution bars the legislature from authorizing a restraint of trade, that new law may not be effective until some act is taken to amend the state constitution.

UPDATE X1: The Atlanta Journal-Constitution comments on the Atlanta Bread case here.


Court: Supreme Court of Georgia
Opinion Date: 6/29/09
Cite: Atlanta Bread Co. Int'l, Inc. v. Lupton-Smith, 285 Ga. 587 (2009)
Favors: N/A
Law: Georgia

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