invalidating in entirety an agreement's non-compete provisions that consist of two distinct paragraphs and a specific severability clauseSummary of this case from Matthew Focht Enters., Inc. v. LePore
SUBMITTED MARCH 13, 1973.
DECIDED MAY 10, 1973.
Injunction, etc. DeKalb Superior Court. Before Judge Tillman.
Nick Lambros, for appellant.
Richard N. Hubert, Haas, Holland, Levison Gibert, for appellee.
1. The general noncompetition provision of the contract of employment in proscribing post-employment competitive activity on the part of the employee "within a radius of 50 miles of any city in which Stand-By Services, Inc., or any affiliated company is operating at the time . . . employment is terminated," is unreasonably broad and therefore void as in restraint of trade. No claim may be maintained pursuant to it.
2. The specific nondisclosure provision of the contract of employment is not void as a matter of law. Its reasonableness must be established on the basis of the legitimacy of the business need to protect the information sought to be protected — here, customer lists, information and personnel data. Given the proper factual basis establishing such reasonableness, a claim for relief may be maintained for its breach.
SUBMITTED MARCH 13, 1973 — DECIDED MAY 10, 1973.
This is an action to enforce restrictive covenants in a contract of employment and for damages. The appeal seeks to test the legal sufficiency of the complaint on the ground that no claim was stated upon which relief could be granted. The trial court determined a claim had been stated and certified its order for review.
In its complaint, Stand-By Labor of Georgia prayed for injunctive relief and damages for alleged violations of post-employment restrictions in a contract with its former employee, Francis L. Durham. Paragraph Eleven, a general noncompetition provision, provided that upon termination of employment, for a period of one year, the employee would not engage in any competitive activity with Stand-By Labor "(a) within a radius of 50 miles of Atlanta, Georgia," and "(b) within a radius of 50 miles of any city in which Stand-By Services, Inc., or any affiliated company is operating at the time . . . employment is terminated." Clauses (a) and (b) were made distinct and severable. Paragraph Twelve, the other post-employment provision, provided in material part that for a period of one year after termination the employee would not "for yourself or any other person or company, divulge the name and/or address or any information whatsoever concerning any customer or employee of Stand-By Services, Inc." without consent of the company. Such confidential information was made to include Stand-By Labor's method of doing business.
In Counts I and II of the complaint Stand-by Labor asked for injunctive relief and damages growing out of the alleged breach of contract. In Count III it asked for damages, actual and punitive, as a result of wilful tort growing out of such breach. The material allegations as to Counts I and II were to the effect that the defendant, Durham, had become employed by a competitor within a radius of 50 miles of Atlanta, Georgia, within the restricted time period of one year and had "actively solicited, diverted, and attempted to take away customers and personnel" of Stand-By Labor and to provide such services to the customers as had been previously provided by the defendant while still in the employ of Stand-By Labor. The material allegations as to Count III were that the defendant had acted wilfully and wantonly in offering his services to a competing concern and in soliciting and diverting Stand-By Labor's customers and personnel and that such conduct in breach of contract constituted a wrongful tortious interference with the business of Stand-By Labor.
1. The appellee, Stand-By Labor of Georgia, has moved this court to dismiss the appeal upon the ground the appellant has failed to file his enumeration of errors within the time allowed by Rule 14(a) of the Rules of the Supreme Court, and upon the ground that the trial court's certified order overruling the motion to dismiss for failure to state a claim, being one not involving the grant or denial of equitable relief, is not such an order from which an appeal would lie to this court. As we have held on previous occasions, Rule 14(a) is directory and its violation does not constitute one of the limited grounds for dismissal as prescribed by the Appellate Practice Act, Code Ann. § 6-809. In addition, because substantial equitable relief was sought by Stand-By Labor against the defendant Durham by way of injunction, the present appeal from an order overruling a motion to dismiss for failure to state a claim with proper certification will lie to this court and not to the Court of Appeals. Cp. Brown v. Wood, 227 Ga. 548 ( 181 S.E.2d 860) (1971). It follows, therefore, that the motion to dismiss the appeal is denied.
2. The contractual restraints in suit are those tending to lessen competition and are to be considered in the light of public policy disfavoring agreements having that effect. Code Ann. §§ 2-2701 and 20-504. Under the law of Georgia, covenants in restraint of trade may be enforced if they are reasonable as to time and place and are not overly broad as to the activities proscribed, taking into consideration the interests of individuals in gaining and pursuing a livelihood, of commercial concerns in protecting property, confidential information and relationships, good will and economic advantage, and of the broader public policy favoring individual freedom to enter into contracts and to contract as one will. Shirk v. Loftis Bros. Co., 148 Ga. 500 ( 97 S.E. 66) (1918); Rakestraw v. Lanier, 104 Ga. 188 ( 30 S.E. 735, 69 ASR 154) (1898). In all cases involving covenants not to compete, whether in sales of businesses or covenants ancillary to employment contracts, the rule of reason prevails: "[I]f, considered with reference to the situation, business, and objects of the parties, and in light of all the surrounding circumstances . . . the restraint contracted for appears to have been for a just and honest purpose, for the protection of the legitimate interests of the party in whose favor it is imposed, reasonable as between them, and not specially injurious to the public, the restraint will be held valid." Rakestraw v. Lanier, 104 Ga. 188, 195, supra. See Restatement of Contracts, § 513-515 (1932), and cp. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 648 (1960).
(a) The general noncompetition provision. Paragraph Eleven of the present contract of employment provided as part of its general noncompetition terms that the defendant Durham would not enter into any competitive activity "within a radius of 50 miles of any city in which Stand-By Services, Inc., or any affiliated company is operating at the time . . . employment is terminated." As we have indicated in prior decisions, Ellison v. Labor Pool of America, 228 Ga. 147 ( 184 S.E.2d 572) (1971); Taylor Freezer c. Co. v. Sweden Freezer c. Corp., 224 Ga. 160( 160 S.E.2d 356) (1968); and, WAKE Broadcasters v. Crawford, 215 Ga. 862 ( 114 S.E.2d 26) (1960), such terms are overly broad and unreasonably in restraint of trade due to the chilling effect that may be had upon post-employment competitive activity because of the employee's inability to forecast with certainty the territorial extent of the duty owing the former employer. In Richard P. Rita Personnel Services v. Kot, 229 Ga. 314 ( 191 S.E.2d 79) (1972), this court declined to apply the "Blue-pencil theory of severability" in such circumstances and to sever the unenforceable clauses of the contract in view of policy considerations militating against the adoption of this theory. In Rita, this result was reached despite a specific contractual provision that its illegal clauses were severable.
Taking Paragraph Eleven of the contract as a whole, therefore, and in the face of a specific severability clause, the territorial limitations being overly broad, the entirety of the paragraph's noncompetition provisions must be declared void and unenforceable. No claim for relief may therefore be asserted pursuant to this part of the contract.
(b) The specific nondisclosure provision. It should be noted, however, that a claim for breach of covenant not to compete and one for wrongful disclosure and use of confidential information in violation of contract may be maintained separately and independently under the same or distinct provisions of the employment agreement. See Water Services v. Tesco Chemicals, 410 F.2d 163, 171 (5th Cir. 1969). In Taylor Freezer c. Co. v. Sweden Freezer c. Corp., 224 Ga. 160, supra, for example, we held that non-specialized customer lists and other general confidential business and customer information were not within the purview of traditional Georgia law as to property and were not protectable from post-employment disclosure and use in the absence of contract. Relying on Stein v. National Life Assn., 105 Ga. 821 ( 32 S.E. 615, 46 LRA 150) (1899), and Vendo Co. v. Long, 213 Ga. 774 ( 102 S.E.2d 173) (1958). Contra, Restatement of Agency 2d, § 396 (1958). Of course, such information is fully protectable in the absence of contract if procured by improper means or otherwise disclosed without privilege, as in violation of relationships of confidence. See Restatement of Torts, §§ 757-759 (1939). In view of Taylor Freezer, when a duty has been imposed upon an employee pursuant to contract not to disclose confidential business information upon termination of employment, public policy is swung in favor of protecting these commercial intangibles and of preventing unfair methods of exploiting them in breach of duty. See Developments in the Law — Competitive Torts, 77 Harv. L. Rev. 888, 947 (1964).
Covenants not to disclose and utilize confidential business information are related to general covenants not to compete because of the similar employer interest in maintaining competitive advantage. Unlike general noncompetition provisions, however, specific non-disclosure clauses bear no relation to territorial limitations and their reasonableness turns on factors of time and the nature of the business interest sought to be protected. See Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, supra. In determining whether restraints on disclosure are reasonable, two factors are of importance: (1) whether the employer is attempting to protect confidential information relating to the business, such as trade secrets, methods of operation, names of customers, personnel data, and so on — even though the information does not rise to the stature of a trade secret; and (2) whether the restraint is reasonably related to the protection of the information. See Restatement of Contracts, §§ 515 (a), 516, and Forrester, Maintaining Trade Secrecy: The Significance of Water Services v. Tesco Chemicals, 4 Ga. L. Rev. 541 (1970). These considerations apply to claims for wrongful disclosure brought pursuant to contractual clauses which are broadly drawn in general noncompetition provisions, as in Baxley v. Black, 224 Ga. 456 ( 162 S.E.2d 389) (1968); Nelson v. Woods, 205 Ga. 295 ( 53 S.E.2d 227) (1949); and, Franco v. Fulton Bakery, 190 Ga. 298 ( 9 S.E.2d 240) (1940), and to those asserted pursuant to specific provisions restricting disclosure as Paragraph Twelve of the present contract.
In considering Paragraph Twelve of the present contract, therefore, we are unable to say as a matter of law such provision against disclosure and utilization of confidential information, here customer names and addresses and personnel data, is void as in restraint of trade. Its reasonableness must be developed in the trial court. Certainly, however, customer lists and customer information which have been compiled by firms represent a material investment of employers' time and money. This information is often highly confidential and constitutes a valuable asset. Whether this information was embodied in written lists or committed to memory is, we believe, of no significance in the present case; in either event, the date are entitled to protection under the contract. And the same is true as regards personnel information and data where, as here, firms are engaged in providing personnel services. But the legitimacy of the need to maintain the confidentiality of such information is a question of fact whose resolution is for the court below. We need not indicate all the many factors to be considered in this regard. They encompass, however, the time and effort of Stand-By Labor in amassing its clientele and in building up its good will, the need to protect its economic advantage through confidential customer connections and confidential personnel data, the efforts made to protect the information and the need to do so against employee "draw," for example, and in general the overall aspects of the business as may indicate a legitimate need to protect the information. See Note, Trade Secrets, Customer Contacts and the Employer-Employee Relationships, 37 Ind. L. Rev. 218 (1962). It is enough to say that Stand-By Labor has stated a claim as to violations of Paragraph Twelve of the contract and the allegations in support of the claim were sufficient to withstand a motion to dismiss.
3. Because the appellant has filed a general enumeration of error as to the overruling of his motion to dismiss and has not argued orally or in briefs the question whether a tort claim has been stated in Count III of the complaint, we consider this issue to have been abandoned on appeal. It follows from the foregoing that the order of the trial court denying appellant's motion to dismiss for failure to state a claim must be affirmed.
Judgment affirmed. All the Justices concur. Mobley, C. J., Grice, P. J., and Jordan, J., concur in the judgment but not in all that is stated in the opinion.
I dissent from Division 2 (a) of the majority opinion declaring the noncompetition provisions of the contract void for the same reasons stated in my dissent in Richard P. Rita Personnel Services v. Kot, 229 Ga. 314, 318. The majority opinion here is doing exactly what was done in Rita, i.e., rewriting the contract for the parties. The parties to this contract in clear and unequivocal language set forth the noncompetition provisions of the contract in two distinct paragraphs with a specific severability clause. In lumping the two separate provisions into one and voiding both we have simply nullified the clear intent of the parties to this contract.
I would affirm the order of the trial court denying the motion to dismiss for failure to state a claim for the above stated reason as well as the reason stated in Division 2(b) of the opinion.
I am authorized to state that Chief Justice Mobley and Presiding Justice Grice concur in what is said herein.