Habif, Arogeti & Wynne, PC v. Baggett

• Decision Date: 17 March 1998
• Docket Number: No. A97A2476.,A97A2476.
• Parties: HABIF, AROGETI & WYNNE, P.C. v. BAGGETT et al.
• Court: Georgia Court of Appeals

498 S.E.2d 346

231 Ga. App. 289

HABIF, AROGETI & WYNNE, P.C. v. BAGGETT et al.

No. A97A2476.

Court of Appeals of Georgia.

March 17, 1998.

Alembik, Fine & Callner, Lowell S. Fine, Atlanta, for appellant.

Alston & Bird, Lisa H. Cassilly, Robert H. Buckler, Atlanta, for appellees. BEASLEY, Judge.

Kenneth Baggett, a shareholder and officer in the public accounting firm of Habif, Arogeti & Wynne, P.C. ("HAW"), left HAW to work as an officer, director, and shareholder in the public accounting firm of Reznick, Fedder & Silverman, P.C. ("RFS"). The previous year Baggett had signed an employment agreement with HAW that contained noncompete and nonsolicit covenants as well as a liquidated damages clause. HAW sued Baggett and RFS in several counts, including breach of the noncompete and nonsolicit covenants. The court granted Baggett's motion for partial summary judgment regarding the alleged breach on the ground the covenants were unenforceable.

The issues are (i) what standard of scrutiny should be used in reviewing noncompete and nonsolicit covenants of shareholders in a professional corporation; (ii) whether the covenants here are enforceable; and (iii) whether the liquidated damages clause is an unenforceable penalty.

1. The Degree of Scrutiny.

Traditionally Georgia courts divide restrictive covenants into two categories for purposes of review: covenants ancillary to an employment contract, which receive strict scrutiny and are not blue-penciled, and covenants ancillary to a sale of business, which receive much lesser scrutiny and may be blue-penciled.¹

Citing Rakestraw v. Lanier,² the court in Jenkins v. Jenkins Irrigation,³ stated in dicta that covenants "ancillary to a professional partnership agreement ... have been treated by this court like employee covenants ancillary to employment contracts." Five years later the Supreme Court eschewed this approach and adopted a middle category of scrutiny for covenants ancillary to professional partnership agreements. Rash v. Toccoa Clinic Med. Assoc.⁴ distinguished employment contracts from partnership agreements, holding that in the latter "the consideration flows equally among the contracting parties. For example, when an employee agrees to subject himself to possible future restrictions, he does so in exchange for the opportunity to have the job. He really gets nothing other than the opportunity to work in exchange for giving up this aspect of his freedom. On the other hand, here a partner has not only restricted himself, but he has also exacted from each of the other contracting parties a like restriction....

"The next distinction between employment agreements and partnership agreements is that it is generally true in the employer/employee relationship that the employee goes into a transaction such as this at a great bargaining disadvantage. Such would not be expected to be the case in a professional partnership arrangement...."⁵ Using a lesser degree of scrutiny (but not the much lesser scrutiny accorded sale of business covenants), Rash found enforceable a covenant not to practice medicine or surgery within a radius of twenty-five miles of the city of Toccoa for three years.

Since Rash, this Court on at least four occasions has stated it was using the lesser degree of scrutiny to analyze noncompete covenants ancillary to professional partnership agreements (or their equivalents, e.g., professional association or professional corporation agreements).⁶Pittman v. Harbin Clinic Prof. Assn.⁷ exemplified this distinction when it applied lesser scrutiny to uphold the noncompete covenants of the shareholder physicians in the professional association but applied strict scrutiny to strike down the broader covenants of nonshareholder physicians. Pittman also considered it unimportant that the covenants of the shareholders were found in employment agreements separate from the shareholders agreement. None of these cases addressed whether covenants falling into this middle category may be blue-penciled or severed.⁸

At the time he signed the 1994 employment agreement containing the restrictive covenants, Baggett had been with HAW 17 years. He had been a shareholder of HAW for 13 of those years. He was an officer of the corporation and had often served on the firm's executive committee; in fact, just months prior to the signing he had completed an 18-month term as the managing partner in charge of running the entire firm. He was paid in excess of $300,000 (the second highest paid person in the 130-person firm) and was responsible for originating business in excess of $1.2 million. The other shareholders of HAW agreed to identical restrictive covenants, which inured to Baggett's benefit. After signing the agreement he continued to enjoy similar responsibilities and benefits. Baggett was in a bargaining position equivalent to that of HAW, which subjects the covenants to the lesser or middle degree of scrutiny.⁹

2. The Covenant Not to Compete.

The noncompete covenant provides: "The Employee covenants and agrees that, for a period of twenty-four (24) months following the effective date of his termination of employment with Corporation, regardless of the reason for such termination and regardless of whether such employment is terminated by the Employee or the Corporation, Employee will not, directly or indirectly, individually or as a partner, corporate employee, stockholder, consultant, officer, director, entity or advisor render or perform `Accounting Services' (as hereinafter defined) within the counties of Fulton, DeKalb, Clayton, Gwinnett, Cobb, Fayette and Douglas in the State of Georgia."

"Accounting Services" are defined as "those same or similar types of accounting, tax or business services as were rendered or performed by the Employee during the twelve (12) month period immediately prior to the effective date of the termination of the Employee's employment with the Corporation."

A contract in general restraint of trade or which tends to lessen competition is against public policy and is void.¹⁰ A restrictive covenant in an employment contract, whether a nonsolicit covenant or a noncompete covenant, is considered in partial restraint of trade and will be enforced if reasonable.¹¹ "Whether the restraint imposed by the employment contract is reasonable is a question of law for determination by the court, which considers the nature and extent of the trade or business, the situation of the parties, and all the other circumstances. A three-element test of duration, territorial coverage, and scope of activity has evolved as a helpful tool in examining the reasonableness of the particular factual setting to which it is applied."¹²

(a) Duration.

A two-year duration is often considered reasonable even under the strict scrutiny for employment covenants not to compete.¹³ It is reasonable under the circumstances here.

(b) Territorial Coverage.

Baggett argues the seven-county limitation is unreasonable because, he claims, in the two years before he left HAW he performed no work in two of the counties (Clayton and Douglas) and he performed only a nominal amount of work in DeKalb County. He contends the seven counties simply represent the area serviced by HAW generally, not by him personally.¹⁴ But during his career at HAW Baggett indisputably worked in all seven counties and in many other areas throughout the country and Georgia. There was also some evidence he worked in the three disputed counties during the two years prior to his departure.

Sysco Food Svcs. v. Chupp¹⁵ held a similar covenant enforceable under the strict scrutiny standard. The covenant restricted activities in eleven counties, including two counties where the employee had not worked during his last eighteen months of employment. Upholding the covenant, Sysco Food Svcs. explained: "The goal of a non-competition covenant is to balance two competing rights: first, the employee's right to earn a living and his ability to determine with certainty the prohibited territory; second, the employer's interest in customer relationships created or furthered by its former employee on its behalf and its right to protect itself from the former employee's possible unfair appropriation of contacts developed while working for the employer. Under this analysis, an employer is permitted to include in such a covenant the territory in which the employee has in fact performed work, thus protecting itself from the unfair appropriation of good will and information acquired in the course of that work. The fact that Chupp's territory had not included two of the counties listed for approximately 18 months does not, of itself, render the agreement void for overbreadth.

"As the covenant stands, its description of Chupp's territory is more narrow than the territory in which Chupp actually worked for Sysco. The law does not require exact precision; it forbids unreasonably broad territorial coverage. The territorial restrictions in Chupp's agreement, while not precisely congruent with Chupp's territory at the time of his resignation, are reasonable because they include only territory in which he actually performed work for Sysco, and thus enabled Chupp to determine with certainty the territory included in the covenant. This is the reverse of the typically overbroad covenant describing a large territory with no indication that an employee ever performed work there."¹⁶

Sysco Food Svcs. is consistent with Nat. Settlement Assoc. of Ga. v. Creel,¹⁷ which held reasonable a territorial restriction in an employment contract that forbade competition in a radius of 200 miles of Atlanta. Creel explained that the employee worked in a "substantial portion" of the territory.¹⁸

Taken to its logical conclusion, Baggett's argument would suggest that even if the restricted territory were only a single county, an employee could validly argue that although he worked throughout the county generally, he did not work in...