Farmer v. Airco, Inc.

• Decision Date: 08 March 1974
• Docket Number: No. 28506,28506
• Citation: 231 Ga. 847,204 S.E.2d 580
• Parties: John FARMER v. AIRCO, INC.
• Court: Georgia Supreme Court

Page 580

204 S.E.2d 580

231 Ga. 847

John FARMER v. AIRCO, INC.

No. 28506.

Supreme Court of Georgia.

March 8, 1974.

Schreiber & Rozier, C. Edwin Rozier, Waycross, for appellant.

Kopp, Peavy & Conner, John G. Kopp, Waycross, for appellee.

Syllabus Opinion by the Court

INGRAM, Justice.

The appellee filed an equitable complaint in Ware Superior Court seeking to enjoin the appellant from violating the terms of a non-competition covenant contained in a contract for the sale of a business. The trial court overruled appellant's motion to dismiss the complaint for failure to state a claim upon which relief can be granted. This ruling was certified for review and is the issue to be decided on appeal.

The facts alleged in the complaint are substantially as follows: The defendant, John Farmer, was, in May of 1971, a holder of common stock in the Welding Supply Company, a Georgia Corporation. In that month, Welding Supply Company (as seller) entered into an agreement with Hughes Welding Supply, Inc. (as buyer) by which Hughes obtained 'certain listed assets, the business, good will and name of the company (Welding Supply), which is engaged in the sale and distribution of various welding products and supplies.' Mr. Farmer was a party to the contract and signed it as a stockholder. He was also an officer and director of the seller corporation, Welding Supply Company.

As an integral part of the sale agreement, the stockholders of Welding Supply Company covenanted as follows: 'Covenant Not to Compete: Each of the Stockholders agrees that from and after the closing he will not (unless acting as an officer or employee of the buyer or with the buyer's prior written consent) and the company agrees that from and after the closing, it will not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, or control of, or be connected in any manner with, any business under any name similar to the company's name, and that, for a period of five (5) years after the closing, neither any of the stockholders nor the company will in any such manner directly or indirectly compete with buyer or be interested in any competitor of the buyer within one hundred fifty (150) miles radius of the company's present office and will not, during said five-year period, compete with the buyer for the business of the company's present customers as shown by the list of accounts receivable, wherever located. The stockholders and the company agree that the remedy at law for any breach by any of them for the foregoing will be inadequate and that the buyer shall be entitled to injunctive relief.'

Subsequently, Hughes Welding Supply, Inc., was itself acquired by the plaintiff, Airco, Inc., effective January 8, 1973, at which time Airco, Inc., also obtained by assignment all of the 'right, title and interest in the covenant not to compete.' It was further alleged that Farmer, in November of 1972, became associated with Waycross Welding Supply, a business in competition with Airco, Inc., located within 150 miles of the appellee's office in Waycross, Georgia.

Appellant's argument on appeal is that the trial court erred in failing to dismiss plaintiff's complaint for failure to state a claim 'because the contract upon which same is based is indefinite, unreasonable and vague in the description of the prohibited business.'

The contractual restraints under consideration are those which tend to diminish competition and trade and have to be considered against a background of public policy generally disfavoring contracts which have that effect. See Code Ann. §§ 2-2701, Const. art. IV, § IV, par. 1, 20-504. Under the law of Georgia, there are three prerequisites which must be met before non-competition provisions in contracts may be enforced without contravening this expressed public policy. These prerequisites are: 1. The provision must be reasonable as to the time of the restraint. 2. The provision must be definite and reasonable as to the territorial extent of the duty owed not to compete. 3. The provision must be definite and reasonable as to nature of the business activities proscribed by the noncompetition covenant. See Durham v. Stand-By Labor of Georgia, 230 Ga. 558, 198 S.E.2d 145; Rita Personnel Services v. Kot, 229 Ga. 314, 191 S.E.2d 79; Kutash v. Gluckman, 193 Ga. 805, 20 S.E.2d 128; Hood v. Legg, 160 Ga. 620, 128 S.E. 891; Shirk v. Loftis Bros. & Co., 148 Ga. 500, 97 S.E. 66; and Rakestraw v. Lanier, 104 Ga. 188, 30 S.E. 735.

Generally, these provisions apply to non-competition covenants ancillary to contracts of employment and to those included in agreements for the sale of a business. However, covenants not to compete incorporated in agreements for the sale of a business or its assets have been given greater latitude and broadness in their interpretation and enforcement by Georgia courts. In Hood v. Legg, 160 Ga. 620, 628, 128 S.E. 891, 895, supra, this court noted: "There are several reasons for upholding a covenant on the part of the vendor in all such cases to desist from the business in competition with the purchaser, which do not obtain in other cases. In the first place, the restraint is partial in the sense that it covers only the time and locality during and in which the vendee carries on the business purchased, and beyond these limitations the seller is at liberty to carry on the same business. Then, too, the vendor receives an equivalent for his partial abstention from that business, in the increased price paid him for it on account of his covenant; and his entering into and observance of the covenant not only do not tend to his pauperization to the detriment of the public, but on the contrary, by securing to him the full value of his business and its good will, a value which he has an absolute right to secure in this way, the covenant operates to his affirmative pecuniary benefit and against his impoverishment, in that, while being paid for desisting from the peculiar business in the locality covered by it, he may still enter upon other pursuits of gain in the same locality or upon this one in other localities. Finally, while such covenants preclude the competition of the covenantor, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality,...