Grayhawk Homes, Inc. v. Addison

• Decision Date: 18 June 2020
• Docket Number: A20A0769
• Citation: 845 S.E.2d 356,355 Ga.App. 612
• Parties: GRAYHAWK HOMES, INC. v. ADDISON.
• Court: Georgia Court of Appeals

355 Ga.App. 612

845 S.E.2d 356

GRAYHAWK HOMES, INC.

v.ADDISON.

A20A0769

Court of Appeals of Georgia.

June 18, 2020

Robert R. Lomax, Columbus, for Appellant.

Ogletree Deakins Nash Smoak & Stewart, Todd Clifford Duffield, Atlanta, for Appellee.

Miller, Presiding Judge.

Grayhawk Homes, Inc., seeks review of the trial court's order granting summary judgment in favor of Grayhawk's former employee, Bill Addison, in a dispute about whether Addison violated certain restrictive covenants to which he had agreed during his employment at Grayhawk. On appeal, Grayhawk argues that the trial court erred by granting summary judgment because (1) the liquidated damages provision of the non-compete agreement was enforceable; (2) even if the liquidated damages provision of the agreement was void, it was severable, and so the entire agreement was not void; (3) Grayhawk could still recover actual damages rather than liquidated damages; (4) the liquidated damages provision could be severed under the Restrictive Covenants Act; and (5) Grayhawk had produced evidence showing that Addison breached the non-compete restrictive covenant.

We conclude that the trial court properly determined that the liquidated damages provision is an unenforceable penalty because Grayhawk failed to pre-estimate its potential damages. We agree with Grayhawk, however, that the liquidated damages provision is severable from the remainder of the agreement and that there is a genuine issue of material fact as to whether Addison breached the non-compete provision. We therefore affirm in part and reverse in part.

Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. A de novo standard of review applies to an appeal from a grant of summary judgment, and we view the evidence, and all reasonable conclusions and inferences drawn from it, in the light most favorable to the nonmovant.

(Citation and punctuation omitted.) Crouch v. Bent Tree Community , 310 Ga. App. 319, 713 S.E.2d 402 (2011).

Grayhawk is a home construction company that is based in Columbus, Georgia. In April 2013, Grayhawk hired Addison as a superintendent. When Addison started his employment with Grayhawk, he signed an "Agreement Not to Compete or Disclose Confidential Information." Among other provisions, the agreement included a non-compete covenant, a non-disclosure covenant, and a non-solicitation of customers covenant. The agreement also contained a liquidated damages clause, specifying that "[i]n the event of [Addison]’s breach of this Agreement, [Grayhawk] shall be entitled to liquidated damages in the amount of [$100,000] plus [$50,000] for each year or any portion thereof that [Addison] was employed by [Grayhawk]." Addison's employment with Grayhawk ceased in October 2014. Upon leaving Grayhawk, Addison started working for America's Home Place, Inc. ("AHP"), where he had worked for eight years before he joined Grayhawk.

In October 2015, Grayhawk filed the instant lawsuit against Addison based on his employment with AHP and raised five claims: (1) breach of the non-compete covenant; (2) breach of the non-disclosure covenant; (3) breach of the non-solicitation of customers covenant; (4) punitive damages; and (5) attorney fees. After discovery, Addison moved for summary judgment on all claims. Following a hearing, the trial court granted Addison's motion for summary judgment. The trial court first concluded that the agreement's liquidated damages provision constituted an unenforceable penalty and was therefore void because there was no evidence that Grayhawk had attempted to estimate its damages before it made the agreement with Addison. The trial court further concluded that the entire agreement was void because it did not contain a severability clause, and therefore all of Grayhawk's claims failed as a result. Alternatively, the trial court concluded that, even if the liquidated damages provision was enforceable, Grayhawk had failed to present evidence showing that Addison had breached the non-compete or non-disclosure provisions because Addison's post-Grayhawk employment with AHP did not constitute work in the "for sale residential construction" business.¹ The trial court further concluded that, because all of the breach of contract claims failed, Grayhawk's claims for punitive damages and attorney fees also failed. This appeal followed.

1. Grayhawk first argues that the trial court erred in concluding that the liquidated damages provision of the restrictive covenant agreement was an unenforceable penalty. We disagree.

A contractual provision requiring payment of a stipulated sum by one of the parties upon termination or cancellation of the contract will be treated as an enforceable liquidated damages provision rather than an unenforceable penalty only if all three of the following factors are present: First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the parties must intend to provide for damages rather than a penalty; and third, the stipulated sum must be a reasonable pre-estimate of the probable loss resulting from such a breach.

(Citation and punctuation omitted.) Natl. Svc. Indus. v. Here to Serve Restaurants , 304 Ga. App. 98, 99-100, 695 S.E.2d 669 (2010). "[I]n doubtful cases, the courts favor the construction which holds the stipulated sum to be a penalty[.]" (Citation and punctuation omitted.) Id. at 104, 695 S.E.2d 669.

The parties mainly dispute whether the third prong is met, that is, whether the amount of liquidated damages was a reasonable pre-estimate of the probable loss stemming from the breach of the covenant provisions. Grayhawk's president, David Erickson, testified that the $100,000 number in the liquidated damages provision

represents a broad estimate of the damaging effects that somebody could have if they were violating this agreement and disclosing information that would be harmful in various ways and at least put some kind of definitive target on what those damages would be so that if you did get into a court situation you aren't arguing about the merits of the item and then arguing about what it's really worth.

Erickson, however, did not elaborate on how Grayhawk calculated that $100,000 figure or how that number would be related to Grayhawk's losses for the breach of any of the restrictive covenants. See Caincare, Inc. v. Ellison , 272 Ga. App. 190, 194 (1), 612 S.E.2d 47 (2005) (liquidated damages provision was unenforceable in part because "the owner of [the employer] never explained how the parties calculated" the specific amount of damages). Significantly, Erickson only testified that the $100,000 could possibly be related to the damages from the disclosure of information, but the liquidated damages provision applied to all of the restrictive covenants, not just the non-disclosure provision. This is particularly relevant in this case where, as noted in Division 4, below, the only claim currently at issue is Grayhawk's claim for breach of the non-compete agreement, which would present different damages and involve different business interests than a claim for breach of the non-disclosure provision.

Erickson further testified that the same non-compete agreement with the same liquidated damages provision is provided to nearly every Grayhawk employee even though Erickson admitted the damages would not be the same for each employee. See Daniels v. Johnson , 191 Ga. App. 70, 72 (1), 381 S.E.2d 87 (1989) (where designated amount of liquidated damages "would be in some instances too large and in others too small a compensation for the injury occasioned," it "was not shown to have a reasonable pre-determined relation to the contractual damages the [non-breaching party] might suffer") (citations and punctuation omitted). Erickson also testified that the amount was not negotiated or adjusted for Addison's circumstances. Compare Joyce's Submarine Sandwiches v. California Public Employees’ Retirement Sys. , 195 Ga. App. 748, 750 (2), 395 S.E.2d 257 (1990) (pre-estimate was reasonable in part when the amount of liquidated damages in a lease was adjusted to the tenant's circumstances). Accordingly, "we think a correct resolution of this issue must be found in the doctrine that ‘in cases of doubt the courts favor the construction which holds the stipulated sum to be a penalty, and limits the recovery to the amount of damages actually shown, rather than a liquidation of the damages.’ " Physician Specialists in Anesthesia v. MacNeill , 246 Ga. App. 398, 401-402 (1), 539 S.E.2d 216 (2000) (liquidated damages provision was unenforceable when the amount of damages was chosen because it "would be practical, and easy to implement" and the attorneys drafting the provision "thought it would be a just amount," but no evidence was presented that the potential amount of losses was actually estimated).

Grayhawk argues at length that it is Addison's burden to prove that the liquidated damages provision is a penalty and that he did not come forth with his own evidence establishing that the estimation was unreasonable. "At trial the burden is on the defaulting party to show that the provision is a penalty, but this burden does not arise at the summary judgment stage." (Citation and punctuation omitted.) JR Real Estate Development v. Cheeley Investment , 309 Ga. App. 250, 251 (1), 709 S.E.2d 577 (2011). Instead, "[t]o obtain summary judgment, a defendant need not produce any evidence, but must point to an absence of evidence supporting at least one essential element of the plaintiff's claim." Id. Thus, Addison was entitled to simply point to Grayhawk's lack of evidence that the liquidated damages were pre-estimated. Grayhawk further argues that the amount of the liquidated damages that was set in the agreement is indeed a reasonable estimation of its damages for Addison's alleged breach of the non-compete agreement. "However, the law requires pre-estimation. The...