White v. Fletcher/Mayo/Associates, Inc.

• Decision Date: 24 June 1983
• Docket Number: No. 39248,39248
• Citation: 251 Ga. 203,303 S.E.2d 746
• Parties: , 1983-2 Trade Cases P 65,498, 1 IER Cases 218 Eldredge W. WHITE, Jr. v. FLETCHER/MAYO/ASSOCIATES, INC., et al.
• Court: Georgia Supreme Court

Page 746

303 S.E.2d 746

251 Ga. 203, 1983-2 Trade Cases P 65,498,

1 IER Cases 218

Eldredge W. WHITE, Jr. v. FLETCHER/MAYO/ASSOCIATES, INC., et al.

No. 39248.

Supreme Court of Georgia.

June 24, 1983.

Rehearing Denied July 21, 1983.

Abraham A. Sharony, Neil C. Gordon, Macey & Sikes, Atlanta, for Eldredge W. White, Jr.

Michael J. Goldman, Freeman & Hawkins, Atlanta, for Fletcher/Mayo/Associates, Inc., et al.

BELL, Justice.

This is a suit by a former employee of an advertising company for a declaration that certain non-competition covenants he agreed to are unenforceable because they are against public policy.

In 1973 appellant Eldredge White graduated from college and was hired by Fletcher/Mayo/Associates, Inc., (FMA) a marketing, advertising, and sales promotion company based in St. Joseph, Missouri. He was transferred to Atlanta in November of 1977 as a corporate vice-president and manager of the Atlanta office, and was named a senior vice-president in May, 1981.

FMA began merger negotiations with appellee Doyle Dane Bernbach International, Inc., a New York advertising firm, culminating in a March, 1982 merger which was accomplished by Doyle Dane forming a subsidiary Delaware corporation, the other appellee in this case, which acquired FMA and took its name. Doyle Dane paid $3.1 million for FMA, which had a book value of $1.7 million; the difference between book value and the total price was money paid for the goodwill of FMA. White had no control over the decision to seek a merger and took no part in the merger negotiations. Prior to the merger FMA had encouraged its employees to invest in the company through stock purchases. At the date of merger White, through stock bonuses and his own purchases, owned 7114 shares of FMA common stock, which represented 4.62% of the total FMA stock and were worth a book value of about $85,000. Sixty-nine of FMA's employees held stock, and among them White ranked fifth in size of holdings. Two shareholders, Fletcher and Mayo, together held 43.38% of the stock. They were FMA's principal officers and the only officers or shareholders who sat on FMA's Board of directors. FMA shareholders voted March 16, 1982 on the issue of merger with Doyle Dane. Those voting in favor of merger received Doyle Dane common stock in exchange for their FMA stock at a rate of 1.2991 Doyle Dane shares for each FMA share. Those who dissented received no Doyle Dane stock and instead received the fair market value of their shares. White voted in favor of merger and received, according to the standard exchange rate for all stockholders, Doyle Dane stock worth about $145,000, thus realizing a paper profit of about $60,000 on the corporate acquisition.

Prior to the merger White had no written employment contract with FMA. Doyle Dane conditioned its purchase of FMA on White signing agreements containing restrictive covenants in favor of FMA and Doyle Dane. Only three other employees of FMA--Fletcher, Mayo, and the chief financial officer--signed such agreements; no others, including the fourth largest shareholder and two other senior vice-presidents, made such agreements. White testified that at the time FMA told him he should sign the agreements because they were necessary to guarantee his job and secure broader career opportunities for him. There was trial testimony for appellees that FMA's biggest client was serviced out of the Atlanta office, that White supervised service of this and other accounts, and that he was asked to sign the covenants because, in light of his client contacts, he was considered a key employee.

Soon after the merger White was fired. He filed suit to determine whether he had to honor the covenants he'd agreed to. The learned trial judge, after careful consideration of the evidence and past decisions of this court, found the covenants overbroad but also found that they'd been entered into ancillary to the sale of FMA, and that the court therefore had the authority to blue pencil ^* the covenants into a more limited form. The judge extensively edited them, declared them enforceable as rewritten, and enjoined White from breaching them. White appeals. Appellees argue that White was a seller, but stipulate that if we decide that the covenants should be treated as ancillary to White's employment, then they are entirely unenforceable. We hold for White, and reverse.

"A covenant not to compete ancillary to an employment contract is enforceable only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the employee." Howard Schultz & Assoc. v. Broniec, 239 Ga. 181(1), 183, 236 S.E.2d 265 (1977). If such a covenant as read in its entirety is unenforceable, then under the doctrine announced in Rita Personnel Services, Inc. v. Kot, 229 Ga. 314, 191 S.E.2d 79 (1972), it cannot be judicially rewritten so as to sever the objectionable portion, because to do so would violate public policy. In the Rita Personnel Services case Kot entered into a franchise agreement with Rita, and covenanted not to compete with Rita for two years after termination of the franchise agreement in three named counties "or in any territorial area in which a franchise agreement has been granted by Rita." The franchise was ended, and Rita sought to have the court obliterate the quoted phrase, which was clearly unreasonable, and enforce the remainder. The trial court refused the requested judicial surgery, and this court affirmed, concluding that although there were good reasons for severance, they were offset by the potential in terrorem effect on employees who don't challenge their contractual obligations. Rita Personnel Services, id. at 317, 191 S.E.2d 79, citing Blake, 73 Harv.L.Rev. 625, 682-83 (1960). ^** Accord, Howard Schultz & Assoc., supra, 239 Ga. at 186, 236 S.E.2d 265.

On the other hand, if a covenant not to compete has been made by a seller ancillary to the sale of a business, the seller "may be enjoined from competing to the extent that it is found essential, by clear and convincing evidence, to protect the purchaser, despite the overbreadth of the covenant." Redmond v. Royal Ford, Inc., 244 Ga. 711, 713, 261 S.E.2d 585 (1979). In the Jenkins case Jenkins owned 50% of the stock of Jenkins Irrigation; he sold his interest and covenanted not to compete in that business for five years in the State of Georgia. The territorial restriction of the covenant was too broad, and hence unreasonable, but we held that Jenkins could be enjoined from competing in a more limited geographical area in which the buyer could show by clear and convincing evidence that protection from competition by Jenkins was essential for the buyer's protection. In reaching this conclusion we found that Rita Personnel Services, supra, was distinguishable: "When a person sells a business and covenants not to compete in a certain territory, the buyer pays and the seller receives a part of the total purchase price as consideration for that covenant. The buyer frequently would not buy the business if the seller were free to begin competing immediately. By restricting the territory to an area less than that specified in the covenant, the court requires the seller to do that which the buyer and seller bargained for, yet in a smaller area than that agreed to by the seller. The reasons for rejecting severability in employee covenants, Rita Personnel Services v. Kot, supra, are not applicable to covenants not to compete made in conjunction with the sale of a business. Many courts in this country apply the 'blue pencil' to covenants not to compete. 14 Williston on Contracts (3rd) 285, § 1647B (1972). Without disapproving Rita Personnel Services v. Kot, supra, we join those courts as to covenants not to compete made in conjunction with the sale of a business." Jenkins, supra 244 Ga. at 100, 259 S.E.2d 47.

In short, we do not blue pencil in employment contract cases, but do in sale of business cases. For this reason, if we are confronted with a case challenging the enforceability of a noncompetition covenant, our threshold task is to classify the agreement containing the covenant. In cases such as Rita and Jenkins the classification is obvious. Indeed, there are four cases, including Rita, which are cited in Jenkins as dealing with types of covenants which "have been treated by this court like employee covenants ancillary to employment contracts", Jenkins, supra at 97-98, 259 S.E.2d 47; an examination of these cases shows the typology in each was either assumed or cursory. See Rakestraw v. Lanier, 104 Ga. 188, 30 S.E. 735 (1898) (professional partnership agreement); Rita, supra (franchise agreement); Barrett-Walls, Inc. v. T.V. Venture, Inc., 242...