April 3, 2015
Authored by: Chris Galanek and Aiten McPherson
Can Inclusion Of A Boilerplate Duty Of Loyalty Provision
Invalidate Your Covenant Not To Compete?
The Early v. MiMedx Decision
On February 10, 2015, the Georgia Court of Appeals held in Early v. MiMedx Grp, Inc., that a provision in a consulting agreement requiring an employee to devote her full working time to the performance of her duties for the employer was not a loyalty clause but, instead, constituted an illegal restraint on trade. In and of itself, the decision in Early is interesting and will undoubtedly affect how employers draft their duty of loyalty provisions. Perhaps a less obvious consequence of this decision, however, is that by reading a loyalty clause as a restrictive covenant, the Court has now placed employers in jeopardy of having their
otherwise valid, and properly tailored, restrictive covenants invalidated if they are contained in an agreement signed prior to May 11, 2011.
Sometime in January 2011, MiMedx Group, Inc. (“MiMedx”), a developer and manufacturer of patent protected bio-material based production, began discussing a potential business relationship with Ms.
Ryanne Early. As part of these discussions the parties entered into a Mutual Confidentiality and Nondisclosure Agreement (the “Nondisclosure Agreement”) which “prohibit[ed] Early from disclosing trade secrets and confidential information, which might be revealed to her during negotiations with MiMedx.” Shortly thereafter MiMidex and Ms. Early entered into a Consulting Agreement, whereby Ms. Early’s company ISE Professional Testing and Consulting Services (“ISE”) agreed to provide certain consulting services to MiMidex (the “Consulting Agreement”).
As part of the Consulting Agreement, Ms. Early was required to “devote her full working time (not less than forty (40) hours per week) to [the] performance of Consultant’s duties . . .” (the “full working time provision”). The Consulting Agreement was subsequently terminated and MiMidex filed a complaint against Ms. Early and her company seeking damages and specific performance under the Consulting Agreement and the Nondisclosure Agreement. Ms. Early filed a motion for judgment on the pleadings “contending . . . among other things that the full-time working provision of the Consulting Agreement was void and unenforceable as either a general or partial restraint of trade.” The primary issue considered on appeal involved the enforceability of the full-working-time provision.
In assessing the issue, the Georgia Court of Appeals determined that the full-time-working provision required that “Early would devote any working time to MiMedx’s business, whether or not that working time was related in any way to the type of enterprise in which MiMedx is engaged.” In fact, the parties agreed that Early would be prohibited from even doing jobs such as babysitting on the weekends or working at a bookstore. Looking to its earlier decision in Atlanta Bread Co. Intl., Inc. v. Lupton–Smith, the Court held that a provision that requires an employee to spend all her working time on the employer’s business, regardless of the type of job, is a “partial restraint of trade designed to lessen competition. ” Accordingly, the Georgia Court of Appeals deemed the full-working-time provision “a restraint of trade, rather than a loyalty provision.” The Court went on to find the provision unenforceable as it was not limited in time, territory or scope.
This decision threatens to void restrictive covenants in many pre-May 2011 employment agreements. On May 11, 2011, the Governor of the State of Georgia signed into law a favorable statute with respect to restrictive covenants, which allows far more flexibility in the enforcement of restrictive covenants. This new statute, however, applies only to those agreements that were entered into after May 11, 2011. As such, agreements entered into prior to May 11, 2011, such as the Consulting Agreement in Early, are governed by the more strict law applied by the courts prior to the enactment of O.C.G.A. § 13-8-50 et. seq.
Further, Georgia courts have explicitly held that where an agreement entered into prior to May 11, 2011 contains two non-compete covenants, the courts “will not sever or ‘blue pencil’ an unenforceable non-compete covenant and enforce reasonable restrictions in other non-compete covenants, but will declare all the non-compete covenants unenforceable.” The Early decision’s interpretation of a full working time provision as a restrictive covenant thus threatens the validity of other properly tailored restrictive covenants within the same agreement, as the courts will consider all non-compete provisions in the same agreement unenforceable if one is deemed to be invalid.
The Early decision, therefore, requires employers not only to be cognizant of the “duty of loyalty” provisions contained within their employment agreement and the scope of such provisions, but also to reevaluate the otherwise valid non-compete provisions contained within the same pre-May 2011 agreements. Going forward employers should ensure that loyalty provisions requiring that an employee dedicate their full working time to the employer are properly tailored to restrict only the type of activity performed by the employee to the type of enterprise in which the employer is engaged. The provision will also arguably need to be limited temporally and geographically. More importantly, however, employer’s should review their pre-May 2011 agreements to determine if they should amend or modify these agreements to cure any defect in a perceived duty of loyalty or full time working provision that might now invalidate other post-employment restrictions intended originally to protect the employer’s legitimate business interest.
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