Belt Power, LLC v. Steve Reed

• Court: Court of Appeals of Georgia
• Decided: March 13, 2020
• Docket: A19A1824
• Status: Published

Opinion

SECOND DIVISION MILLER, P. J., RICKMAN and REESE, JJ.

NOTICE: Motions for reconsideration must be physically received in our clerk’s office within ten days of the date of decision to be deemed timely filed. http://www.gaappeals.us/rules

March 10, 2020

In the Court of Appeals of Georgia A19A1824. BELT POWER, LLC et al. v. REED et al.

MILLER, Presiding Judge.

This case presents us with issues of first impression concerning the scope and

application of Georgia’s recently enacted Restrictive Covenants Act (OCGA § 13-8-

50 et seq.). Belt Power, LLC and Shorehill Belt Power, LLC (collectively “Belt

Power”) seek review of the trial court’s final summary judgment order declaring void

and unenforceable various restrictive covenants in their contracts with former

employees Steve Reed and Jeffrey Harrington and dismissing their counterclaims for

breach of those restrictive covenants. Belt Power argues on appeal that (1) the trial

court erred when it concluded that the 2014 agreements between the parties

completely superseded and replaced their prior 2008 agreements; (2) the trial court

erred by applying strict scrutiny to analyze the reasonableness of the restrictive covenants; (3) the trial court erred by applying Georgia common law instead of the

Restrictive Covenants Act; (4) the trial court erred by failing to apply a choice of law

provision; and (5) the trial court erred by declining to modify or “blue pencil” the

agreement so that it was enforceable.

We determine that the trial court correctly concluded that the 2014 contracts

between the parties superseded and replaced their earlier 2008 contracts. We further

conclude that Georgia’s Restrictive Covenants Act applies to these restrictive

covenants and that the trial court did not abuse its discretion in declining to use the

Act’s “blue pencil” provision to modify the restrictive covenants, and it correctly

declined to apply the choice of law provision in the contract. We therefore affirm the

trial court’s final judgment declaring that the restrictive covenants were

unenforceable, and we affirm the trial court’s order dismissing Belt Power’s

counterclaims for breach of those restrictive covenants.

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.

2 (Citation omitted.) Crouch v. Bent Tree Community, Inc., 310 Ga. App. 319 (713

SE2d 402) (2011).

Belt Power is a company that is primarily engaged in making and distributing

conveyor belts and conveyor belt components. Reed and Harrington were employees

of Belt Power and were both engaged as territory managers. In 2008, Reed and

Harrington each purchased a small minority equity share of Belt Power pursuant to

an “LLC Interest Purchase and Restriction Agreement” with Belt Power that each

separately signed. This agreement included restrictive covenants providing that, for

a certain period after their employment ends, Reed and Harrington would not (1)

solicit business from any of Belt Power’s customers; (2) compete with Belt Power in

any state in which it operates; (3) solicit any of Belt Power’s employees to join their

business; (4) hire any of Belt Power’s employees; or (5) disclose any trade secrets or

confidential information.

In 2014, Reed and Harrington each separately sold their minority shares back

to the company pursuant to a “Confidentiality, Non-Competition and Non-Solicitation

Agreement” with Belt Power that also included certain restrictive covenants. Among

other restrictions, the agreement stated that Reed and Harrington would not recruit

3 or hire, or attempt to recruit or hire, any of Belt Power’s employees for a period of

five years after the sale of their shares.

Reed stopped working for Belt Power in 2015, and Harrington left the company

in 2017. In 2017, Harrington and Reed created Sitka Belt, LLC, for the purpose of

“marketing and selling industrial belts for conveyors and other applications.” Reed

and Harrington brought this action for a declaratory judgment that the restrictive

covenants contained in the parties’ 2008 and 2014 agreements were void, and they

asked for a permanent injunction enjoining Belt Power from enforcing the covenants.

Belt Power counterclaimed for breach of the restrictive covenants, alleging that

Harrington violated the 2008 agreement by soliciting Belt Power’s customers and that

Reed violated the 2014 agreement by inducing Harrington to leave Belt Power and

join Sitka. Reed and Harrington then filed a motion for the entry of a declaratory

judgment and a permanent injunction.

Following a hearing, the trial court granted the motion for a declaratory

judgment, concluding that the restrictive covenants were void and unenforceable. The

trial court also entered a permanent injunction enjoining Belt Power and any other

entity from enforcing the restrictive covenants in the parties’ agreements, and it

4 dismissed Belt Power’s counterclaims for breach of contract. Belt Power then

appealed.

1. Belt Power first argues that the trial court erred in concluding that the 2008

agreement (and the restrictive covenants contained therein) was superseded and

replaced by the 2014 agreement (and its restrictive covenants). We conclude that the

trial court correctly construed the 2014 agreement’s merger clause so as to conclude

that the 2014 agreement superseded and replaced the 2008 agreement.

The interpretation of a contract is normally a question of law to be resolved by the court, and the [order] of the lower court in this case [is] therefore subject to de novo review. This review requires us first to decide whether the contract provisions at issue are ambiguous. If there is no ambiguity, then we simply enforce the contract according to its terms.

(Citations omitted.) Willesen v. Ernest Communications, Inc., 323 Ga. App. 457, 459

(1) (746 SE2d 755) (2013).

The 2014 agreement contained a merger clause which stated that the agreement

“[set] forth the entire understanding with respect to the subject matter hereof and

supersedes any prior or contemporaneous understandings with respect thereto, written

or oral.” “We conclude that the language of the superseding-agreement clause is clear

5 and unambiguous: the later-entered agreement replaces in their entirety all

earlier-entered agreements that concerned a similar subject matter.” MAPEI Corp. v.

Prosser, 328 Ga. App. 81, 86 (4) (761 SE2d 500) (2014).

The differing covenant obligations contained in the two agreements do not

create any ambiguity in the application of the merger clause. The 2008 and 2014

agreements clearly concerned similar subject matters: the primary basis for the 2008

agreements was the purchase by Reed and Harrington of minority shares of Belt

Power, and the primary basis of the 2014 agreements was the sale of those same

shares back to the company. It is entirely logical that the parties would agree to have

Reed and Harrington be subject to more stringent covenant obligations once they

became partial owners of the company and that such obligations would no longer

apply once they ceased to be partial owners. Thus, the trial court correctly concluded

that the 2014 agreement superseded the 2008 agreement.

2. Belt Power also argues1 that the trial court erred in concluding that Georgia’s

Restrictive Covenants Act did not apply to the employee no-hire and employee no-

solicitation covenants in the 2014 agreement and by instead applying Georgia

1 This issue is listed as Belt Power’s third enumeration of error, but we will address it second in light of our conclusion.

6 common law to analyze the enforceability of the covenants. Upon a close reading of

the entire statute, we conclude that the restrictive covenants at issue do fall within the

ambit of the Act. We nevertheless conclude that the trial court did not abuse its

discretion in declining to apply the “blue pencil” provision in the Act to modify the

terms of the covenants.

“On appeal, we review the lower court’s interpretation of a statute de novo, as

statutory interpretation is a question of law.” (Citation omitted.) Hill v. First Atlantic

Bank, 323 Ga. App. 731, 732 (747 SE2d 892) (2013). “The fundamental rules of

statutory construction require us to construe a statute according to its terms, to give

words their plain and ordinary meaning, and to avoid a construction that makes some

language mere surplusage.” (Citation and punctuation omitted.) Couch v. Red Roof

Inns, Inc., 291 Ga. 359, 362 (1) (729 SE2d 378) (2012). “[S]tatutes in derogation of

the common law must be limited strictly to the meaning of the language employed,

and not extended beyond the plain and explicit terms of the statute.” (Citation and

punctuation omitted.) Id. at 364 (1). On the other hand, when we interpret a statute,

“we do not look at the text in isolation. Rather, to determine its meaning, we also

consider its context. For context, we may look to the other provisions of the same

statute, the structure and history of the whole statute, and the other law . . . that forms

7 the legal background of the statutory provision in question.” (Citations omitted.)

Plummer v. Plummer, 305 Ga. 23, 26-27 (2) (823 SE2d 258) (2019).

(a) The Restrictive Covenants Act Applies to these Restrictive Covenants

The trial court here first concluded that the Restrictive Covenants Act does not

apply to the employee no-hire and employee no-solicitation covenants in the 2014

agreement based upon its review of OCGA § 13-8-53, the main enforcement

provision, which does not explicitly mention the covenants at issue in this case.

Because we are required to view the statute as a whole, however, we do not end our

inquiry at this one provision.

We first turn to the Act’s list of definitions. The Act defines the term

“restrictive covenant” in part as

an agreement between two or more parties that exists to protect the first party’s or parties’ interest in property, confidential information, customer good will, business relationships, employees, or any other economic advantages that the second party has obtained for the benefit of the first party or parties, to which the second party has gained access in the course of his or her relationship with the first party or parties, or which the first party or parties has acquired from the second party as the result of a sale.

8 (Emphasis supplied.) OCGA § 13-8-51 (15). We next look at the Act’s judicial

review provision, which broadly states, “In any action concerning enforcement of a

restrictive covenant, a court shall not enforce a restrictive covenant unless it is in

compliance with the provisions of OCGA § 13-8-53. . . .” (Emphases supplied.)

OCGA § 13-8-54 (b). Taken together, the clear and plain language of these two

provisions compels a conclusion that any agreement that meets the Act’s definition

of restrictive covenant, and is otherwise not excepted from the Act’s provisions, is

subject to the terms of the Act and must comply with the terms of the Act. Restricting

the Act’s scope to merely the provisions that are explicitly mentioned in OCGA § 13-

8-53 would render meaningless the majority of the broad definition of “restrictive

covenant” located in OCGA § 13-8-51 (15), which contains many more types of

agreements.

Finally, we readily conclude that the employee no-hire and employee no-

solicitation covenants at issue are clearly “agreement[s] . . . to protect [Belt Power]’s

interest in . . . employees” and thus fall within the Act’s definition of “restrictive

covenants.” See OCGA § 13-8-51 (15). As a result, we conclude that the two

provisions at issue fall within the scope of the Restrictive Covenants Act, and the

enforceability of those covenants should be analyzed under the provisions of the Act.

9 (b) The Trial Court Did Not Abuse its Discretion in Declining to Apply the

“Blue Pencil” Provision

In addition to concluding that the covenants were unreasonable and

unenforceable under Georgia common law, the trial court made the alternative

holding that, even if the Restrictive Covenants Act applied, the provisions were

facially unreasonable and overly broad under the Act, and it also concluded that it

would not exercise its discretion to modify the covenants under the Act’s “blue

pencil” provision. Belt Power does not argue in its appellate brief that the covenants

should have been considered reasonable under the Restrictive Covenants Act. Instead,

Belt Power argues that the trial court erred by failing to use the “blue pencil”

provision of the Act to modify the covenants so as to make them enforceable. We

conclude that the trial court did not abuse its discretion in declining to modify the

covenants.

10 This Court has not yet interpreted the Act’s covenant modification provision.2

The Restrictive Covenants Act provides that

if a court finds that a contractually specified restraint does not comply with the provisions of [this Act], then the court may modify the restraint provision and grant only the relief necessary to protect such interest or interests and to achieve the original intent of the contracting parties to the extent possible.

OCGA § 13-8-54 (b). See also OCGA § 13-8-53 (d) (“[A] court may modify a

covenant that is otherwise void and unenforceable so long as the modification does

not render the covenant more restrictive with regard to the employee than as

originally drafted by the parties.”).

2 We note that the Act’s blue pencil provision is clearly its most significant departure from our prior common law framework. Under our prior precedent, the ability to modify unreasonable covenants was frowned upon and was only allowed in very limited circumstances. See Carson v. Obor Holding Co., LLC, 318 Ga. App. 645, 649 n.8 (1) (734 SE2d 477) (2012) (noting the few, limited instances the Supreme Court has sanctioned the use of blue-penciling restrictive covenants); see also Richard P. Rita Personnel Svcs. Intl., Inc. v. Kot, 229 Ga. 314, 317 (191 SE2d 79) (1972) (noting the fear that if courts were allowed to modify unreasonable restrictive covenants, “employers [could] fashion truly ominous covenants with confidence that they will be pared down and enforced when the facts of a particular case are not unreasonable. This smacks of having one’s employee’s cake, and eating it too.”).

11 We first note that each of these two provisions directs that a court “may”

modify a covenant if it determines that the covenant is unreasonable. “The word

‘may,’ when used in a statute, usually implies some degree of discretion. This

common-sense principle of statutory construction is by no means invariable, however,

and can be defeated by indications of legislative intent to the contrary or by obvious

inferences from the structure and purpose of the statute.” United States v. Rodgers,

461 U. S. 677, 706 (IV) (B) (103 SCt 2132, 76 LE2d 236) (1983). Upon a close

reading of this provision, however, we see no indications that the “may” in these

provisions indicates that applying these provisions is mandatory, and so we can come

to no other conclusion than that it is within a trial court’s discretion whether or not

to apply the Act’s blue pencil provisions.

We will therefore analyze the trial court’s decision under the abuse of

discretion standard. Normally, “[a] trial court abuses its discretion when the exercise

of discretion was infected by a significant legal error or a clear error as to a material

factual finding.” Rockdale Hospital, LLC v. Evans, 306 Ga. 847, 851 (2) (b) (834

SE2d 77) (2019). In its order, the trial court explicitly considered Belt Power’s

legitimate business interests and concluded that they did not warrant a modification

of the covenants so as to make them enforceable. See OCGA § 13-8-54 (a) (“A court

12 shall construe a restrictive covenant to comport with the reasonable intent and

expectations of the parties to the covenant and in favor of providing reasonable

protection to all legitimate business interests established by the person seeking

enforcement.”). Viewing the facts and circumstances in this case in their totality, we

conclude that the trial court did not abuse its discretion when it declined to use the

Act’s blue pencil provision to modify the covenants to make them enforceable.3

3. Belt Power further argues that the trial court erred in refusing to enforce a

choice of law provision in the 2014 agreement and by applying Georgia law rather

than Delaware law. “Forum selections clauses are prima facie valid and should be

enforced unless the opposing party shows that such enforcement would be

unreasonable under the circumstances.” (Citation omitted.) Bunker Hill Intl., Ltd. v.

Nationsbuilder Ins. Svcs., Inc., 309 Ga. App. 503, 506 (710 SE2d 662) (2011). It has,

however, long been Georgia law that choice of law provisions will not be enforced

if application of the clause would “contravene[] a strong public policy” of this State.

3 In light of our ruling, we need not address Belt Power’s second and fifth enumerations of error, to the extent they were not otherwise addressed by our ruling, because they concern the trial court’s application of Georgia common law. We also note that the employee non-hire and non-solicitation covenants are the only ones at issue in this litigation, and we do not address whether the blue pencil provision may or should be used to sever these covenants from the remainder of the contract.

13 Id. (Citation and punctuation omitted.) Before the enactment of the Restrictive

Covenants Act, we held that restrictive covenants in restraint of trade (such as the

ones at issue here) fall within this public policy exception if (1) at least one of the

restrictive covenants violates Georgia public policy and (2) such a covenant would

likely be enforced by the other state’s court. Id. at 507. The Restrictive Covenants Act

does not change our prior conclusion that unreasonable restrictive covenants are

against Georgia public policy. See OCGA § 13-8-54 (b) (“[A] court shall not enforce

a restrictive covenant unless it is in compliance with the provisions of [this Act].”)

(emphasis supplied). Compare OCGA § 13-8-50 (“The General Assembly finds that

reasonable covenants contained in employment and commercial contracts serve the

legitimate purpose of protecting legitimate business interests and creating an

environment that is favorable to attracting commercial enterprises to Georgia and

keeping existing businesses within the state.”) (emphasis supplied). Accordingly, the

trial court did not err in refusing to apply the choice of law provision.

In sum, the trial court correctly ruled that the 2014 agreement superseded the

2008 agreement. The trial court also did not abuse its discretion in declining to

modify the contract under the blue pencil provision of the Restrictive Covenants Act,

and it did not err by applying Georgia law. We therefore affirm the trial court’s entry

14 of a declaratory judgment declaring that the restrictive covenants were unenforceable,

and we affirm the trial court’s order dismissing Belt Power’s counterclaims for breach

of those restrictive covenants.

Judgment affirmed. Reese, J., concurs. Rickman, J., concurs in Divisions 1 and

2 and in judgment only in Division 3.*

*DIVISION 3 OF THIS OPINION IS PHYSICAL PRECEDENT ONLY.

COURT OF APPEALS RULE 33.2(a).