Last summer the Georgia Supreme Court in Atlanta Bread Co. v. Lupton-Smith held that covenants not to work for a competitor or perform competitive acts during the course of employment were subject to strict scrutiny. In Georgia, application of a strict scrutiny review makes it considerably more difficult for an in-term covenant to be enforced by a Georgia court.

The Court stated : “Appellant contends that the clause at issue is a “loyalty provision” and not a restrictive covenant such that it is not subject to being scrutinized for its reasonableness as to time, territory and scope. We disagree. A plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition.

Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy…. When such restraints are found in franchise or distributorship agreements, our jurisprudence has held time and again that these restraints are subject to strict scrutiny, receiving the same treatment as non-competition covenants found in employment contracts… “A non-competition covenant entered into in connection with a franchise or employment contract is enforceable, but only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of [the party] sought to be protected and the effect on the franchisee.” [internal citation omitted]. 285 Ga. 587 (2009) Read the rest of this entry »