Non-Competition Restrictive Covenants and Territorial Limitations


It is important to keep abreast of the ever-evolving law pertaining to non-competition restrictive covenants. Mid-level marketers of petroleum product often encounter or need to consider such covenants in a) employment contracts with key personnel, and b) contracts involving the acquisition of locations or other jobberships.

Generally, while a contract in restraint of trade or which tends to lessen competition is against public policy and is void, a restrictive covenant contained in an employment contract is considered to be in partial restraint of trade and will be upheld if the restraint imposed (a) is not unreasonable, (b) is founded on a valuable consideration, (c) is reasonably necessary to protect the interest of the party in whose favor it is imposed, and (d) does not unduly prejudice the interests of the public. Whether the restraint imposed by the contract is reasonable is a question of law for determination by the court. A court reviewing the factual situation involved will consider the nature and extent of the trade or business, the situation of the parties, and all the surrounding circumstances related to employment or relationship of the parties.

A three-element test of duration, territorial coverage, and scope of activity has evolved as a helpful tool in examining the reasonableness of the particular factual setting to which it is applied. Brunswick Floor, Inc. v. Guest, 506 S.E.2d 670 (1998). Georgia has refused to apply a blue pencil role. This means that if the restrictive covenant is overly broad, it is unenforceable. Courts will not rewrite covenants or partially enforce such overly broad covenants.

In applying the three-part test, a court will look at a multitude of issues paying consideration to the general facts in the particular situation.

In evaluating whether the territorial coverage restriction is overly broad, Courts respect that the goal of a non-competition covenant is to balance two competing rights, first the employee's right to earn a living and his ability to determine with certainty the prohibited territory; second, the employer's interest in customer relations created or furthered by its former employee on its behalf and its right to protect itself from the former employee's possible unfair appropriation of contacts developed while working for the employer. Under this analysis, an employer is permitted to include in such a covenant the territory in which the employee has in fact performed work, thus protecting itself from the unfair appropriation of good will and information acquired in the course of that work. See Brunswick.

In contrast, a restriction relating to the area in which the employer does business is generally unenforceable due to overbreadth, unless the employer can show a legitimate business interest that will be protected by such an expansive geographic description. Further, avoidance of competition, is not a legitimate business interest. In determining the legitimacy of the interest the employer seeks to protect, the court will take into account the employer's time and monetary investment in the employee's skills and development of his craft. The more money or time expended on training the greater the territory that may be upheld. For example, in Beckman v. Cox Broadcasting Corp., 296 S.E.2d 566 (1982), statewide territorial restriction upheld because employee worked statewide and employer had expended large sums of money in training.

Drafters of covenants must also be careful not to make the scope of the covenant overly broad. For example, prohibiting an employee from being an officer or director or owning stock in other companies, or from performing activities which are very different from work performed as an employee may be deemed overly broad and thus defeat the entire contract.

Great care should be given to the language utilized in a restrictive covenant. If any portion of the covenant is overly broad, such covenant will not be enforceable. Since this area of law is so fact/circumstance dependant, counsel must continually monitor recent case law developments, and clients must continually review or have their counsel review applicable contracts to confirm enforceability.