Appellant Atlanta Bread Company International, Inc. operates a franchise system of “bakery/delis” in twenty-five states, including Georgia. Appellees entered into franchise agreеments with appellant to operate five Atlanta Bread Company retail bakery/deli stores — four located in Atlanta, Georgia and one located in Knoxville, Tennessee. 1 Each of the franchise agreements contained the following clause:
During the term of this Agreement, neither Franchisee nor any Principal Shareholder, for so long as such Principal Shareholdеr owns an Interest in Franchisee, may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporаtions, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similаr to that employed by store units within the System.
During the term of these franchise agreements, appellees opened and began operating a PJ.’s Coffee & Lounge in Atlanta, Georgia. Apрellant, believing appellees to be in violation of the above-quoted clause, sent a notice to appellees that it was terminating the franchise agreements. Appеllees filed a request for a temporary restraining order (TRO) and the trial court entered a consent order that sustained the TRO until the parties’ franchise agreements expired. After the TRO expired, appellant paid appellees approximately $840,000 for the tangible assets of the five stores operated by appellees. The case continued with appellees seeking damages for wrongful termination of the franchise agreements. The trial court granted partial summary judgment to appellees, finding the above-quoted “in-term” clause, as well as a
1. In Georgia, contracts that generally restrain trade are void against public policy.
W.R. Grace & Co. v. Mouyal,
[Cjontracts in unreasonable restraint of trade are contrary to public policy and void, because they tend to injure the parties making them, diminish their means of procuring livelihoods and a competency for their families; tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression; tend to deprive the public of services of [people] in the employments and capacities in which they may be most useful to the community as well as themselves; discourage industry and enterprisе, and diminish the products of ingenuity and skill; prevent competition and enhance prices, and expose the public to all the evils of monopoly. [Cit.]
Rakestraw v. Lanier,
2. 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. See
Barrett-Walls, Inc. v. T.V. Venture, Inc.,
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.
Allen v. Hub Cap Heaven, Inc.,
One of the quеstions posed to the parties in this case was whether our decision in
Jackson & Coker, Inc. v. Hart,
3. Appellant argues that the clause at issue should receive less than strict scrutiny because the restraint occurs during the term of the franchise agreement rather than after the agreement’s termination. This argument is unsupported by precedent. The appеllate courts of this state have considered such restraints occurring during the active term of the parties’ agreement and have made no distinction as to the level of scrutiny appliеd based on whether the restraint occurs during the term of the agreement or after the agreement has been terminated.
Barrett-Walls, Inc. v. T.V. Venture, Inc.,
supra,
4. The other question presented in this case is whether the blue-pencil dоctrine of severability may be applied to an in-term restraint in a franchise agreement. Our response is in the negative. Since in-term restraints contained in franchise agreements are subject to strict scrutiny, they cannot be blue-penciled if found to be unreasonable as to time, territory or scope. See
Gandolfo’s Deli Boys, LLC v. Holman,
490 FSupp.2d 1353, 1357-1358 (N.D. Ga. 2007) (applying Georgia law). Here, the restraint is unreasоnable because it lacks any territorial limitation, and a court cannot insert a territorial limitation to render it enforceable.
New Atlanta Ear, Nose & Throat Assoc., P.C. v. Pratt,
Judgment affirmed.
Notes
Appelleеs include Mr. Lupton-Smith and his five franchise companies.
OCGA § 13-8-2.1 (d) provided that “[a]ny restriction that operates during the term of [a] ... franchise . . . shall not be considered unreasonable because it lacks any specific limitation upon scope of activity, duration, or territory. . . .”
Ga. Const. of 1983, Art. III, Sec. VI, Par. V (c) provides: “The General Assembly shall not have the power to authorize any cоntract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, or encouraging a monopoly, which are hereby declared to be unlawful and void.”
Unlike appellant suggests, Barrett-Walls did not construe a post-termination non-competition clause. Although the distributorship agreement at issue had been terminated by two parties, the Court found that, based on the facts, noncompetition contractual obligations were still owed to a third party. That is, the Court effectively held that the distributorship agreement’s term continued with the third party, at least with respect to the in-term noncompetition provision.