“Loyalty” Provision Actually an Unenforceable Restraint of Trade, Georgia Court Rules
Many employers require their employees sign agreements containing a “loyalty provision.” That is, a clause that requires the employee to devote all or most of his/her working time to the employer’s endeavors, while the employee remains employed by the employer. What many employers fail to realize, however, is that some states treat such loyalty provisions as restrictive covenants. Thus, as a recent decision from the Georgia Court of Appeals reminds, these loyalty provisions must comply with restrictive covenant law. See Early, et al v. MiMedx Group, Inc., 330 Ga. App. 652 (Feb. 10, 2015).
MiMedx Group, Inc. and ISE Professional Testing & Consulting Services, Inc. (“ISE”) entered into a Consulting Agreement, whereby Ryanne Early was to provide consulting services to MiMedx on behalf of ISE. The Consulting Agreement contained a “loyalty provision,” requiring Early to “devote her full working time (not less than forty (40) hours per week) to [the] performance of [her] duties” under the Consulting Agreement and in service of MiMedx. Notably, this clause addressed Early’s duties while she worked as a consultant, not after the termination of the Consulting Agreement.
Eventually, MiMedx terminated the Consulting Agreement and sued ISE and Early, alleging, among other things, that Early had failed to devote her full working time to the performance of her consulting duties under the Consulting Agreement; thereby, breaching the loyalty provision in the Consulting Agreement. In their defense, ISE and Early argued the loyalty provision was, essentially, a restrictive covenant and unenforceable under Georgia’s applicable restrictive covenant law.
Court of Appeals Rules Loyalty Provision is an Unenforceable Restrictive Covenant
Though the trial court rejected ISE and Early’s argument, the Court of Appeals reversed, holding that the loyalty provision entered into by the parties was a restraint on trade and, therefore, must comply with Georgia’s restrictive covenant law. (Unfortunately for MiMedx, the Consulting Agreement was entered into before the enactment of Georgia’s Restrictive Covenant Act, which is much more favorable to restrictive covenants than Georgia’s old law.) Specifically, the Court Appeals held the loyalty provision was unenforceable because it contained “no limitation at all concerning either scope or territory,” which is required of restrictive covenants in Georgia. Thus, any claim by MiMedx for breach of this unenforceable contractual provision was doomed.
Under Georgia’s current Restrictive Covenant Act (which applies to all agreements entered into on or after May 11, 2011), however, this loyalty provision would likely be enforceable. Specifically, O.C.G.A. 13-8-56(4) states that restrictive covenants that operate during the term of an employment relationship do not need “any specific limitation upon scope of activity, duration, or geographic area, so long as [the covenant] promotes or protects the purpose or subject matter of the agreement or relationship[.]” Therefore, agreements entered into on or after May 11, 2011 need not comply with the Court’s instruction in this decision.
Though most employers are aware restrictive covenants must be carefully reviewed to ensure compliance with applicable state law, this decision reminds that loyalty provisions should be similarly reviewed.