The Atlanta Bread Company Case and Protecting Your System:
What to Do Now

Les Wharton
Epstein Becker & Green P.C.
©2008

You saw or heard about the ruling of the Georgia Court of Appeals in the Atlanta Bread Company International, Inc. v. Lupton-Smith case throwing out Atlanta Bread’s in-term non-compete provision (see the note of Perry McGuire posted elsewhere on this SEFF site). If you are a franchisor, what should you be doing now?

First, if this issue is important to you, consult your attorney, as this is a very technical area and what is presented here is just an overview. This area is fraught with nuance at every turn, nuance that cannot be addressed in an overview and is not addressed here. Spending money now will save you more money and management time later. So talk with your attorney.

If one of your major concerns is preventing your franchisees from taking your system, think about whether you want to put a Georgia choice of law provision in your agreement. Georgia law relating to enforcement in this area is one of the toughest on franchisors. The laws of other states are normally much better for you in this area. Although a few states prohibit non-competition agreements, most will enforce them if they are reasonable. So, if you are based in Georgia, it may be better to have the agreement adopt the law of the state where the franchise is located.

If you have chosen Georgia law to govern your agreements, and feel you must retain that choice of law, you should review your restrictive covenants (non-competition, non-solicitation, and non-disclosure) with your attorney to ensure, as best you can, that they will pass muster under the strict standards of Georgia law. “As best you can” because one of the issues in Georgia is the predictability of the outcome relating to any given restrictive covenant and part of the analysis of the court will be subjective.

Georgia says, as most states, that these restrictions must be “reasonable”. But Georgia then defines what is “reasonable” narrowly. Whether the covenants are in-term (restricting conduct while the Franchise Agreement is in place) or post-term (restricting conduct after the Franchise Agreement), Georgia law will require that non-compete restrictions be limited as to time, territory and scope of activity restricted, non-solicitation restrictions be limited as to time and territory (although if you limit non-solicitation to customers with whom the franchisee had contact, you may be able to eliminate territory as to the non-solicitation provision), and non-disclosure restrictions be limited as to time and scope. The exact limits in each area that are required will be fact driven in each case, and the rulings of a given court will be somewhat subjective, because the court is considering whether the restrictions are reasonable considering the business interests to be protected in each case. Consequently, your attorney will have to help you look at your particular situation in light of the Georgia court decisions on record to determine what limits to put in your Franchise Agreement.

And beware, unlike the courts of some states, Georgia courts will not revise a covenant to make it enforceable (called “blue penciling”) if it does not meet the standards. Instead, the Georgia court throws out the entire covenant relating to non-competition and non-solicitation if even one aspect of it does not measure up. If the covenant has been drafted to separate out non-disclosure, the court may leave that in place if it, on its own, meets the required standards. However, if there is not a separation, the non-disclosure restriction may be thrown out with the unenforceable non-competition/non-solicitation provisions.

The other thing your counsel can do is to help you draft into the Franchise Agreement or tighten other provisions that may help achieve your objectives in protecting your system. For example, if your concern is that the franchisee will use the system you have developed to set up a similar business in another city, you might consider putting a requirement in the agreement to devote full time to the franchised business. This will at least cause the franchisee to risk his franchise if he tries to set up elsewhere.

You can also tighten the non-disclosure provision. Georgia courts are somewhat more receptive to restrictions on disclosure of confidential information (but they still will expect a time limit). You should also tighten your procedures relating to handling information you consider to be a trade secret—if you don’t carefully protect the information, the court may not view it as a trade secret. But if it is a trade secret, then Georgia law will protect it without a time limit.

So, what to do? If protecting your system is important to you, consult your attorney and spend focused time on ensuring your agreement is drafted to best achieve your objectives in this area. That way, you minimize the chance that you will be disappointed later.

If you would like additional information regarding this topic, please contact: Les Wharton at 404 869 5347 or lwharton@ebglaw.com. For more information on the Law Firm of Epstein Becker & Green P.C. see http://www.ebglaw.com.

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