Court Rules Noncompete Period Could Not be Extended Even Though Defendants Violated Injunctions Enforcing the Noncompete Agreement
December 22, 2021
By: Stephen B. Stern
In Deneshgari v. Patriot Towing Services, LLC, 864 S.E.2d 710 (Ga. App. 2021), the Court of Appeals of Georgia reversed the decision of a trial court to extend by court order the noncompete period in a noncompete agreement because the order changed the express terms of the agreement, which is contrary to Georgia law.
In Patriot Towing, Patriot Towing Services, LLC (“PTS”), purchased the majority of assets belonging to D&D Autow’s, Inc. (“D&D”), which was a full-service emergency road service and towing company owned and operated by Khosrow Daneshgari and Leslie Zotti. The purchase agreement included a noncompete provision that precluded Daneshgari and Zotti from engaging in certain competitive activities for four years following the closing of the sale. The parties understood that the noncompete period was set to expire on June 22, 2020. Within one month of closing the sale, however, Daneshgari and Zotti started operating a competing towing business named E-Motorworks, Inc. (“E-Motorworks”).
In response to the violations of the noncompete provision, PTS filed a lawsuit against Daneshgari and Zotti seeking monetary and injunctive relief. PTS also filed a motion for preliminary injunction, which the trial court granted, ordering Daneshgari and Zotti to cease and desist from violating the noncompete provision. Daneshgari and Zotti did not comply with the court order, however, and continued violating the noncompete provision. PTS filed a motion for contempt, which was granted. Daneshgari was incarcerated until he paid $20,000 to cover PTS’s attorneys’ fees. After Daneshgari was released from incarceration, Daneshgari and Zotti violated the preliminary injunction order yet again and PTS filed another motion for contempt (this one was filed on January 21, 2020), which the court scheduled for hearing on August 10, 2020, approximately two months after the lapse of the noncompete provision. At the conclusion of the hearing on the second motion for contempt, the trial court ruled in PTS’s favor and later (on September 3, 2020) issued two additional orders. The first order found Daneshgari in contempt, awarded PTS attorneys’ fees, entered default judgment against Daneshgari, and extended the court’s preliminary injunction order enforcing the noncompete provision “until further order of this [c]ourt.” The second order found Zotti in contempt as well and it also enjoined her from violating the noncompete provision “until further order of this [c]ourt.” These orders had the effect of extending the four-year noncompete provision for an indefinite period. Daneshgari and Zotti appealed the trial court’s orders.
On appeal, the Court of Appeals of Georgia examined certain decisions of the Supreme Court of Georgia spanning a period of 25 years and found that the Georgia Supreme Court had implicitly rejected the notion that “equity permits a court to extend the period of a non-compete agreement.” The Georgia Court of Appeals further found that by extending its injunction orders against the defendants indefinitely, the trial court “essentially rewrote the parties’ contract exactly as [the Georgia] Supreme Court has proscribed.” The Court of Appeals of Georgia was not persuaded by PTS’s arguments that the trial court was exercising its contempt power and, thus, distinguished the current case from prior cases. In rejecting this argument, the Court of Appeals of Georgia noted that the Georgia Supreme Court’s prior decisions involved the trial courts’ exercise of equitable powers and concluded that rewriting a contract exceeded those equitable powers. The Court of Appeals of Georgia also rejected the notion that prohibiting the trial court from extending the noncompete period as it did in this case would somehow impair the trial court’s contempt power because, as the trial court demonstrated, it has other remedies available to it. Although the Court of Appeals of Georgia did not specify what those other remedies were, presumably those other remedies include incarceration and monetary relief.
The court’s decision in Patriot Towing is significant in that it warns businesses if they want to have the opportunity to extend a noncompete period in the event that a noncompete provision is violated, they must at the very least include an express provision in the noncompete agreement that gives the court authority to extend the noncompete period to remedy a violation of the agreement, at least under Georgia law. Indeed, this decision likely will be of limited utility in other jurisdictions because the law governing noncompete agreements generally varies from state to state.