Georgia Appellate Court Applies Strict Scrutiny and Affirms Trial Court's Finding that Restrictive Covenants Were Overbroad and Unenforceable
March 13, 2022
By: Patrick W. Daley
In BB&T Ins. Servs. v. Renno, 361 Ga. App. 415, 864 S.E.2d 608 (2021), the Court of Appeals of Georgia applied a strict scrutiny standard to its review of restrictive covenants and found that the restrictive covenants in an employment agreement were overbroad in terms of scope and, thus, they were unenforceable.
In Renno, Hoyt E. Renno, Jr. (“Renno”), was an insurance salesman that operated a brokerage known as Stephens & Company Insurances Services, Inc. (“Stephens”). Renno was both a shareholder and a director of Stephens. In April 2001, BB&T Insurances Services, Inc. (“BB&T”), purchased Stephens, at which point Renno became an employee of BB&T subject to an employment agreement (“Employment Agreement”) that included certain restrictive covenants.
In February 2001, prior to BB&T closing on its purchase of Stephens, Renno and two other minority shareholders executed a document whereby the majority shareholder transferred 1,995 shares of Stephens to the three minority shareholders, leaving the majority shareholder with 9,765 shares and the three minority shareholders with 7,245 shares each. The transfer of shares agreement provided that the stock transfer would close one day prior to BB&T acquiring Stephens. Thus, prior to entering into the Employment Agreement with BB&T, Renno and the three other shareholders of Stephens executed a transfer of assets from Stephens to BB&T (“Sale Agreement”).
Following the execution of these various agreements, Renno worked for BB&T until April 23, 2018, at which time he and another BB&T employee notified BB&T that they were resigning effective immediately. Upon BB&T taking inventory of Renno’s office, it discovered that three-ring binders containing BB&T customer information were missing. After further investigation, BB&T discovered that Renno exported a 2,000 – 3,000 customer contact list to his personal email account prior to his resignation. It also discovered that Renno sent an email to his personal email account prior to his resignation, which blind copied his BB&T clients and included a new signature block and a link to a LinkedIn profile for Renno’s new company, Snellings Walters Insurance Agency, Inc. d/b/a Snellings Walters Insurance Agency (“Snellings”).
On the same date as his resignation, Renno sent a text message to another BB&T employee requesting a breakfast meeting prior to work. Shortly after this meeting and following another text message from a principal at Snellings, the employee resigned from BB&T and began working for Snellings. Following these resignations, multiple BB&T clients from the surrounding counties moved their business from BB&T to Snelling.
In the wake of Renno’s (and others’) resignation from BB&T and the resultant client departures to Snellings, BB&T filed suit against Renno, asserting that he breached his employment agreement with regard to the provisions for non-competition, customer solicitation, and confidentiality. BB&T’s initial complaint was amended to add a claim against Snellings for tortious interference.
Renno and Snellings moved for summary judgment, which was granted by the trial court. The trial court concluded that the relevant restrictive covenants existed in the Employment Agreement, rather than the Sale Agreement and, thus, they were subject to strict scrutiny. Because the restrictive covenants were found in the Employment Agreement, the trial court found that Renno had no more bargaining power with BB&T than that of an ordinary employee, which supported its application of strict scrutiny. Notwithstanding the strict scrutiny review, the trial court also found the restrictive covenants unenforceable due to BB&T’s breach of the contract. On appeal, the court was tasked with analyzing (1) whether the trial court applied the proper level of scrutiny to the restrictive covenants and (2) whether the restrictive covenants were enforceable.
In Georgia, restrictive covenants are analyzed using varying levels of scrutiny, similar to those used when analyzing whether laws violate constitutional rights. As explained by the appellate court, restrictive covenants that are ancillary to an employment agreement are analyzed using strict scrutiny and may not be “blue penciled.” Restrictive covenants that are ancillary to the sale of a business receive less scrutiny and may be “blue penciled.” The rationale for the varying levels of scrutiny is grounded in fundamental principles of fairness in that there is a gap of bargaining power between a business and an individual when negotiating an employment agreement while an agreement for the sale of a business that includes restrictive covenants tends to involve individuals on more equal footing and, thus, a court applies a lower level scrutiny.
In Renno, the court found that the application of strict scrutiny was proper. First, Renno’s employment agreement was on the only document that contained restrictive covenants. Second, the Sale Agreement was not contingent upon Renno entering into the Employment Agreement, although this certainly was contemplated because the Employment Agreement referenced the Sale Agreement. Third, the court noted that the restrictive covenants in the Employment Agreement were not supported by consideration other than Renno’s employment. While the court noted that Renno received money from the Sale Agreement, the Sale Agreement also provided employment for other, non-shareholder, employees of Stephens. Finally, the court noted the unequal bargaining power between Renno and BB&T: (1) Renno could not negotiate the terms of the Employment Agreement; (2) Renno could not change the terms of the Sale Agreement because he was a minority shareholder; and (3) Renno did not have independent counsel regarding the terms of his BB&T employment. As a result, the court found that Renno’s bargaining power was similar to that of an ordinary employee and, thus, the Employment Agreement was not ancillary to the Sales Agreement. Consequently, the court affirmed the trial court’s application of strict scrutiny.
Regarding the enforceability of the restrictive covenants under a strict scrutiny analysis, the court separately addressed both the non-competition and non-recruitment provisions separately. Generally, in applying strict scrutiny, a Georgia court will void a restrictive covenant if it imposes an unreasonable restraint on trade. Conversely, a covenant will be upheld so long as it is “founded on a valuable consideration and is reasonably necessary to protect the interest of the party in whose favor it is imposed and does not unduly prejudice the interests of the public.” The court also noted that in terms of capacity for competition, an employer does not need a restrictive covenant that prohibits work for a competitor in any capacity to protect its legitimate interests.
Applying these principles to the non-competition covenant, the court found that it was overbroad and, thus, unenforceable because the non-solicitation provision (1) was not limited to those customers with whom Renno had material contact and (2) was not limited to those specific types of insurance products that Renno sold during his time with BB&T.
As for the non-recruitment provision, the court also found that it was overbroad in that it was not limited to Renno’s solicitation of BB&T employees, but it also prohibited Renno from “supporting” a BB&T employee’s personal decision to leave the company. The court noted that, hypothetically, Renno could violate this provision if he happened to run into a former co-worker and “supported” the employee’s decision to leave BB&T so that he/she could, for example, care for an ailing relative.
Ancillary to the analysis regarding the enforceability of Renno’s restrictive covenants, the court also found that summary judgment was properly granted to Snellings on BB&T’s tortious interference count. Focusing on the element of intent on the part of Snellings, the court noted that Snellings advised Renno that he should not solicit BB&T’s customers, employees, and/or take/use any confidential or private information. Regarding a claim that Renno and Snelling “conspired” to solicit former BB&T employees, the court harkened back to its earlier analysis, finding that because Renno’s restrictive covenants were unenforceable, BB&T could not tie Renno’s actions to Snellings. Further, the court noted a lack of “predatory tactics, such as physical violence, fraud or misrepresentation, defamation, use of confidential information, abusive civil suits, and unwarranted criminal prosecutions” by Snellings in its recruitment of BB&T employees. To the contrary, the record reflected that one employee departed BB&T because he was unhappy while another left because Snellings offered opportunities that BB&T could not.
The court’s decision in Renno is significant to practitioners and businesses alike. While not complex in its analysis, the court provided the analytical framework that may help individuals and businesses, on the front end, better determine whether restrictive covenants will be enforceable as intended upon an employee’s departure. To this end, it is important to understand, at least when Georgia law (and the law of certain other states) applies, whether a restrictive covenant can be included in a business sale agreement as opposed to an employment agreement. In addition, as is common in many jurisdictions, it is important to connect non-solicitation provisions to the contacts of the employee to which the provision will be applied.