White v. Fletcher/Mayo/Associates
303 S.E.2d 746 (1983)
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Rule of Law:
A non-competition covenant signed by an employee during the sale of a business will be treated as a covenant ancillary to employment if the employee's bargaining capacity was not significantly greater than that of a mere employee. As an employment covenant, if it is overbroad, it is entirely unenforceable and cannot be judicially modified or 'blue-penciled'.
Facts:
- Eldredge White was a senior vice-president at Fletcher/Mayo/Associates, Inc. (FMA), an advertising company.
- White, through stock bonuses and purchases, owned 7,114 shares of FMA stock, representing 4.62% of the company.
- FMA negotiated a merger with Doyle Dane Bernbach International, Inc., in which White took no part.
- Doyle Dane conditioned the merger on White and three other key executives signing restrictive non-competition agreements.
- White was told he should sign the agreements to guarantee his job and career opportunities.
- White voted his shares in favor of the merger, receiving Doyle Dane stock and realizing a profit of approximately $60,000, a profit proportional to what all other shareholders received.
- The vast majority of FMA's 69 employee shareholders were not required to sign such covenants.
- Soon after the merger was completed, White was fired.
Procedural Posture:
- Eldredge White (plaintiff) filed a suit in a trial court for a declaration that his non-competition covenants with Fletcher/Mayo/Associates, Inc. and Doyle Dane Bernbach International, Inc. (defendants) were unenforceable.
- The trial court found the covenants were overbroad.
- However, the trial court classified the covenants as being ancillary to the sale of a business, rather than employment.
- Based on this classification, the trial court judicially modified ('blue-penciled') the covenants to make them narrower and enforceable.
- The trial court then enjoined White from breaching the rewritten covenants.
- White (appellant) appealed the trial court's decision to the Supreme Court of Georgia.
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Issue:
Does a non-competition covenant signed by a minority shareholder-employee as a condition of a corporate merger fall under the stricter 'ancillary to employment' rule, which prohibits judicial modification of an overbroad covenant, rather than the more lenient 'ancillary to sale of business' rule, which permits it?
Opinions:
Majority - Bell, Justice.
Yes. A non-competition covenant signed by an employee who is also a minority shareholder is treated as ancillary to employment if the employee's bargaining capacity is not significantly greater than that of a mere employee. Georgia law distinguishes between covenants ancillary to employment, which cannot be judicially modified ('blue-penciled') if overbroad, and those ancillary to the sale of a business, which can be. To determine the covenant's classification, courts must assess the covenantor's status. Here, despite his stock ownership, White had no control over FMA's management, did not participate in merger negotiations, and could not prevent his own termination. He was an employee, not a seller with significant bargaining power. The consideration he received was proportional to that of all shareholders, not special payment for the covenant. To blue-pencil this covenant would undermine the public policy of protecting employees from the in terrorem effect of overbroad restrictive covenants by encouraging employers to coerce employees during acquisitions.
Analysis:
This decision clarifies the boundary between sale-of-business and employment non-competition covenants, establishing that substance prevails over form. The court created a 'bargaining capacity' test to prevent companies from using corporate mergers to circumvent Georgia's strict prohibition against rewriting overbroad employment covenants. This precedent protects employees who are also minority shareholders from being treated as business sellers with equal bargaining power. It reinforces the state's public policy against the in terrorem effect of overbroad agreements, ensuring that employers cannot use their superior position in a transaction to impose unenforceable restrictions with the expectation that a court will later reform them.
