Last summer, the Georgia Supreme Court issued a decision that has damaged the ability of franchisors to protect their brands and business models from being duplicated by former franchisees. In response, a new bill (HR 178) has been presented in the Georgia House of Representatives. HR 178 proposes an amendment to the Georgia Constitution that allows more latitude in enforcing agreements that regulate competitive activities between franchisors and franchisees, and give courts the authority to limit the scope, geographic area and duration of competitive activities in franchise relationships.
In Atlanta Bread Company International Inc. v. Lupton-Smith et al., the Atlanta Bread Company sued a former franchisee who had been terminated for allegedly violating his franchise agreement with Atlanta Bread. The agreement prohibited the franchisee from operating another bakery/deli business whose methods of operation are similar to Atlanta Bread. During the term of the franchise agreement with Atlanta Bread, Lupton-Smith began operating a P.J.’s Coffee & Lounge in Atlanta. The Georgia Supreme Court ruled that this provision of the franchise agreement constituted an unreasonable restraint on trade.
“In the franchise context, a non-compete agreement requires that a franchisee not start a competing business within a certain geographic area for a specified amount of time,” says Ellen Taylor, an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz PC. “But the Georgia courts have routinely said that these types of agreements are unenforceable and constitute unfair restraints of trade designed to lessen competition.”
Smart Business spoke with Taylor about the ruling and how the proposed constitutional amendment could make the Georgia business climate friendlier to franchising.
What are the facts of the recent ruling of the Georgia Supreme Court?
In Atlanta Bread Company v. Lupton-Smith, the franchisor terminated the franchise agreement because the franchisee violated key provisions of the franchise agreement by opening a competing business within the same geographic area while he was still operating an Atlanta Bread Company franchise. But the court ruled that these provisions were subject to strict scrutiny, and were unenforceable and constituted an unreasonable restraint on trade. The court further rejected Atlanta Bread Company’s attempts to ‘blue pencil’ the agreement by striking out only those portions found to be unreasonable. The court stated ‘such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.’
In response to this decision, the proposed HR 178 will ask Georgia voters to decide whether to enact changes to current constitutional provisions governing competition in commercial and employment relationships. Such changes will make it easier for franchisors in Georgia to protect their investment in their business model.