In Atlanta Bread Co. Int’l, Inc. v. Lupton-Smith, S08G1815, 2009 WL 1834215 (Ga. Jun. 29, 2009), the Georgia Supreme Court today confirmed that in-term restrictive covenants are subject to the same strict scrutiny standard applied to post-term covenants and the same reasonableness standards of time, territory, and scope.

The question presented in Atlanta Bread Company was whether the in-term non-compete covenant in a franchise agreement between Atlanta Bread Company and Sean Lupton-Smith is enforceable under Georgia law. The covenant at issue states as follows:

During the term of this Agreement, neither [Lupton-Smith] nor any Principal Shareholder, for so long as such Principal Shareholder owns an Interest in [Lupton-Smith], may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.

During the term of the franchise agreements, Lupton-Smith opened and began operating a P.J.’s Coffee & Lounge in Atlanta, Georgia. Atlanta Bread Company sent a notice terminating the franchise agreement and litigation ensued. The trial court and Court of Appeals both found that the in-term non-compete provision was unenforceable under Georgia law because it failed to “meet[] the reasonableness standards promulgated in Georgia.”

The Supreme Court rejected Atlanta Bread Company’s argument that the provision is a loyalty provision rather than a non-compete provision, noting that

[a] plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.

The Court rejected any contention that a franchise relationship should be treated differently, confirming that the court has held time and again” that franchise agreements and employment agreements are subject to the same strict scrutiny (meaning, among other things, that it cannot be blue-penciled). This analysis removes any doubt that the Court’s analysis in Atlanta Bread Company also will apply to in-term restrictive covenants in an employment agreement.