Atlanta Bread Franchisee Wins in Georgia Supreme Court

Atlanta Bread bakery in White Plains, New York. Photo/Steinberg

ATLANTA – “Accordingly, the Court of Appeals did not err when it affirmed the trial court’s finding that the in-term restraint was unenforceable. Judgment affirmed. All the Justices concur.” That was the final ruling posted this morning by the Georgia Supreme Court in the Atlanta Bread Co. v. Lupton-Smith case that determined non-compete clauses for franchises have limits.

The Supreme Court ruled last October that it would review the appellate court decision in the case of a former Atlanta Bread franchisee who had been terminated for allegedly violating his non-compete clause in opening a PJ’s Coffee franchise. Lupton-Smith, a five-unit operator, initially filed a lawsuit against Atlanta Bread in 2006 for the termination. At the trial level the court applied a very strict standard to in-term covenants and ruled that the franchisor’s non-compete was unenforceable.

Randy Edwards, Esq.

Randy Edwards, Cochran & Edwards, representing Lupton-Smith said they are very pleased with the court’s ruling.  “With today’s decision we’ve had  the trial court, we’ve had three judges from the Georgia Court of Appeals and seven justices from the Georgia Supreme Court who have unanimously agreed that Atlanta Bread Company did not have the right to terminate these franchise agreements based on the alleged violation of these non-competition covenants.”  Edwards said the case will now go back to the trial court, which could commence in the next few months.

The International Franchise Association had filed two amicus briefs in support of Atlanta Bread in the case. David French, president of the IFA’s government relations division, had stated, "This case is important to preserving the franchise model because the lower court’s ruling, if allowed to remain as is, could render unenforceable the in-term restrictive covenants in the vast majority of franchise contracts for businesses operated in Georgia, including many of the most well-known and respected franchises in the world."

The ruling states that because there is no error, they likewise affirm the appellate court decision, stating, “In this state, restrictive (or non-competition) covenants are considered to be partial restraints of trade and must be reasonable as to time, territory and scope to be enforceable.” Although Atlanta Bread contends that the clause at issue is a “loyalty provision” and not a restrictive covenant subject to being scrutinized for its reasonableness as to time, territory and scope, the Supreme Court disagreed. “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.” The court said such restraints "are disfavored in Georgia as a matter of public policy."

The decision also stated that they rejected “a legislative attempt to usurp the application of standard of reasonableness to non-competition covenants in employment agreements, and, by extension, in franchise agreements.” 

Atlanta Bread argued that the clause at issue should receive less scrutiny because it is restricted during the term of the franchise agreement rather than after its termination.

Sean Lupton-Smith said it has been a long battle for him. “We look forward to getting this matter wrapped up.”  He said it is hard to put into words how taxing it has been and what effect it has had on him and his business. “When Atlanta Bread told us we had 10 days from the termination notice to turn over the keys to our stores, it really took a toll on us. We had a very, very successful business going and the termination was unreasonable.”

David French issued this statement regarding the Georgia Supreme Court ruling:

We are disappointed that the GA Supreme Court has construed Georgia’s constitutional limitation on covenants not to compete so narrowly that no distinction is made between in-term and post-term covenants.  This decision elevates the interests of a single franchisee above the interests of the entire franchise business community in Georgia.  Not only will franchisors find Georgia a less welcome place to do business following this decision, but the Court’s interpretation in this case exposes other franchisees in Georgia to the potential of unfair competition.

James P.P. Dirr, vice president and group general counsel for Atlanta Bread, did not return phone calls. The company's outside counsel David Monde of Jones Day was unavailable to make comment prior to publishing. 

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Related reading:

• Appeals Court strikes IFA's amicus brief on non-compete clause
• Atlanta Bread Legal Fight Heats up 
• Franchise Community Awaits Amicus Decisions on Appeal
• IFA Files Amicus Curiae in Georgia Court of Appeals
• CFR (Franchise Times Magazine- May, 2009)
• Georgia Supreme Court to Review Appellate Decision in Atlanta