United States: Georgia Court Of Appeals Reiterates That Trial Courts Cannot Rely On Equity To Extend A Non-Compete's Expiration Date

Suffice it to say, it's never a good idea to deliberately violate a trial court's order, much less do so repeatedly. That, however, is precisely what Khosrow Daneshgari did in Patriot Towing Services, LLC v. Daneshgari, et al. Notwithstanding Daneshgari's willful contempt, the Georgia Court of Appeals recently ruled that the trial court nevertheless overstepped its authority by extending the expiration date of the parties' non-compete agreement. See Daneshgari, et al. v. Patriot Towing Services, LLC, Georgia Court of Appeals, Case No. A21A0887, Oct. 21, 2021.

Underlying Facts

On June 2016, Patriot Towing Services, LLC ("Patriot") purchased the assets of a company owned by Daneshgari and simultaneously entered into a Non-Competition, Non-Disclosure, and Non-Solicitation Agreement (the "Agreement"). The Agreement included a non-competition covenant, which had an expiration date of June 22, 2020. The non-competition covenant did not include any type of tolling provision. Notwithstanding the non-competition covenant, Daneshgari began directly competing against Patriot within a month of the parties executing the Agreement.

Patriot eventually filed suit against Daneshgari and, in June 2018, the trial court entered a preliminary injunction forbidding Daneshgari from further violating the Agreement's non-compete covenant, which was still in effect. Despite the trial court's order, Daneshgari's violations continued undeterred. As a result, Patriot filed a motion for contempt, which the trial court granted in July 2019, ordering Daneshgari to be incarcerated until he paid Patriot $20,000 in attorneys' fees.

Daneshgari was ultimately released from jail, but he clearly had not learned his lesson because he promptly continued operating his competing business. Accordingly, in January 2020, Patriot filed a second motion for contempt. In September 2020, the trial court granted Patriot's motion, striking Daneshgari's answer, entering a default judgment, and ordering him (once again) to pay Patriot's attorneys' fees. Additionally, the trial court enjoined Daneshgari from violating the non-competition covenant "until further order of this Court."

Daneshgari appealed, claiming that the trial court erred when it extended the non-competition covenant's expiration date beyond June 22, 2020.

Analysis

The Georgia Court of Appeals reversed the portion of the trial court's ruling that extended the non-competition covenant beyond its June 22, 2020, expiration date because "the Supreme Court of Georgia has rejected—at least implicitly—the idea that 'equity permits a court to extend the period of a non-compete agreement.'" Patriot attempted to distinguish the prior Supreme Court of Georgia precedent relied on by the Court of Appeals (most notably Coffee System of Atlanta v. Fox, 227 Ga. 602, 182 S.E.2d 109 (1971) and Electronic Data Systems Corp. v. Heinemann, 268 Ga. 755, 493 S.E.2d 132 (1997)) by claiming these matters were inapplicable because they did not involve a trial court exercising its contempt power. The Georgia Court of Appeals disagreed, finding it made no substantive difference that this case concerned a contempt order and the prior cases did not.

Instead, the Georgia Court of Appeals held that "while we certainly understand [Patriot's] (and the trial court's) frustration with the [Daneshgari's] willful violation of an agreement they entered into voluntarily, we do not agree with its contention that adhering to our Supreme Court's directive that '[c]ourts do not make contracts for the parties' significantly impairs a trial court's contempt power. In fact, as this case aptly demonstrates, a trial court is not without other means to address a party's contempt. Given these circumstances, the trial court abused its discretion in indefinitely enjoining the defendants from violating the noncompete provision beyond its June 22, 2020 expiration."

Summary

The Daneshgari  decision reiterates that even in situations of overt, irrefutable contempt, Georgia trial courts are simply not permitted to extend the expiration date of an agreed upon non-competition covenant. Instead, in order to have any chance at extending a non-competition's expiration date, parties should strongly consider including a tolling provision to guard against situations where subsequent litigation continues beyond the non-competition's expiration date. Otherwise, while a plaintiff may be stuck litigating over past, wrongful acts, they will have little ability to prevent ongoing or future harm.

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