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GEORGIA COURT OF APPEALS: NO EQUITABLE TOLLING OF NON-COMPETE AGREEMENT

In a recent decision interpreting Georgia’s Restrictive Covenant Act (“RCA”), O.C.G.A. § 13-8-50, et seq., the Georgia Court of Appeals explicitly rejected a concept that the Supreme Court of Georgia had, according to it, already “at least implicitly” rejected: that “equity permits a court to extend the period of a non-compete agreement.” Daneshgari v. Patriot Towing Servs., LLC, No. A21A0887, 2021 WL 4900514, at *2 (Ga. Ct. App. Oct. 21, 2021). That is, Daneshgari held that a Georgia trial court may not use its equitable powers, or even its contempt powers, to lengthen the duration of a noncompete restriction.


The Daneshgari case involved the sale of a towing business. The seller, Daneshgari, agreed to a four (4) year non-compete as a condition of the sale. (The RCA permits non-competes of longer than two (2) years in conjunction with the sale of a business. See O.C.G.A. § 13-8-57.) That restriction lasted from the date of the sale, June 23, 2016, until June 22, 2020.


Apparently suffering from seller’s remorse, Daneshgari “began operating a competing business” within “a month of the execution of the purchase agreement.” Id. at *1 (emphasis added). Not surprisingly, the disgruntled buyer sued, seeking an injunction against Daneshgari to enforce the noncompete as well as monetary damages.


The trial court enjoined Daneshgari from violating the noncompete, but he nevertheless persisted. This resulted in the plaintiff filing not one, but two separate contempt motions against him. At the hearing on the second contempt motion, which occurred on August 10, 2020 (after the noncompete expired), the trial court extended the injunction against Daneshgari “until further order of [the] court.” Id. Thus, the trial court effectively extended the noncompete beyond its June 22, 2020 expiration date.


Daneshgari appealed. The Court of Appeals—invoking two Supreme Court decisions that predated enactment of the RCA—held that a trial court may not use its equitable powers, or even its contempt powers, to extend a noncompete beyond its expiration date. To do so, it held, would be to impermissibly rewrite the parties’ noncompete agreement. In the first of the Supreme Court cases that Daneshgari considered—Coffee Systems of Atlanta v. Fox, 227 Ga. 602 (1971)—the Court rejected the argument that the pendency of a lawsuit tolled a noncompete agreement’s one-year restrictive period. In the other case, Electronic Data Systems Corp. v. Heinemann, 268 Ga. 755 (1997), the Court “refused to overrule Coffee Systems, and again rejected the argument that when a party sues to enforce a noncompete agreement, the litigation itself should toll the terms of the agreement.” Daneshgari, 2021 WL 4900514, at *3 (emphasis in original). As the Heinemann court stated, “[t]he courts should hesitate to rewrite private contracts. Judicially providing a tolling provision would effect such a rewrite.” Heinemann, 268 Ga. at 757. This is the rationale the Daneshgari court found persuasive.


It is frequently argued in noncompete cases that the restrictive period should be tolled—either because of the pendency of litigation to enforce the noncompete or because of the defendant’s continued violation of the covenant. To the extent any doubt remained about the viability of such arguments, Daneshgari seems to resolve it. After all, the defendant’s conduct in Daneshgari was about as extreme as one is likely to encounter—he continued violating the noncompete despite not only the pendency of litigation, but also an injunction and contempt order prohibiting him from doing so. The lesson: going forward, don’t count on a Georgia court extending the duration of a noncompete or other restrictive covenant.