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Early v. MiMedx Group, Inc.

Court of Appeals of Georgia

February 10, 2015

EARLY et al.
v.
MIMEDX GROUP, INC

Cert. applied for.

Restrictive covenants. Cobb Superior Court. Before Judge Ingram.

Erika C. Birg, for appellants.

Berman Fink Van Horn, Benjamin I. Fink, Neal F. Weinrich, Collin L. Freer, for appellee.

OPINION

Page 824

McMillian, Judge.

We granted this interlocutory appeal to determine whether a provision in a Consulting Agreement that requires a designated employee of the Consultant to " devote her full working time" to the performance of the Consultant's duties under the Agreement constitutes an illegal and unenforceable restraint of trade, and if not, whether the

Page 825

provision is enforceable against the employee named in the Agreement, even though she did not expressly agree to be bound [330 Ga.App. 653] by the provision at issue. We answer the first question in the affirmative and thus need not reach the second question.

Pertinent to these issues, the record shows[1] that appellee MiMedx Group, Inc. (" MiMedx" ) develops, manufactures, and markets patent protected biomaterial-based products, including bioimplants made from human amniotic membrane. Appellant Ryanne Early[2] was experienced in this field, and had worked for a " now defunct emerging competitor of MiMedx." Sometime around January 2011, MiMedx and Early entered into negotiations about a possible " business relationship," and later that month MiMedx and Early, as founder and president of ISE Professional Testing & Consulting Services, Inc. (" ISE" ), entered into a " Mutual Confidentiality and Nondisclosure Agreement" (" Nondisclosure Agreement" ) prohibiting Early from disclosing trade secrets and confidential information, which might be revealed to her during negotiations with MiMedx.

A short time later,[3] MiMedx and ISE entered into a Consulting Agreement whereby ISE, as the named " Consultant," would provide product, research and development consulting services to MiMedx related to its amnion products. Paragraph 2 of the Consulting Agreement named Early as the ISE employee who would provide consulting services to MiMedx, and further specified that Early would " devote her full working time (not less than forty (40) hours per week) to [the] performance of Consultant's duties hereunder" (" full-working-time provision" ).

MiMedx terminated the Consulting Agreement in December 2011, and subsequently filed a verified complaint against, inter alia, Early and ISE (collectively referred to as " appellants" ) seeking damages, specific performance and injunctive relief under the Consulting Agreement and the separate Nondisclosure Agreement.[4] Although the complaint set out numerous causes of action against both ISE and Early and specifically alleged that Early had failed to devote her full working time to the performance of the consulting duties under the [330 Ga.App. 654] Consulting Agreement, it did not set out a separate cause of action for breach of that Agreement.

Appellants answered and filed a counterclaim seeking payment for the consulting services which were rendered in December 2011. A short time later, MiMedx filed an amended complaint asserting a cause of action against ISE and Early for breach of the Consulting Agreement. Although MiMedx did not specifically allege which provisions of the Consulting Agreement had been breached, the amended complaint again alleged that Early had failed to devote her full working time to the performance of the consulting duties under the Consulting Agreement and had instead misappropriated MiMedx's trade secret and confidential information to start a rival company.

Appellants subsequently filed a motion for judgment on the pleadings,[5] contending, among other things, that the full-working-time provision[6] of the Consulting Agreement

Page 826

was void and unenforceable as either a general or partial restraint of trade.[7] Following a hearing, the trial court denied appellants' motion for judgment on the pleadings without explanation, and appellants filed an application seeking interlocutory review of that order in this Court. We granted appellants' application, and this appeal followed. As more fully set forth below, we now reverse.

It is well settled that,

[o]n a motion for judgment on the pleadings, we treat all well-pled material allegations by the nonmovant as true and all denials by the movant as false. Although such motion is, by definition, limited to the pleadings, a trial court may also consider exhibits that have been incorporated into the pleadings. If, in reviewing these documents, there is a complete failure by the plaintiff to state a cause of action, then the defendant is entitled to judgment as a matter of law.

(Footnotes omitted.) Printis v. Bankers Life Ins. Co., 256 Ga.App. 266, 266 (568 S.E.2d 85) (2002). However, we are mindful that " [a] motion for judgment on the pleadings should be granted only if the moving [330 Ga.App. 655] party is clearly entitled to judgment." (Citation and punctuation omitted.) Sherman v. Fulton County Bd. of Assessors, 288 Ga. 88, 90 (701 S.E.2d 472) (2010).

1. Before turning to the merits of this appeal, we must first address MiMedx's contention that appellants are barred from challenging the enforceability of the Consulting Agreement because they failed to raise this issue by way of a responsive pleading below, and because appellants admitted that the Consulting Agreement was valid and enforceable in their counterclaim seeking payment for the consulting services that were rendered in December 2011.

(a) MiMedx first asserted its claim for breach of the Consulting Agreement in its amended complaint, but did not specify which provision of the Agreement was allegedly breached. Appellants did not file an answer to the amended complaint, but raised the issue of the enforceability of Paragraph 2 of the Consulting Agreement by way of a motion for judgment on the pleadings. This was sufficient. As we have held on numerous occasions, a defendant " is not required to file an answer to an amended complaint unless the trial court itself has affirmatively ordered such answer." (Citation and punctuation omitted.) Hiner Transport, Inc. v. Jeter, 293 Ga.App. 704, 705 (667 S.E.2d 919) (2008). See also OCGA § 9-11-12 (a). " This is consistent with the statement in OCGA § 9-11-8 (d) that averments in a pleading to which no responsive pleading is required or permitted shall be taken as denied or avoided." (Citations and punctuation omitted.) Nat. City Mtg., Inc. v. Point Center Financial, Inc., 306 Ga.App. 655, 656 (703 S.E.2d 113) (2010). Moreover, although MiMedx cites OCGA § 9-11-8 (c) for the proposition that affirmative defenses such as illegality must always be raised by way of a responsive pleading, our precedent clearly establishes that this rule is not as inflexible as MiMedx contends.

The purpose of the requirement that affirmative defenses be pleaded is to prevent surprise and to give the opposing party fair notice of what he must meet as a defense. If it is not pleaded[,] it is generally held that the defense is waived, but if it is raised by motion, or by special plea in connection with the answer or by motion for summary judgment there is no waiver.

Hardy v. Ga. Baptist Health Care Systems, Inc., 239 Ga.App. 596, 596-597 (1) (521 S.E.2d 632) (1999), and cites. Cf. First Bank of Clayton County v. Dollar, 159 Ga.App. 815, 816-817 (3) (285 S.E.2d 203) (1981) (affirmative defense of illegality waived when it was neither included in a defensive pleading nor raised by written motion).

[330 Ga.App. 656] Moreover, by failing to raise this issue in the trial court, MiMedx itself has waived this issue on appeal. See Phillips v. State Farm Mut. Auto. Ins. Co., 121 Ga.App. 342, 347 (2) (b) (173 S.E.2d 723) (1970) (" The lack of pleading, if such there was, was not raised in the trial court and that issue is not properly before us. The question was not submitted to the trial court, was not passed upon by

Page 827

that court, and thus under the law of this State cannot be considered by this court." ) (citations and punctuation omitted). Roberts v. Farmer, 127 Ga.App. 237, 240-241 (5) (193 S.E.2d 216) (1972) (contention not made in the trial court cannot be considered on appeal).

(b) MiMedx also contends that appellants are barred from asserting this defense because they themselves sought to enforce the Consulting Agreement in their counterclaim and specifically pled that the Agreement was valid and enforceable. Again, however, MiMedx has waived the right to raise this contention by failing to raise it below. E.g., Crippen v. Outback Steakhouse Intl., 321 Ga.App. 167, 170 (1) (741 S.E.2d 280) (2013).

Moreover, this contention fails on the merits. First, MiMedx had not asserted its claim for breach of the Consulting Agreement at the time appellants made this allegation in their counterclaim, and thus it would be incongruous to say that they had admitted to a claim that had not yet been pled.[8]

Additionally, the Consulting Agreement contains the following severability clause:

If any provision of this Agreement shall be declared invalid or illegal for any reason whatsoever, then notwithstanding such invalidity or illegality, the remaining terms and provisions of this Agreement shall remain in full force and effect in the same manner as if the invalid or illegal provision had not been contained therein.

[330 Ga.App. 657] It is well settled that the intent of the parties determines whether a contract is severable such that the remaining contract provisions will survive even if one or more provisions of the contract are void. Capricorn Systems, Inc. v. Pednekar, 248 Ga.App. 424, 428 (2) (d) (546 S.E.2d 554) (2001). And " [a] severability clause indicates the intent of the parties where the remainder of the contract can exist without the void portion." Id. Accordingly, " [v]oid restrictive covenants, which cannot be blue-penciled out of the contract, do not void the entire contract when the contract contains a severability clause. ... [Cits.] [T]he other contract terms survive the void terms, provided that the contract is severable." [9] Id. Applying these principles here, we find that appellants were not foreclosed from seeking to enforce parts of the Consulting Agreement while challenging other severable parts of that Agreement as unenforceable.

2. We now turn to the primary issue on appeal -- whether the full-working-time provision is enforceable -- and begin our analysis with Paragraph 2 of the Consulting Agreement which provides:

Duties. In conjunction with designated MiMedx staff and under the direction and control of John Daniel, the Consultant shall provide consulting services to MiMedx. The nature and scope of the consulting services relate to product and research and development management related to amnion products. Ryanne [Early] shall devote her full working time (not less than forty (40) hours per

Page 828

week) to [the] performance of Consultant's duties hereunder.

(Emphasis supplied.)

Appellants contend that the full-working-time provision prohibits Early from performing any kind of work during the term of the agreement other than for MiMedx, and thus is an illegal restraint of trade. MiMedx, on the other hand, asserts that this is a simple breach of contract action in that they paid ISE for 100 percent of Early's working time and that ISE (and Early) breached the Consulting Agreement by failing to deliver what they had promised. Moreover, MiMedx argues that the provision is no different from loyalty or best effort provisions requiring an employee to devote her time on the job to her employer's business.

[330 Ga.App. 658] We must begin our analysis by construing the full-working-time provision and what is required therein. That analysis has been aided in this case because the parties essentially agree on what the clause means -- ISE contracted that Early would devote any working time to MiMedx's business, whether or not that working time was related in any way to the type of enterprise in which MiMedx is engaged.[10] We see no reason to construe the contract in a different or narrower way given that the parties agree on its terms. See Head v. Scanlin, 258 Ga. 212, 214 (1) (367 S.E.2d 546) (1988).

Next, we turn to the question of whether a contract between a company and its customer that requires an employee to spend all her working time on the customer's business is an illegal restraint of trade or merely a loyalty provision. Atlanta Bread Co. Intl., Inc. v. Lupton-Smith, 285 Ga. 587, 589 (2) (679 S.E.2d 722) (2009) (" Atlanta Bread Co. II " ), is particularly instructive. In that case, our Supreme Court considered whether an in-term covenant in a franchise agreement prohibiting the franchisee from operating competing stores was a loyalty provision or restraint of trade, and held that " [a] plain reading of the clause shows that it prohibits the [contractor] from engaging in a certain type of business during the terms of the parties' agreement and, thus, it is a partial restraint of trade designed to lessen competition." Id.

Here, the full-working-time provision is in one sense broader than the clause in Atlanta Bread Co. II in that Early is prohibited from doing any work whether in competition with MiMedx or not, and yet is narrower in that any other ISE employee could perform work directly in competition with MiMedx. But MiMedx's breach of contract claim, as pled, is not seeking to prohibit other ISE employees from competing; rather, MiMedx is seeking damages from ISE for not requiring Early to conform to the terms of the contract. Thus, our analysis must focus on whether ISE can enforce the full-working-time provision against Early because if ISE is prohibited from requiring Early to spend any and all working time on consulting for MiMedx, we fail to see how MiMedx can base a breach of contract claim on the same conduct. See Dougherty, McKinnon & Luby, P.C. v. Greenwald, Denzik & Davis, P.C., 213 Ga.App. 891, 892 (1) (447 S.E.2d 94) (1994) (" [I]t is the legal effect of a contractual provision, not the parties' specified manner of enforcement of the provision, that determines enforceability vel non of a contract." ) (citation and punctuation [330 Ga.App. 659] omitted); OCGA § 13-8-2 (a) (2) (contracts which are deemed contrary to public policy, including contracts in general restraint of trade, are unenforceable).

When viewed in that light, it is clear that under Atlanta Bread Co. II, the full-working-time provision is a restraint of trade, rather than a loyalty provision. Although MiMedx cites several cases that it contends demonstrate that this Court routinely reviews and upholds best effort, full-time, or similar " loyalty" provisions without regard to their anti-competitive effect, it appears that in none of those cases was this Court confronted with the issue presented here. It is well settled that " [q]uestions neither brought to the attention of the Court nor ruled upon will not be considered as precedent." BIK Assocs. v. Troup County, 236 Ga.App. 734, 738 (4) (513 S.E.2d 283) (1999). As our appellate courts have

repeatedly cautioned[,] our decisions stand only for the points raised by the parties and decided by

Page 829

the court. Questions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents.

(Citations and punctuation omitted.) Holton v. Physician Oncology Svcs., 292 Ga. 864, 869-870 (2) (742 S.E.2d 702) (2013).[11] Accordingly, we agree with appellants that none of these cases preclude us from analyzing the full-time-working provision as a restrictive covenant when the terms of the provision, as agreed by the parties, would preclude Early from engaging in any work apart from the contract [330 Ga.App. 660] with MiMedx, which restriction would clearly have an anti-competitive effect. See Dougherty, 213 Ga.App. at 892-893 (1) (analyzing liquidated damages provision as a restrictive covenant due to its anti-competitive effect).

In analyzing restrictive covenants, Georgia courts have distinguished between general and partial restraints of trade. See W. R. Grace & Co. v. Mouyal, 262 Ga. 464, 465 (1) (422 S.E.2d 529) (1992); Atlanta Bread Co. II, 285 Ga. at 588 (1). While " contracts that generally restrain trade are void against public policy," id., covenants in partial restraint of trade are upheld " if the restraint imposed is not unreasonable, is founded on a valuable consideration, and is reasonably necessary to protect the interest of the party in whose favor it is imposed, and does not unduly prejudice the interests of the public." (Citation omitted.) W. R. Grace & Co., 262 Ga. at 465 (1).

Appellants argue that because the full-working-time provision is designed to completely prohibit Early from working in any marketplace, it should be viewed as a general restraint of trade and declared void without further analysis. Pretermitting whether the provision is a general or partial restraint of trade, we find that even if viewed as a partial restraint of trade, the provision would be unenforceable. A partial restraint of trade is enforceable only if it is reasonable as to time, territory, and scope. Murphree v. Yancey Bros. Co., 311 Ga.App. 744, 747 (716 S.E.2d 824) (2011). In making this determination, " 'a court may consider the nature and extent of the business, the situation of the parties, and all other relevant circumstances.' [Cit.] The reasonableness of the restraints imposed is a question of law." Id. at 747 (1). In addition, Georgia courts have applied different levels of scrutiny based on the type of agreement that contains the restrictive covenant. Swartz Investments, LLC v. Vion Pharmaceuticals, Inc., 252 Ga.App. 365, 368-369 (2) (556 S.E.2d 460) (2001). And it is important to note that although cases distinguish post-term restrictive covenants from in-term restrictive covenants, at least factually, courts " have made no distinction as to the level of scrutiny applied based on whether the restraint occurs during the term of the agreement or after the agreement has been terminated." [12] Atlanta Bread Co. II, 285 Ga. at 590 (3).

Page 830

See also Atlanta Bread Co. Intl. v. Lupton-Smith, 292 Ga.App. 14, 17-18 (1) (663 S.E.2d 743) (2008) (" Atlanta Bread Co. I " ).

[330 Ga.App. 661] Given the procedural posture, we lack the information necessary to determine the precise level of scrutiny which should be applied in this case; but it is not necessary for us to make that determination, because the full-working-time provision, which contains no limitation at all concerning either scope or territory, fails as a matter of law under any level of scrutiny. See Atlanta Bread Co. I, 292 Ga.App. at 18-19 (2) (in-term provision that would prevent franchisee from working in any capacity in the deli/bakery business, even as a janitor, was unreasonable and overbroad). See also Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 184 (2) (236 S.E.2d 265) (1977) (post-term covenant that restricts an employee from engaging in employment " in any capacity," is unreasonable and unenforceable); Uni-Worth Enterprises, Inc. v. Wilson, 244 Ga. 636, 639 (1) (261 S.E.2d 572) (1979) (restrictive covenant that fails to specify the business activities the employee is forbidden to engage in after his employment is unreasonable and unenforceable). Atlanta Bread Co. II, 285 Ga. at 591 (3) (a covenant that is not limited as to territory will be invalidated).

Accordingly, we find that the trial court erred in denying appellants' motion for judgment on the pleadings on the breach of contract claim based on an alleged violation of Paragraph 2 of the Consulting Agreement.[13]

3. Based on the foregoing, it is unnecessary for us to consider appellants' remaining contention that the provision is unenforceable against Early as the alter ego of ISE.

Judgment reversed.

Phipps, C. J., and Ellington, P. J., concur.


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