Summary. Marguerite and her two daughters were the members and managers of an LLC. On behalf of the LLC, Marguerite negotiated and executed a contract to sell its assets to N&N Holdings. The contract contained a covenant providing that “neither Seller nor its agents” would compete with, or solicit customers or employees of, the buyer during specified periods in a designated geographical area. Within that period and area, however, Marguerite and her daughters created a new LLC. It began competing with N&N which sued everybody — the seller, the new LLC, Marguerite, and her daughters — in a Georgia state court for violation of the covenant.
The trial court granted summary judgment to N&N. The judgment was reversed on appeal on the grounds that the seller was not competing with N&N, and none of the other defendants had agreed to be bound individually by the covenant. Primary Investments, LLC v. Wee Tender Care III, Inc., Case No. A13A0412 (Ga. App., 7/16/13) (notice of intention to petition the Supreme Court of Georgia for a writ of certiorari filed 7/19/13).
The contract. Primary Prep Academy operated a childcare facility. In a multi-million dollar transaction, Primary sold its assets to N&N which continued Primary’s business under a new name. The purchase and sale contract contained a three-year covenant pursuant to which “Seller agrees that neither Seller nor its agents will” (a) solicit Primary’s employees who become employees of N&N at the same location, (b) solicit parents of a child enrolled at Primary’s facility during the 12 months preceding the closing, or (c) open a child care center within a 10-mile radius of any location being sold.
Litigation commences. During the relevant time period, Marguerite and her two children formed a new LLC which opened a childcare facility within the 10-mile radius. After they were sued, the defendants filed a counterclaim for rescission and equitable reformation of the non-competition clause. All parties moved for summary judgment.
Trial and Appellate Court rulings. The trial court granted the buyer’s summary judgment motion with regard to the defendants’ alleged violation of the non-compete covenant and denied the defendants’ summary judgment motion with respect to their counterclaim for rescission or reformation. On appeal, the lower court’s ruling that defendants violated the non-compete covenant was reversed, but the lower court’s decision declining to order rescission or reformation of the covenant was affirmed.
The Appellate Court held that none of the defendants was liable for improper competition with N&N. The seller was not liable because it did not engage in business, much less in competition with N&N, after the sale. The new LLC and Marguerite’s children were not liable because none of them was a party to the asset purchase agreement. Marguerite was not liable because she was not a party to the agreement as an individual. She negotiated and signed the agreement solely in her representative capacity on behalf of the seller, a disclosed principal, thereby binding the principal. Ordinarily, an agent who executes a contract on behalf of a disclosed principal does not bind herself individually absent an express agreement to do so.
Takeaway. In support of its holding that only the principal was bound by the covenant, the Appellate Court cited several Georgia court decisions. But none involved interpretation of a contract provision purporting expressly to bind a principal and “its agents.” Further, reading the contractual provision “neither Seller nor its agents will” as meaning, simply, “Seller will not,” the words “nor its agents” appear to have been given no force or effect.
The ruling undoubtedly would have been different if the parties had identified each of the persons they intended to include within the reference in the covenant to the seller’s “agents,” and had insisted that all of those persons agree unequivocally to be bound by the covenant.