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GEORGIA’S NEW RESTRICTIVE COVENANTS
ACT
New Playing Field!New Game?
G. William Long IIIJohn G. Perry
Womble Carlyle Sandridge & Rice, LLP
©2012 Womble Carlyle Sandridge & Rice, LLPNot for distribution without permission.
The Playing Field The Playing Field (As I Found It)(As I Found It)
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O.C.G.A. § 13-8-2(Old version)
• “A contract which is against the policy of the law cannot be enforced. Contracts deemed contrary to public policy include . . .
Contracts in general restraint of trade.”
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Art. III, Sec. VI, Par. V(c) of the Constitution of Georgia of 1983
• “The General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition . . . , which are hereby declared to be unlawful and void.”
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The Playing Field (As I Found It)
Until now:• No helpful statute that provided any meaningful help.• Georgia law of restrictive covenants has developed
through hundreds of cases decided over many decades.• As of 1980, there were close to 200 cases.• At last count, there were close to 600 cases.• Taken together, give a pretty cohesive set of rules.• But not always consistent.• And who wants to read 600 cases to understand the
law?
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• Cases recognized several categories of covenants:
• Covenants ancillary to employment agreementsStrict scrutiny and no blue pencil
• Covenants contained in professional partnership agreements
More lenient scrutiny but no blue pencil• Covenants ancillary to sales of business
Most lenient scrutiny and blue pencil OK
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• Cases recognized 4 types of restrictive covenants:
– Noncompetition covenants
– Nonsolicitation of customers covenants
– Nonsolicitation of employees covenants (not specifically dealt with in new law, but presumably still allowed)
– Nondisclosure of confidential information covenants
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• Old law: No blue pencil. If anything wrong with a covenant, that entire covenant was thrown out, and if anything wrong with either of the first two, they both were thrown out.
• So the playing field was not pretty:
• Scores of nit-picky rules scattered among hundreds of cases
• Draconian results (invalidation of entire covenant) if even one of said nit-picky rules was violated
• Courts could throw curve balls
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Is this new law a big deal? Yes!
Completely changes the playing field regarding restrictive covenants:
• Makes them much easier to draft and to enforce• Provides for certain safe harbor presumptions and
rules of construction• Expressly permits certain provisions that rendered
covenants void under old law• Most importantly, permits (but does not require)
court to blue-pencil or edit a faulty covenant so as to make it enforceable
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Of course, the very dynamics of employee restrictive covenant situations often make them a “big deal.”
• High emotions
• High stakes
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Does the passage of the new law mean we can forget about the old law? No!
The new law is not retroactive.• It applies only to covenants “entered into” after the
effective date of the new law.• Covenants entered into prior to the effective date will
still be governed under the old law.• Recent cases have indicated that the courts are still
going to be as strict as ever in applying the old law, even though the new law involves a new public policy that expressly favors restrictive covenants.
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• New law clearly applies to covenants entered into on or after May 11, 2011
• Clearly does not apply to covenants entered in prior to November 3, 2010
• Probably does not apply to covenants entered into prior to January 1, 2011
• Still unclear for covenants entered into between January 1 and May 11, 2011
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When might you need to worry about the old law?
• If you are asked to assess the chances of enforcing a covenant against a defecting employee
• If you are asked to do an analysis of your company’s outstanding covenants
• If your company desires to hire someone who is under a restrictive covenant with a former employer
• The old law will govern many of these because they were entered into prior to the effective date.
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Time Presumptions (Rebuttable)
• Employee covenants: 2 years
• Distributor, dealer, franchisee, lessee, and licensee covenants: 3 years
• Owner or seller of all or part of business: longer of 5 years or duration of payout period
• Longer time periods will be presumed unreasonable
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Some Limitations of New Law
• Noncompete (as opposed to other restrictive covenants) cannot be used against lower level employees
• “Confidential Information” limited to information obtained by employee “as a consequence of” relationship with employer
• Court can consider the economic hardship on employee in deciding if covenant is reasonable
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Construction v. Modification(Mandatory v. Permissive)
• “A court shall construe a restrictive covenant to comport with the reasonable intent and expectations of the parties.”
• If covenant does not comply with new act, “the court may modify the restraint . . . .”
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Sample Rules of Construction
• “Any reference to a prohibition against ‘soliciting or
attempting to solicit business from customers’ or similar language shall be adequate for such purpose and narrowly construed to apply only to: (1) such of the employer's customers, including actively sought prospective customers, with whom the employee had material contact; and (2) products or services that are competitive with those provided by the employer's business.” O.C.G.A. § 13-8-53(b)
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Sample Rule of Construction:• “In case of a postemployment covenant entered into prior to
termination, any good faith estimate of the activities, products, or services, or geographic areas, that may be applicable at the time of termination shall also satisfy such requirement, even if such estimate is capable of including or ultimately proves to include extraneous activities, products, or services, or geographic areas. The postemployment covenant shall be construed ultimately to cover only so much of such estimate as relates to the activities actually conducted, the products or services actually offered, or the geographic areas actually involved within a reasonable period of time prior to termination.” O.C.G.A § 13-8-53(c)(1)
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Blue Pencil
• Examples of Georgia blue penciling (in sale of business cases where blue pencil is allowed) under old law:
– “The ‘blue pencil’ marks, but it does not write.”– Blue penciling cannot cure vagueness.– Example: “75 mile radius of the Metro Atlanta,
Georgia, area” too vague to enforce, and could not be cured by blue pencil even though blue penciling was allowed since involved sale of business.
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Some Unanswered Questions
• Blue pencil: – Write or strike?– Drafting concerns
• Gap period (Jan. 1 – May 11, 2011):– Old law or new law (i.e., the old new law)?
• Is “reaffirmation” of old agreement enough to trigger application of new law?
• Will the new act itself survive challenges?
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New Game?• New act may have broad impact on employee
recruitment and retention.• In past, general belief that Georgia covenants are
“impossible to enforce” or “not worth the paper they are written on.”
• Thus, many companies have not bothered to use them, and they were reluctant to try to enforce them even if they had them.
• New act is designed to change that view and attract new businesses to Georgia. Almost all covenants will be enforceable, at least to some extent.
• More companies will use them, and they will be less hesitant in enforcing them.
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• Assuming that Georgia’s new law will bring more businesses into the state of Georgia (which it is supposed to do), those businesses will seek to hire Georgia employees within their industries. That will often mean hiring employees from their competitors (who could be YOU!).
• They may thus focus their recruiting efforts on employees who either have no agreement, or who have agreements entered into under the old law and are less likely to be enforceable.
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Take Away:
• If your company is one that does not make use of restrictive covenants under the new law, then you will be a prime target for poaching by your competitors seeking to hire experienced employees who are not encumbered by enforceable agreements, putting you in a disadvantageous position.
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Questions and Comments?
• What changes do we need to make to our employment agreements now?
• Do we need to have employees sign new agreements if they signed agreements prior to the effective date of the change in the law?
Bill Long
Womble Carlyle
404-888-7443
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John Perry
Womble Carlyle
404-879-2441
