Restrictive Covenants - GA Noncompetes (9-20-13)

Restrictive Covenants in GeorgiaMajor Changes Regarding Noncompetition, Nonsolicitation & Confidentiality Agreements

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Legal Disclaimer

This presentation is not legal advice, and is intended solely for information and educational purposes. As this presentation will demonstrate, restrictive covenants fall within a complex area of law requiring analysis of the specific facts and circumstances applicable to the specific parties and business interests to be protected. If you are contemplating entering into an agreement containing restrictive covenants or any legal transaction, you should consult an experienced Business Attorney who can provide you with the advice that you need, for your specific circumstances. Incorrect or inadequate documentation can have serious ramifications for all parties involved.



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GA Constitutional Restrictions

• Article III Legislative Branch, Section VI Exercise of Powers, Paragraph V(c) Specific Limitations, of the Georgia Constitution provides that: 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, or encouraging a monopoly, which are hereby declared to be unlawful and void.



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GA Courts & Competition• For this reason, Georgia courts developed common law (case law) that

“disfavored restrictive covenants.” See Convergys Corp. v. Kenner, 582 S.E.2d 84, 85–86 (Ga. 2003).

• The reasonableness of a restrictive covenant is generally a question of law for the court, and covenants must be reasonable in time (term), territory (geographic restriction) and scope of activities. See Orkin Exterminating Co. v. Walker, 307 S.E.2d 914, 916 (Ga. 1983).

• A choice-of-law clause is generally enforceable in Georgia. See Carr v. Kupfer, 296 S.E.2d 560, 562 (Ga. 1982). Because of the difficulty in enforcing restrictive covenants under Georgia law, contract parties often chose the law of another state to govern the interpretation of the restrictions.

• But, a Georgia court will not enforce a choice-of-law provision when the application of foreign law would violate Georgia’s public policy. See Nasco, Inc. v. Gimbert, 238 S.E.2d 368, 369 (Ga. 1977). Georgia’s courts refused to enforce a choice-of-law clause when it would validate a restrictive covenant that was invalid under Georgia law. See, e.g., Convergys Corp., 582 S.E.2d at 85–86.



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Constitutional Amendment

• In 1990, the Georgia General Assembly enacted legislation to alter and codify restrictive covenants law in the state.

• However, in 1991, the Georgia Supreme Court held that the General Assembly’s enactment of the noncompetition statute was unconstitutional, because it violated Article III of the Georgia Constitution “inasmuch as it is one that authorizes contracts and agreements which may have the effect of or which are intended to have the effect of defeating or lessening competition or encouraging monopoly.” The Court held that the Constitution forbade the Georgia General Assembly from authorizing restrictive covenants. See Jackson & Coker, Inc. v. Hart, 405 S.E.2d 253, 254 (Ga. 1991).

• To avoid a similar outcome, the General Assembly not only passed House Bill 173 governing restrictive covenants, but also voted to place a proposed Constitutional Amendment on the November 2, 2010 ballot that would ensure that the new law could be implemented.



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Constitutional Amendment

• Stated Purpose: The General Assembly finds that reasonable restrictive covenants contained in employment and commercial contracts serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing businesses within the state. Further, the General Assembly desires to provide statutory guidance so that all parties to such agreements may be certain of the validity and enforceability of such provisions and may know their rights and duties according to such provisions.

• Ballot Initiative on November 2, 2010, asked voters: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?” Who could vote “No” to that, right?

• Because a majority of voters voted “Yes,” the amendment was approved and HB 173 (already passed by the General Assembly in 2009 prior to the Ballot Measure) was signed by the Governor.



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Not so fast!• The Constitutional Amendment authorizes the Georgia legislature to enact

legislation articulating rules regarding the enforcement of noncompetition covenants and other restrictive covenants. In anticipation of the passage of the Constitutional Amendment, the Georgia legislature enacted HB 173 in 2009, which set forth the new rules and which was designed by its terms to go into effect "on the day following the ratification" of the Constitutional Amendment.

• The drafters of the statute assumed that the new statute would go into effect on November 3, 2010, the day after the election (November 2, 2010). However, the 2010 legislation that authorized placing the Constitutional Amendment on the ballot was silent as to its effective date.

• Therefore, under the default rules regarding the effective dates for Constitutional Amendments (that fail to state an effective date), the Constitutional Amendment did not become effective until January 1, 2011.

• Because the GA Legislature enacted legislation regulating restrictive covenants (2009) prior to the effective date of the Constitutional Amendment (1-1-11), guess what happened?!



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Unconstitutional! Do-Over• The decision of the Eleventh Circuit Court of Appeals in June 2012 in Becham v.

Crosslink Orthopaedics (No. 11-14495, Unpublished) answered the single biggest question surrounding Georgia’s new law of restrictive covenants: When did it actually go into effect?

• The Eleventh Circuit Court of Appeals held that May 11, 2011, the day that Governor Nathan Deal signed re-submitted legislation (HB 30) passed by the Georgia legislature in the spring 2011 session, which re-enacted the new law that was originally passed in 2009 (after the Constitutional Amendment became effective and after the legislation was re-enacted and signed into law).

• IMPORTANT: Many employers with restrictive covenant agreements dated between November 3, 2010, and May 10, 2011, presumed that the new law would apply. According to Becham, that presumption is wrong. Employers with any restrictive covenant agreements that have an effective date prior to May 11, 2011, should consider replacing those agreements with new agreements that will benefit from the new law.



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http://www.troutmansanders.com/files/upload/Becham_Decision.pdf


FINALLY! Certain Uncertainty• Despite the legislative controversy surrounding the passage and effective date

of the bill (HB 173; Replaced with HB 30), the Georgia Restrictive Covenants Act (RCA) O.C.G.A. § 13-8-50, et seq. finally became effective on May 11, 2011 when Governor Deal signed House Bill 30. Although some controversy still remains regarding the effective date of the new RCA, the following is clear:

1. Restrictive Covenant Agreements entered into before November 3, 2010, are governed by the old Georgia common law, which was set forth in court decisions;

2. Restrictive Covenant Agreements entered into after May 11, 2011, will be governed by the new RCA; and

3. Restrictive Covenant Agreements entered into on or after November 3, 2010 through May 11, 2011, will be subject to legal interpretation as to whether the old law or the new RCA applies.



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Major ChangesThe new RCA represents a dramatic change from the old Georgia common law, which was not favorable to employers attempting to enforce restrictive covenants against former employees. Among other changes, the new RCA:

1) creates statutory presumptions under which courts must presume that restraints of 2 years or less in duration are reasonable and that restraints of more than 2 years are unreasonable;

2) allows, (but does not require), Georgia courts to “blue pencil” or modify an otherwise overly-broad provision or covenant to make it enforceable, (under the prior law, an overly-broad provision would have made the entire agreement unenforceable);

3) allows courts to evaluate non-solicitation covenants and non-competecovenants separately and to enforce one without regard to enforceability of the other;



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Major Changes (Con’d)The new RCA (con’d):

4) contains a definition of “Confidential Information,” which eliminates some uncertainty as to what constitutes “confidential information;”

5) contains no requirement of a time limit for the protection of “confidential information,” which is similar to the protection provided for trade secrets;

6) provides that non-compete provisions (as distinguished from non-solicitation and non-disclosure covenants) may be enforced ONLY against employees who:

– customarily and regularly solicit customers;

– regularly engage in making sales, obtaining orders, or contracts;

– perform specified management duties as defined by the new RCA, (which definition is similar to the FLSA’s definition of the executive exemption: manages a division, directs 2 or

more employees, can hire/fire, promote, etc.);

– perform duties of a “key employee,” as defined by the RCA; or

– perform duties of a professional, as defined by the RCA, (which definition is similar to the FLSA’s definition for the professional exemption: advanced knowledge in a field of science or learning, specialized intellectual instruction or requiring invention, imagination, originality,

or talent in a recognized field of artistic or creative endeavor)



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Major Changes (Con’d)The new RCA (con’d):

7) applies only to the following individuals and entities:

– employers and employees (the definition of employee may include independent contractors, depending on the situation);

– distributors and manufacturers,

– lessors and lessees;

– partnerships and partners;

– franchisors and franchisees;

– sellers and purchaser of a business or commercial enterprise; or

– two or more employers.



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Presumptions:1) For covenants being enforced against a former employee, a Georgia court will

presume that a covenant of 2 years or less is reasonable and more than 2 years is unreasonable.

2) For covenants being enforced against a current or former distributor, dealer,franchisee, lessee of real or personal property, or licensee of a trademark, trade dress, or service mark, a court will presume that a covenant of 3 years or less is reasonable and more than 3 years is unreasonable.

3) For covenants being enforced against an owner or a seller of all or a material part of business (including assets; shares; partnership, membership, equity interest; profit participation), a court will presume that a covenant of 5 years or less or a covenant for the period of time during which payments are being made to the owner or seller as a result of any sale is reasonable. A court will presume unreasonable a covenant that is the longer of (a) more than 5 years or (b) more than the period of time during which payments are being made to the owner or seller as a result of any sale.



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Presumptions (con’d)• Each of the foregoing presumptions can be rebutted with evidence showing

that the time period is unreasonable in a particular case. But these presumptions should provide a yardstick that will be upheld by the court in the vast majority of circumstances.

• Under the new law, in determining the reasonableness of a restrictive covenant that limits or restricts competition during the course of an employment or business relationship, a Georgia court will presume that a time period equal to or measured by the duration of the parties’ business or commercial relationship is reasonable.

• Under the new law, whenever a description of activities, products, services, or geographic areas is required, any description that provides fair notice of the maximum reasonable scope of the restraint shall satisfy such requirement. This is true even if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters. This is an important change from the current restrictive covenant law.



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Scope of Activities (con’d):• Under the old common law, a restrictive covenant must narrowly and precisely

define the activities, products, services, and geographic areas applicable to the covenant consistent with the company’s actual business and the employee’s actual work at the time the covenant is signed.

• Under the new law, for example, in the case of a post-employment covenant entered into prior to termination, any good faith estimate of the activities, products, services, or geographic areas that may be applicable at the time of termination shall be adequate, even if such estimate is capable of including or ultimately proves to include extraneous activities, products, services, or geographic areas.

• The post-employment covenant shall be construed ultimately to cover only so much of such estimate as relates to the activities actually conducted, the products and services actually offered, or the geographic areas actually involved within a reasonable period of time prior to termination.



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Scope of Activities:• Under the old common law, the employer generally had to limit the

territory to those areas where the employee was working on behalf of the employer at the time the agreement was signed.

• If the employee’s territory expanded over time, the employer and employee were forced to sign a new agreement in order to cover the expanded territory.

• Under the new law, the employer may include the phrase “the territory where the employee is working at the time of termination” or similar language and it shall be considered sufficient as a description of geographic areas if the person or entity bound by the restraint can reasonably determine the maximum reasonable scope of the restraint at the time of termination.



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Blue Pencil:• Under the old common law in Georgia, a restrictive covenant entered into by

an employer and employee that is deemed by a court to be unreasonable in any way is thrown out in its entirety (practitioners generally regarded Georgia as second only behind California in difficulty enforcing restrictive covenants).

• Georgia common law only permitted courts to “blue-pencil” or modifycovenants when such covenants were entered into in a sale of business or other non-employment context.

• Under the new RCA, as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties, the court may modify the provision to grant only the relief reasonably necessary to protect the legitimate business interests and to achieve the original intent of the contracting parties to the extent possible.

• This is a VERY substantial change from the common law. The new law brings Georgia into alignment with most other states in permitting courts to modify covenants that the courts find to be overly broad.



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Non-Solicitation:• Under the new RCA, employers can enforce agreements that limit employees

for a stated period of time following termination from soliciting or attempting to solicit business from customers (including certain prospective customers) with whom the employee had material contact during his or her employment for purposes of providing products or services that are competitive with those provided by the employer’s business.

• No express reference to a geographic area or the types of products or services considered to be competitive is required for the restraint to be enforceable.

• Pursuant to the statute, any reference in the parties’ agreement to a prohibition against “soliciting or attempting to solicit business from customers” or similar language shall be adequate for such purpose.

• A court should narrowly construe such language 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 and services that are competitive with those provided by the employer’s business.



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Non-disclosure:• Under the common law, at least for covenants entered into in an employment

context, provisions limiting the disclosure or use of confidential information must be limited to a period of time specified in the provision.

• The new RCA attempts to address this oddity in Georgia law.

• RCA provides: “Nothing in this article shall be construed to limit the period of time for which a party may agree to maintain information as confidential or as a trade secret, or to limit the geographic area within which such information must be kept confidential or as a trade secret, for so long as the information or material remains confidential or a trade secret, as applicable.”

• While this language still leaves some question as to whether parties must include a time period in the non-disclosure provision, this language will likely be interpreted to eliminate any requirement that a specific time period be stated in order to make a confidentiality provision enforceable. [Yet the “for so long as the information or material remains confidential or a trade secret” sets the battleground and suggests that employers should implement a good non-disclosure policy and take commercially reasonable measures to protect the information].



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Enforcement:

• Under the new RCA, generally it will be easier for businesses to draft, negotiate, and enforce agreements with their employees and other business partners to protect key information, customer relationships, and talent.

• For this reason, the law generally is considered “pro business.”

• Flip Side: Georgia businesses have grown accustomed to a legal environment that has enabled them to hire key employees from competitors by going to court, or threatening to go to court, to invalidate such employees’ noncompetition agreements. Under the new RCA, businesses will find this practice more difficult for employees subject to such agreements.



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Enforcement & Disputes:Despite the Georgia General Assembly’s best efforts to provide additional clarity as to the rights of parties to enter into and have enforced restrictive covenants in Georgia, substantial ambiguities are present in the legislation that will need to be sorted out over time such as:

– Noncompetition Agreements: “Key Employees or Professionals” – the first volley may focus upon whether the employees duties or specialized skillset permits a classification of the employee such that a non-competition covenant would be permissible at all (customer non-solicitation provisions and nondisclosure of confidential information provisions are not limited to these categories of employees)

– Customarily and Regularly: This language forms the battle lines for a trial – a jury or fact-finder could be required to review the evidence in the case (including historical operations because of the “customarily” language) to determine whether the covenant may be enforced against the class of employee

– Reasonableness: The reasonableness analysis is still applicable, but the presumptions in RCA coupled with the discretion of the court to modify the covenant, should prove helpful to enforcement

– Burden of Proof: The burden of proof is upon the party seeking to enforce



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Questions

It’s time to review your agreements and protections. Please call us if you have questions:

Preston C. Delashmit, ChairmanDelashmit Law Group LLC

975 Cobb Place Blvd.Suite 101

Kennesaw, Georgia 30144404.277.9767

[email protected]/in/PrestonDelashmit



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