- Georgia's New Restrictive Covenant Act Impact on Tech Companies/Entrepreneurs - Part 1
- June 4, 2010 | Authors: Brian M. Harris; John C. Yates
- Law Firm: Morris, Manning & Martin, LLP - Atlanta Office
The Georgia legislature has approved a proposed constitutional amendment to give effect to House Bill 173 (the “Georgia Restrictive Covenant Act”), which would dramatically change the law in Georgia with regard to the enforceability of restrictive covenants in employment agreements.
This is a two part series addressing important questions for technology companies and entrepreneurs in Georgia (and any company with employees in our state). In this Part 1, we address general questions relating to the impact of the law. In Part 2, we’ll look at specific sections of the Act and practical pointers for drafting restrictive covenants in employment agreements.
When does the Georgia Restrictive Covenant Act become law in Georgia?
Answer: Not until voters approve the constitutional amendment on the ballot in Georgia for the November 2nd election.
What is the wording of the amendment that Georgia voters will be asked to approve or reject?
Answer: Georgia voters will be asked this question: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?” The actual text of the proposed amendment revises Article III, Section VI, Paragraph V of the Constitution as follows:
"(c)(1) 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 is hereby declared to be unlawful and void. Except as otherwise provided in subparagraph (c)(2) of this paragraph, 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 is hereby declared to be unlawful and void.
(2) The General Assembly shall have the power to authorize and provide by general law for judicial enforcement of contracts or agreements restricting or regulating competitive activities between or among:
(A) Employers and employees;
(B) Distributors and manufacturers;
(C) Lessors and lessees;
(D) Partnerships and partners;
(E) Franchisors and franchisees;
(F) Sellers and purchasers of a business or commercial enterprise; or
(G) Two or more employers.
(3) The authority granted to the General Assembly in subparagraph (c)(2) of this paragraph shall include the authority to grant to courts by general law the power to limit the duration, geographic area, and scope of prohibited activities provided in a contract or agreement restricting or regulating competitive activities to render such contract or agreement reasonable under the circumstances for which it was made."
What’s the impact of the proposed amendment?
Answer: If a majority of the Georgia voters vote “yes” on November 2nd, then legislation signed by Governor Perdue on April 29, 2009 that vastly broadens the permissible scope of contractual restrictions on competitive activity will become effective immediately.
What’s the current state of the law relating to non-compete provisions and restrictive covenants in Georgia?
Answer: Currently, Georgia courts enforce restrictive covenants on a case-by-case basis, without statutory standards for determining enforceability. In the employment context, Georgia Courts strictly scrutinize such covenants, which must be narrowly crafted to be enforceable, and have refused to permit “blue penciling” (editing by the court).
What’s the impact under current law if a restrictive covenant in an employment agreement is held to be unenforceable; does it impact other provisions?
Answer: Even a minor flaw in a restrictive covenant can render the entire covenant unenforceable. Moreover, if one covenant is unenforceable, it can prevent enforcement of other covenants in the same agreement that might otherwise be enforceable. Current case law therefore makes drafting enforceable employment covenants particularly challenging for Georgia businesses.
Generally, how would the Georgia Restrictive Covenant Act change the current law in Georgia relating to restrictive covenants?
Answer: The new law would grant Georgia courts the power to “blue pencil” (i.e. edit) restrictive covenants, “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 law also defines common terms, which definitions appear to expand the permissible scope of certain covenants.
What’s an example of how the new law could broaden the scope of enforceable covenants?
Answer: For example, a customer non-solicitation covenant limited to those customers with whom the employee had “material contact” would apply not only to those customers or potential customers with whom the employee dealt, but also to those “about whom the employee obtained confidential information in the ordinary course of business as a result of such employee’s association with the employer.”
In addition, non-solicitation covenants could permissibly restrict a former employee from merely accepting business from customers. Current case law prohibits such restrictions.
Under current law, time limits on the length of restrictive covenants must be very limited and there is no uniform standard; how is this altered by the Georgia Restrictive Covenant Act?
Answer: The Act sets presumptively reasonable time limits, allowing for enforcement against former employees for up to two years; against a distributor, dealer, franchisee, lessee of property, or licensee of a trademark for up to three years; and against the seller of a business for up to the longer of (a) five years, or (b) the time during which purchase payments are being made to the seller.
What is a main policy reason for enacting the new Georgia Restrictive Covenant Act?
Answer: The new law’s drafters believe that establishing standards for restrictive covenants will make it easier for businesses to draft enforceable covenants that can survive a court challenge, resulting in fewer restrictive covenants lawsuits.
What is the downside of passing the Georgia Restrictive Covenant Act?
Answer: Critics warn that the law will make it more difficult for Georgia businesses to recruit desired talent, and litigation — although perhaps less frequent — may prove much more costly because the dispute will focus on fact intensive issues such as the actual services performed by the employee, the geographic territory within which the services were provided, and whether and to what extent the former employer actually competes with the new employer. Under current law, the dispute usually focuses on the language of the covenant itself.
Does the Georgia Restrictive Covenant Act apply only to new contracts (as opposed to agreements that are already in effect)?
Answer: Yes. The new law would apply to those agreements entered into on or after the law’s effective date; existing agreements would still be interpreted and enforced under current case law. Given the dramatic change in the permissible scope of covenants under the new law, and the greater ease with which such covenants may be enforced, employers will likely be preparing to implement new contracts with employees that are designed to extract maximum benefit from the changes.
PART 2 will address key questions relating to specific sections of the Georgia Restrictive Covenant Act and practical pointers for drafting restrictive covenants in employment agreements.