The Nov. 2, 2010 Election Could Cause Sweeping Changes to Georgia Law Regarding Restrictive Covenants

Georgia voters will have the chance to directly impact the use of non-competes by businesses that operate in the state. A recent, proposed change to Georgia law regarding such restrictive covenants will become effective only upon the adoption of an amendment to the Georgia Constitution, which will be submitted to Georgia voters during the Nov. 2, 2010 general election.

Georgia law regarding post-employment restrictive covenants (non-compete and nonsolicitation agreements) makes enforcement of covenants very difficult. Even covenants drafted by experienced attorneys are often declared unenforceable by the Georgia courts and the standards for enforcement remain a somewhat shifting target. The enforcement issue creates problems for businesses and employees in assessing their legal rights and responsibilities.

The New Act

The Georgia General Assembly adopted an Act which is intended to clarify and codify Georgia law regarding restrictive covenants. In adopting the Act, the General Assembly found that reasonable restrictive covenants "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 business within the state." The Act is intended to provide guidance to parties to restrictive covenants so that everyone may "know their rights and duties." The Act further instructs the Georgia courts to interpret restrictive covenants in accordance with the "reasonable intent and expectations of the parties," but goes further to require that such interpretation be "in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement."

If voters approve the ballot question and the Act becomes effective, it will redefine Georgia restrictive covenant law in many different ways. Key changes include:

Blue-Penciling

Under current Georgia law, the courts are not permitted to modify or redraft (blue-pencil) an unenforceable restrictive covenant unless it was executed in connection with the sale of a business. So, if any portion of a restrictive covenant was deemed to be unenforceable, the covenant would fail; there is no means to salvage the agreement and impose reasonable limits on a former employee's competition or solicitation of customers. The new Act would change Georgia law and authorizes a court to "modify a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties." This important change makes the enforcement of restrictive covenants far more likely in Georgia and changes the nature of any legal dispute from "whether" a covenant is enforceable or unenforceable to "under what terms and conditions" the covenant is enforceable.

Scope of Prohibited Activities, Products, or Services

Under current Georgia law, courts have struck down restrictive covenants because they did not identify with sufficient particularity the types of competitive activities, products, or services the restricted party was prohibited from engaging in or selling. The Act seeks to avoid these attacks by providing that any description of competitive activities, products, or services shall be satisfactory if it "provides fair notice of the maximum reasonable scope of the restraint…even if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters." When a restrictive covenant is entered into prior to termination, the Act further provides that "any good faith estimate" of the competitive activities, products, or services that may be applicable at the time of termination is satisfactory even if it mistakenly includes extraneous matters. Such a covenant is to be enforced by the courts based on activities "actually conducted" and products and services "actually sold" within a reasonable time of termination.

Time Limitations

The Act instructs Georgia courts to presume certain time limitations in restrictive covenants to be "reasonable" and, therefore, enforceable unless proved otherwise. For example, a two year or less restrictive covenant against a former employee (not involving the sale of a business) beginning on the date of termination is presumed to be reasonable under the Act. A restriction for more than two years is presumed unreasonable. Restrictive covenants of three years or less involving distributors, dealers, franchisees, lessees, licensees (not involving the sale of a business) are presumed reasonable under the Act. Covenants longer than three years are presumed unreasonable. In cases involving the sale of a business, the courts shall presume a restraint the longer of: (i) five years or less, or (ii) the period of time during which payments are being made to the seller to be reasonable. Any longer restraint is presumed to be unreasonable under the Act.  

Prospective Application Only

The Act only applies to contracts entered into on or after the adoption of the constitutional amendment. All contracts with restrictive covenants entered into before Nov. 2, 2010, will be governed by pre-existing Georgia law which contains many obstacles to enforcement. In the event of passage of the constitutional amendment, therefore, businesses should very seriously consider entering into new contracts with their employees or other contracting parties so as to take advantage of the provisions of the Act.

Conclusion

There are a number of other important changes to Georgia's restrictive covenant law in the new Act. Whether those changes, as well as the changes discussed above, are important in any particular case depends on the facts and circumstances involved. Moreover, in the event the Georgia Constitution is amended in the Nov. 2, 2010 General Election and the Act becomes effective, businesses throughout Georgia should have legal counsel familiar with this complicated area of law review and revise their restrictive covenants agreements and any employment agreements containing restrictive covenants.

Finally, in the meantime, existing Georgia law regarding restrictive covenants will continue to apply. It will remain important for Georgia businesses and employees to consult experienced counsel to help assess and protect their respective rights in the interim, as well.