Many companies require their executives, sales/operations personnel and other key employees to sign non-compete, non-solicitation, and non-disclosure agreements (typically referred to as “restrictive covenants,” in legal parlance) to protect the company’s trade secrets and confidential operating information, including client and employee information and relationships, all of which are generally considered to be part of trade secrets. This is for the benefit of the company (and the remaining employees) to protect the company from unfair competition through the use of confidential information and trade secrets by the former employee (or his/her new employer).

Restrictive covenants may also be found in other agreements, such as sale-of-business, franchise, distribution, dealership, lease, license, broker, and representative/agent agreements.

Enforceability of those restrictive covenants has always been an “iffy” proposition in Georgia. The question was governed by case law only. Among other issues, an error in drafting could void the entire restrictive covenant, including non-compete, non-solicitation, and non-disclosure covenants, because the courts did not have authority to “blue pencil” (i.e., edit the restrictive covenant to make it enforceable), as is the case in many other states. Thus, attempted enforcement often led to no protection at all.

During the election held on Tuesday, November 2, 2010, the electorate voted to amend the State Constitution of Georgia in a way that made effective the next day, November 3, legislation relating to noncompetition covenants, namely HB 173 (the “Act”), passed in the 2009 session, and signed by the Governor that year.

Now, under the Act, restrictive covenants must still be reasonable (which was the test under the prior court decisions). However, the Act will permit courts to “blue pencil” restrictive covenants and provide certain safe harbors in covenant drafting to make them “reasonable” and, thereby, enforceable.

The full text of the Act can be found at: http://www.legis.ga.gov/legis/2009_10/fulltext/hb173.htm.1

Some of the salient provisions, in general terms, are as follows:

  • The Act does not apply to employees who lack selective or specialized skills, learning, or abilities or customer contacts, customer information, or confidential information; it does not permit post-term covenants for just any employee—post-term covenants are permitted only against certain employees whose duties are outlined in the Act.
  • The Act does apply to restrictive covenants in certain of those other types of non-employment agreements mentioned earlier.
  • In-term covenants are subject to easier standards to meet for enforcement.
  • Post-term covenants in the employment context (rather than in a sale-of-business context) for up to two years in duration are presumed reasonable (technically, subject to a “rebuttable” presumption—meaning a court can consider evidence that the covenant is “unreasonable”).
  • Post-term covenants in certain non-employment/non-sale-of-business contexts (including franchises, dealerships, distributorships, leases, among others) for up to three years in duration are presumed reasonable (technically, subject again to a “rebuttable” presumption).
  • Post-term covenants in the sale-of-business context for up to five years in duration (or the length of a purchase loan) are presumed reasonable (technically, subject again to a “rebuttable” presumption).
  • Courts cannot refuse to enforce the restrictive covenant on the ground that the person seeking such enforcement is a third-party beneficiary or assignee.
  • Courts may consider an “economic hardship” defense made by employees (not by sellers, franchisees, dealers, distributors, etc.).

The Act applies only to agreements signed on or after November 3, 2010. And, there will likely be court battles over the effectiveness of the legislation and its interpretation.

It is a matter of opinion as to the Act’s ultimate effect, of course, but it was intended to improve the certainty of enforceability of reasonable in-term and post-term restrictive covenants.

This is an executive summary of the Act and is not intended as legal advice. You should consult your legal counsel for more detail and as to whether to revise your employment agreements as a result of the changes effected by the Act.