As explained in a previous advisory, the effective date and overall validity of the Georgia General Assembly’s first attempt at passing a statute addressing the enforceability of restrictive covenants— House Bill 173 (H.B. 173)—was thrown into question in November 2010 when it became apparent that the General Assembly had failed to specify the effective date of the amendment to the Georgia Constitution that made the law constitutional. In the absence of an express effective date, the amendment became effective on January 1, 2011, while H.B. 173 stated that the statute would take effect the day following the ratification of the constitutional amendment, which was November 3, 2010. Thus, the law purported to take effect nearly two months before the enabling constitutional amendment, thereby causing significant confusion among lawmakers, attorneys and employers as to when H.B. 173 actually went into effect, or whether the law was valid at all.
In an effort to eliminate such confusion, the General Assembly passed—and on May 11, 2011, Governor Deal signed—House Bill 30 (H.B. 30), which substantially reenacted the original statute. The new statute, however, only applied to restrictive covenants signed on or after May 11, 2011, leaving as an open question whether the enforceability of covenants signed between November 3, 2010, and May 10, 2011, would be analyzed under H.B. 173 or under Georgia’s previous body of rigid common law rules. Most practitioners felt confident that covenants signed between November 3, 2010, and December 31, 2010—before the effective date of the enabling constitutional amendment—would continue to be analyzed under the old common law regime. There was less certainty, however, regarding the treatment of covenants signed between January 1, 2011, and May 10, 2011. Some believed that H.B. 173 sprang into effect on January 1, 2011, with the effectiveness of the constitutional amendment; therefore, covenants signed after this date would be analyzed under the original version of the statute (H.B. 173). Others, though, were concerned that Georgia courts might find that H.B. 173 was void ab initio, because it was unconstitutional when it went into effect and could not be saved by the subsequent effectiveness of the enabling amendment. In the face of this uncertainty, some Georgia employers waited until after May 11, 2011, to ask employees to sign new covenant agreements, but others went ahead and obtained new covenant agreements before H.B. 30 went into effect.
In a recent unpublished opinion,1 the U.S. Court of Appeals for the Eleventh Circuit squarely addressed the constitutionality of H.B. 173 and the related issue of whether covenants executed between November 3, 2010, and May 10, 2011, should be analyzed under H.B. 173, or whether they must be examined under the old common law rules. Relying on previous decisions from the Georgia Supreme Court, the Eleventh Circuit concluded that the constitutionality of the statute must be assessed at the time it went into effect (November 3, 2010); that it was unconstitutional on that date because the enabling amendment did not become effective until January 1, 2011; and that the subsequent effectiveness of the amendment did not alter the unconstitutional status of the statute. Thus, under Becham, only covenants executed on or after May 11, 2011, are to be analyzed under the new statutory covenant law. All previously executed covenants must be assessed under Georgia’s common law rules.
While it is theoretically possible that the Georgia Supreme Court or a different panel of the Eleventh Circuit (or the court sitting en banc) could reach a different conclusion if presented with this issue, unless and until that happens, employers should assume that the Eleventh Circuit’s holding in Becham is going to be the controlling word on the issue. Even though it is an unpublished opinion and therefore not a binding precedent, it is very likely that federal district courts will follow the holding, and it is also likely that state trial court judges will follow it, too.
As a result of Becham, any employers who drafted new covenant agreements in reliance on H.B. 173 and had their employees sign such agreements prior to May 11, 2011, should consult counsel about the most appropriate strategy for having employees sign another round of new agreements in order to get the employer-friendly benefits of the second (and constitutional) version of the Georgia covenant statute. While some of the court’s comments in Becham suggest that it might be possible to get treatment under the subsequent statute by having employees simply reaffirm in writing previously signed covenants, the much safer and more conservative approach will likely be to have employees sign new agreements rather than only reaffirming earlier agreements.