On November 2, 2010, Georgia voters passed Amendment One, which changed the state Constitution to allow for sweeping reform of Georgia’s law concerning restrictive covenants. By amending the Constitution, Georgia was able to officially enact House Bill 173 (“H.B. 173”), which had previously been passed by the Georgia General Assembly and signed by Governor Perdue in 2009. The broad changes of H.B. 173 took effect immediately on November 3, 2010, and will have far-reaching implications for drafting and enforcing restrictive covenants in Georgia. Though H.B. 173 applies to all restrictive covenants, the new law most significantly affects employment covenants by providing clarity and allowing employers more leeway in drafting these agreements. These employer-friendly changes apply only to those restrictive covenants executed on or after November 3, 2010.
Historically, Georgia has been hostile to restrictive covenants, which include non-competition, customer nonsolicitation, employee non-recruitment and non-disclosure provisions. Before the passage of Amendment One, the Georgia Constitution specified that contracts restraining trade were illegal and void. Employers were therefore substantially limited in the duration, geographic area and scope of prohibited activities they could include in their employment agreements, and Georgia courts would subject these covenants to rigorous review in determining their reasonableness. As a result, a collection of complicated and sometimes counterintuitive rules developed over time, introducing significant uncertainty for employers and making it difficult to create and enforce meaningful employment covenants in Georgia. This difficulty has been exacerbated in recent decades by the modern business environment in which employers increasingly have national or global footprints.
Key Provisions of the New Georgia Restrictive Covenant Law
H.B. 173, which is now codified at O.C.G.A. § 13-8-50, et seq., attempts to resolve the previous uncertainties of restrictive covenant law in Georgia. The new law provides guidance to employers and others regarding the permissible parameters of restrictive covenants, as well as guidance to courts on how to interpret and enforce them. Listed below are some key general provisions of the new law:
- Perhaps most importantly, the statute allows for judicial modification of an otherwise overly broad covenant to make it enforceable. Previously, Georgia courts took an “all or nothing” approach, invalidating a restrictive covenant in its entirety if any part of it was found to be unreasonable. The new statute allows courts to uphold and enforce overly broad covenants either by removing unenforceable provisions in their entirety or enforcing provisions only to the extent that they are reasonable. O.C.G.A. §§ 13-8-51 (11)-(12), 13-8-53(d), 13-8-54(b).
- The statute only applies to employment covenants with executive employees; employees in possession of important confidential information; or employees with specialized skills or knowledge, or customer contacts or information. O.C.G.A. §§ 13-8-51(5), 13-8-52(a)(1).
- The statute provides guidance regarding the permissible time limits of restrictive covenants. Employment covenants of two years or less are presumed reasonable, while covenants of more than two years are presumed unreasonable. O.C.G.A. § 13-8-57.
- The statute defines the “legitimate business interests” that an employer may protect through restrictive covenants to include, without limitation, trade secrets, other valuable confidential information, substantial relationships with customers and venders, customer good will and extraordinary or specialized training. O.C.G.A. § 13-8-51(9).
A Side-by-Side Comparison of the Old and New Law
In order to appreciate the significance of the changes in the new statute, it is useful to compare some aspects of the previous Georgia common law and the new statutory law in relation to non-competition, non-solicitation and non-disclosure agreements.
Please see tables.
Given the dramatic sea change brought about by Georgia’s new restrictive covenant statute, employers are well advised to consult their counsel about making appropriate changes to agreements with incoming and current employees. Remember, the new law only applies to agreements entered into on or after November 3, 2010. Thus, if an employer wishes to avail itself to the new statute’s protections and guidance, it must execute new agreements with its current employees.