In 2009, the Georgia General Assembly enacted legislation substantially changing Georgia law on employment-related restrictive covenants, but the legislation provided that it would not become effective until the Georgia Constitution was amended to authorize it. Georgia voters approved such a constitutional amendment on November 2, 2010. A controversy has recently developed, however, about when the restrictive-covenant legislation will be effective and when employers wishing to take advantage of the new law should consider having new restrictive-covenant agreements signed.
The legislation states that it will become effective the day after adoption of the constitutional amendment that authorizes it. Although the constitutional vote was November 2, some claims are being made that the amendment will not take effect until January 1, 2011, thus making the effective date of the legislation January 2, 2011 instead of November 3, 2010. At least one legislative official has now advised that, to be prudent, employers should delay until the later date.
As a result of this controversy, the safest course would be for employers considering entering into new agreements with employees containing restrictive covenants to wait until at least January 2, 2011 to seek to obtain the signatures of employees on new agreements.
Employers should also be aware that a court challenge is expected to determine whether the authorizing constitutional amendment was validly adopted.
The highlights of the new legislation include the following:
- Standards for Restrictive Covenants. In the past, restrictive-covenant agreements have been found to be void and unenforceable because they did not adequately describe the types of activities prohibited or the geographic area of the restraint. Under the new law, “any description that provides fair notice of the maximum reasonable scope of the restraint shall satisfy [the] requirement [for a description], even if the description is generalized or could possibly be stated more narrowly. . . .” With regard to a post-employment covenant, a “good faith estimate of the activities, products, and services, or geographic areas that may be applicable at the time of termination shall also satisfy” the requirement of a restriction. This gives the drafters of such agreements and the employers seeking to enforce them considerably greater breathing room.
- Confidential Information. The new law also covers the protection of confidential information. Traditionally in Georgia, agreements protecting confidential information had to have a reasonable time limit unless the confidential information also qualified as a trade secret. The new law contains no time-limitation requirement, allowing employers to protect confidential information as long as it remains truly confidential.
- Presumptions As to Reasonable Time Limits. The new law will continue to require that restrictive covenants be reasonable as to time, activities covered, and geographic scope, and a customer restriction will continue to be an acceptable substitute for a geographic limitation on solicitation. However, a major question under Georgia law in the past has been what constitutes a reasonable time limit on a restrictive covenant. The new law provides guidance on this question. Rebuttable presumptions are created as to the appropriate time limit.
- The Ability of Courts to Change Defective Agreements.The new law will allow courts to “blue pencil” or edit defective restrictive-covenant provisions to make them enforceable, provided the courts do not make those provisions less favorable to the employee. The new law also changes a long-standing court-made rule dictating that any defect in a noncompetition or nonsolicitation covenant in an employment agreement (other than an agreement entered into in connection with the sale of a business) rendered other restrictive covenants in the same agreement unenforceable. Under the new law, a defect in a restrictive-covenant provision that cannot be remedied by blue-penciling or judicial modification will not invalidate otherwise valid restrictive covenants elsewhere in the same agreement.
The new Georgia law on restrictive covenants may provide an opportunity for employers in the state to change their agreements with employees in ways that are more advantageous to the employer. For at-will employees (that is, employees who are not employed for a fixed period of time), the continuation of at-will employment will provide adequate consideration for a new restrictive-covenant agreement. For Georgia employees with fixed-term employment contracts, the employer will have to provide additional consideration (that is, something of value) to support a new restrictive-covenant agreement.
The safest course for Georgia employers is to seek to obtain new agreements on or after January 2, 2011. Further, even under the more favorable terms of the new law, counsel should be consulted about the drafting of any such agreements.