While the federal Defend Trade Secrets Act is garnering a great deal of attention, it’s worthwhile to remember that state law remains critically important in drafting restrictive covenants. This week, May 11, 2016, marks the fifth anniversary of Georgia’s revised trade secrets act, which fundamentally recast how courts view and enforce restrictive covenants.
Prior to enactment of the new law, Georgia was one of the most difficult states in which to enforce restrictive covenants against employees. As a result, before the revised act, employees sometimes moved to Georgia to take advantage of Georgia’s extremely pro-employee public policy. (In fact, some lawyers commented — only half -jokingly — that their clients should go to Las Vegas to get out of their marriage and go to Atlanta to get out of their non-compete.)
The new act implemented a sea change in Georgia’s public policy towards restrictive covenants. The new act substantially liberalizes drafting requirements for restrictive covenants in Georgia (which, before the new act, were governed by a series of arcane court decisions that imposed a variety of highly technical drafting requirements). Perhaps most notably, the new act permits Georgia courts to “blue pencil” or partially enforce overbroad restrictive covenants (though the Georgia courts have had few opportunities to exercise that new power). As a result, with enactment of the new law, Georgia is one of the more favorable jurisdictions for enforcement of restrictive covenants in employment agreements.
In our one-year anniversary post on the act’s passage, we made three predictions: (1) Georgia courts would be considerably more likely to enforce restrictive covenants under the new act than they had under prior Georgia law, (2) Georgia courts would “blue pencil” overbroad restrictive covenants, and (3) Georgia courts would continue to apply prior Georgia law to agreements that predate the new act. Five years later, the jury is still out. Few published or appellate decisions have examined the revised act. Although some trial courts have grappled with the act in recent years, there has not been enough time for agreements signed after May 11, 2011 to make their way into more than a handful of published or electronically-available decisions.
Nevertheless, one decision over the past few years, Cellairis v. Duarte, is particularly notable. That case (which we previously examined here as an illustration of the difficulties in drafting effective carveouts from arbitration provisions) suggests that courts are more likely to enforce restrictive covenants under the new law, just as we predicted four years ago.
In Cellairis, a franchisor sued a former employee who, at various times, worked as an officer, employee, and independent contractor. A 2014 franchise agreement between the franchisor and employee obligated the employee to refrain from owning or operating a competing business within 10 miles of any franchise operating as of the termination date. The franchise agreement also contained a two-year non-solicitation provision prohibiting the employee from soliciting any customer who the franchisee or the employee did business with in the two years preceding the agreement’s termination.
The franchisor moved for and obtained a preliminary injunction. The court sidestepped the employee’s multifaceted career with the franchisee by analyzing the restrictive covenants as if the employee worked only as an employee.
The court quickly found that a two-year restriction was “presumptively reasonable” under Georgia’s new act and brushed aside the employee’s attempts to argue that it was still unreasonable. The court also honored the new act’s position on geographic limitations; it held that a 10-mile radius from any franchise, even those that did not exist when the agreement was signed, was reasonable.
Unlike previous restrictive covenant decisions, the court did not limit the non-compete and non-solicitation to customers that the employee managed. This is a clear departure from pre-amendment Georgia law, which routinely struck down restrictive covenant agreements that were untethered from customers managed by the former employee.
Finally, the court found that the public interest now favored the entry of a preliminary injunction because “reasonable restrictive covenants . . . serve the legitimate purpose of protecting business interests and creating an environment favorable to attracting commercial enterprise to Georgia and keeping existing businesses within the state.” Formerly, the public interest element always weighed against imposing a preliminary injunction. This decision suggests a party moving for a preliminary injunction can always cite to public interest as a factor favoring preliminary injunctive relief because even overly broad restrictive covenants can be “blue penciled” to reasonable limitations on competition.
The Cellaris decision illustrates the profound impact that the new act has on restrictive covenants signed on or after May 11, 2011. Restrictive covenant agreements governed by pre-act law remain vulnerable. Employers with restrictive covenants signed before May 11, 2011 should sign new agreements to erase any doubts about which law governs. (Some decisions have found that pre-act restrictive covenants amended after May 11, 2011 are still governed by pre-act law.)
Employers should also feel more comfortable about seeking preliminary injunctive relief if they can present evidence that a former employee is violating a restrictive covenant. With the public interest on its side and a blue pencil in hand, courts seem less hesitant to impose preliminary injunctive relief — even though the federally governed standard for preliminary injunctive relief has not changed.
Finally, practitioners should look to federal Alabama and Florida decisions until Georgia state courts have established Georgia’s position on post-act restrictive covenants. The Cellaris court looked to Florida law to guide its analysis. Without any binding authority, these out-of-state decisions should serve as a rough proxy for how much evidence a district court wants to see before it grants preliminary injunctive relief.