On Nov. 2, 2010, Georgia voters adopted a constitutional amendment which triggered the effectiveness of a new law that makes sweeping changes to the law on restrictive covenants. Georgia’s law before Nov. 2 made restrictive covenants notoriously difficult to enforce. The new law has been written so as to make the enforcement of restrictive covenants easier and more predictable – a goal of virtually all businesses. However, the new law should be considered a call to action because it only applies to contracts entered into on or after Nov. 2, 2010. All contracts with restrictive covenants entered into before Nov. 2, 2010, will be governed by pre-existing Georgia law which contains many obstacles to enforcement. Georgia courts have traditionally held that continued employment of an employee is sufficient consideration to support a new restrictive covenant agreement. Businesses might want to consider, therefore, entering into new contracts with their employees so as to take advantage of the provisions of the new law.
As we alerted you in October, the new law has now redefined Georgia restrictive covenant law in many ways. Key changes include:
Under the old Georgia law, the courts were not permitted to modify or redraft (blue-pencil) an unenforceable restrictive covenant unless it was executed in connection with the sale of a business. The new law changes Georgia law to authorize a court to “modify a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” This important change makes the enforcement of restrictive covenants far more likely in Georgia and may change the nature of any legal dispute from “whether” a covenant is enforceable or unenforceable to “under what terms and conditions” the covenant is enforceable.
Scope of Prohibited Activities, Products, or Services
Under the old Georgia law, courts have struck down restrictive covenants because they did not identify with sufficient particularity the types of competitive activities, products, or services the restricted party was prohibited from engaging in or selling. The new law changes Georgia law so as to provide that any description of competitive activities, products, or services shall be satisfactory if it “provides fair notice of the maximum reasonable scope of the restraint... even if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters.”
In addition, when a restrictive covenant is entered into prior to termination, the new law further provides that "any good faith estimate" of the competitive activities, products, or services that may be applicable at the time of termination is satisfactory even if it mistakenly includes extraneous matters. Such a covenant is to be enforced by the courts based on activities "actually conducted" and products and services "actually sold" within a reasonable time of termination.
The new law instructs Georgia courts to presume certain time limitations in restrictive covenants to be "reasonable" and, therefore, enforceable unless proved otherwise. For example, a two year or less restrictive covenant against a former employee (not involving the sale of a business) beginning on the date of termination is presumed to be reasonable. A restriction for more than two years is presumed unreasonable. Restrictive covenants of three years or less involving distributors, dealers, franchisees, lessees, licensees (not involving the sale of a business) are presumed reasonable. Covenants longer than three years are presumed unreasonable. In cases involving the sale of a business, the courts shall presume a restraint to be reasonable for the longer of: (i) five years or less, or (ii) the period of time during which payments are being made to the seller. Any longer restraint is presumed to be unreasonable.
On Dec. 10, 2010, Thomas J. Gallo of the Atlanta office will be participating in a seminar that will address Georgia’s new restrictive covenant law entitled “Covenants Not to Compete.” You may register to attend the seminar by contacting Lorman Education Services online at www.lorman.com/seminars/seminar_faqs.php?pid=213306&tid=&sid.