Georgia’s noncompete agreement law is in the throes of transition. Historically, the state’s constitution declares that “[t]he General Assembly shall not have the power to authorize any contract or agreement which may have the effect of … lessening competition…, which [agreements] are hereby declared to be unlawful and void.” Accordingly, Georgia courts had interpreted (e.g., W.R. Grace v. Mouyal) that provision as invalidating noncompete agreements that are not reasonable as to “duration, territorial coverage, and scope of activity.” And, in 1991, the Supreme Court of Georgia relied on the constitutional provision to rule, in Jackson & Coker v. Hart, that the statute providing for enforcement of noncompete agreements under certain circumstances is unconstitutional in its entirety.
Put simply, as in Atlanta Bread Company v. Lupton-Smith, noncompete agreements traditionally have been “disfavored in [Georgia] as a matter of public policy.”
Ramifications of Atlanta Bread Company
Atlanta Bread Company, a 2009 Supreme Court of Georgia decision, epitomizes the historic antipathy toward noncompete agreements in Georgia’s courts. In it, a franchisee sued its franchisor to prevent it from terminating a franchise agreement based on an alleged violation of an “in-term” noncompete agreement that kept the franchisee, “during the term of th[e] agreement,” from having any involvement with a store that competes with any of the franchisor’s stores. The trial court entered summary judgment in favor of the franchisee, invalidating the noncompete agreement; the Court of Appeals affirmed.
The Supreme Court of Georgia began its analysis by observing that in Georgia, “contracts that generally restrain trade are void against public policy.” Noncompete agreements are “partial restraints of trade and must be reasonable as to time, territory and scope to be enforceable.” It stated that noncompete agreements in franchise agreements must be accorded the same treatment they get in employment agreements and are therefore subject to strict scrutiny.
The court also opined that in-term agreements should be treated the same as post-termination agreements, and that the clause at issue in Atlanta Bread Company was unreasonable because it lacked a territorial limitation. Furthermore, because it lacked authority to modify (or “blue-pencil”) the noncompete agreement to include a reasonable scope, the court struck it entirely.
Meanwhile, Back at the Georgia Assembly
Shortly before the state supreme court announced its decision, however, the Georgia Assembly enacted the Restrictive Covenants Act (RCA), which enhances the enforceability of noncompete agreements and expressly gives Georgia courts authority to blue-pencil otherwise unenforceable noncompete agreements.
Passed in 2009, the RCA provided that it would:
- Become effective “on the day following” ratification of a constitutional amendment providing for the enforcement of covenants that limit competition.
- Apply to contracts entered “on and after such date.”
- Not apply to contracts “entered into before such date.”
On November 2, 2010, Georgia voters approved, by a two-to-one margin, Amendment One, which effectively amends Article III of the Georgia Constitution, as quoted at the beginning of this article. The amendment creates an exception to the constitutional prohibition against contracts “defeating or lessening competition.”
Specifically, Amendment One authorizes the state’s General Assembly to enact laws providing for enforcement of agreements that restrict competition between employers and employees, franchisors and franchisees, as well as among others. Based on its plain language, the RCA became effective on, and applied to contracts entered into on or after, November 3, 2010.
Effective Date Issues
Concerns arose about the RCA’s effective date, however. As noted above, the 2009 Act provided that it was to become effective the day after the enabling constitutional amendment was passed, which proved to be November 3, 2010. But Georgia law provides that constitutional amendments do not go into effect until January 1 of the year following their passage.
Thus, based on its plain language, the 2009 Act went into effect nearly two months before the enabling constitutional amendment. Accordingly, the General Assembly substantially reenacted the RCA with modifications in 2011. The 2011 iteration became effective on, and applies to contracts entered into on or after, May 11, 2011.
A complete recitation of the RCA’s provisions is beyond our scope here, but highlights include:
- “Reasonable” restrictive covenants protect legitimate business interests and create an environment conducive to attracting and retaining businesses in Georgia.
- The RCA permits restrictive covenants that are reasonable in time, geographic area and scope of prohibited activities, but they are enforceable only if the employee solicited customers, sold products or services, was in management or was otherwise a “key employee.”
- No geographic limitation need be called out if the restrictive covenant prohibits, for a stated period of time following termination, solicitation of business from the employer’s customers with whom the employee had “material contact” while employed.
- The RCA authorizes courts to blue-pencil restrictive covenants so long as the modified covenant is not more restrictive with regard to the employee.
In-term restrictive covenants are presumptively reasonable if:
- Their duration is the same as the duration of the parties’ relationship;
- The geographic scope includes areas in which the employer does business at any time during the parties’ relationship, provided the total area is reasonable and/or the covenant contains a list of particular competitors with which employment is prohibited; and
- The scope of competitive conduct is measured by the business of the employer.
Post-termination covenants are rebuttably presumed reasonable if their durations are:
- Two years or less for former employees.
- Three years or less for former distributors or franchisees.
- Five years or less for sellers of a business.
- Courts shall not enforce restrictive covenants that are not in compliance with the Official Code of Georgia Annotated (OCGA) § 13-8-53, though the courts “may modify” such covenants to make them reasonable and enforceable.
Relatively few cases have been decided since reenactment of the RCA. Most have merely confirmed that traditional principles will be applied to contracts entered into prior to November 3, 2010 (e.g., Clark v. Johnson Truck Bodies; Fantastic Sam’s Salon v. Maxie Enterprises; Paragon Technologies v. Infosmart Technologies; Murphree v. Yancey Brothers).
The most revealing decision since May 2011 is Boone v. Corestaff Support Services. In Boone, the former CEO of one of the defendants and his new employer filed suit against his former employer to invalidate restricting covenants in his December 2008 employment agreement. The defendants filed a parallel suit in Delaware and moved to dismiss the action in Georgia. In June 2011, the district judge granted the defendants’ motion to dismiss based on his finding that because he was likely to enforce the Delaware choice of law provision, it made sense to allow the Delaware court to decide the case. In doing this, the judge ruled the restrictive covenant was not contrary to Georgia public policy as evidenced by the RCA. However, in an August 3, 2011 order, the district judge granted the plaintiffs’ motion for reconsideration, denied the defendants’ motion to dismiss and entered partial summary judgment in favor of the plaintiffs on the enforceability of the restrictive covenant.
The linchpin of the judge’s decision was his holding that consistency of the covenant with Georgia public policy must be evaluated based on public policy as it existed at the time the covenant was entered into, not at the time its enforceability is decided. Based on the conflict with Georgia public policy, the district judge declined to apply Delaware law and applied Georgia law instead. Under Georgia law, the restrictive covenant was held unenforceable because it included a tolling provision that rendered its temporal duration unreasonable. And, because the court lacked authority to blue-pencil, the entire restrictive covenant was found unenforceable.
It now seems clear that contracts entered into before November 3, 2010 will be decided under Georgia’s traditional legal principles. Just as clear, contracts entered into on or after May 11, 2011 will be governed by the RCA. But two critical questions remain:
- Will contracts entered into between November 3, 2010 and May 10, 2011 be governed by traditional principles or the RCA?
- Will restrictive covenants in agreements executed after November 3, 2010 (or May 11, 2011) to replace older agreements be governed by traditional principles or the RCA?
When these questions are answered the transition largely will be complete, and businesses will be better able to evaluate their rights and obligations under restrictive covenants governed by Georgia law.