On November 2, 2010, Georgia voters approved an amendment to the state constitution that will have a substantial impact on the drafting, negotiation, and enforcement of non-competition, non-solicitation and non-disclosure covenants in Georgia. The amendment allows for the implementation of House Bill 173, which is a comprehensive statute governing post-employment and other restrictive covenants. Historically, Georgia has been one of the most difficult states in which to enforce post-employment restrictive covenants. Employers have been forced to rely upon an assortment of confusing and often conflicting court opinions for guidance on what is and is not enforceable. The recently enacted statute is designed to bring about employer friendly changes to the law by eliminating the guesswork and making it easier to draft and enforce post-employment restrictive covenants.
Some key elements of the new statute include:
- The new statue will apply only to contracts entered into on or after November 3, 2010. Contracts entered into prior to that date are still governed by the old case law;
- The new statute is applicable to a wide range of agreements containing restrictive covenants, including agreements between: (1) employers and employees; (2) distributors and manufacturers; (3) lessors and lessees; (4) partnerships and partners; (5) franchisors and franchisees; (6) sellers and purchasers of a business or commercial enterprise; and (7) two or more employers;
- Georgia courts are now allowed to partially enforce restrictive covenants in the employment context that are otherwise overbroad, reversing Georgia’s longstanding “all or nothing rule.” For example, under the previous law if a post-employment non-competition provision was determined to be unenforceable, a non-solicititation of customers provision in the same agreement was automatically invalidated, even if it would have been enforceable standing alone. Under the new law, the court can modify otherwise unenforceable provisions to make them reasonable and enforce the modified agreement in full;
- Post employment non-competition provisions (as opposed to non-solicitation and non-disclosure provisions) are now only permitted for employees who: (1) customarily and regularly solicit customers or prospective customers for the employer; (2) customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others; (3)
perform the duties of a “key employee” or of a “professional”; or (4) perform all of the following duties: (a) has the primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision of the business; (b) customarily and regularly directs the work of two or more other employees; and (c) has the authority to hire and fire other employees or has particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees. The statute attempts to define the terms “key employee” and “professional.” Those definitions must be carefully considered to determine whether a particular employee falls within either definition and in turn may be subject to an enforceable post employment non-competition provision;
- The new statute permits employers to extend post employment restrictions on customer solicitation to customers and potential customers with whom an employee did not have actual contact, as long as, within two years prior to the date of termination, the employee supervised the employer’s dealings with the customer, obtained confidential information about the customer, or earned compensation, commissions, or other earnings as a result of the customer’s purchase of the employer’s products or services. Additionally, no express reference to a geographic area or the types of products or services considered to be competitive is required for the restraint to be enforceable;
- Non-competition and non-solicitation time restrictions of (1) two years or less following the termination of employment; and (2) three years or less following the termination of an agreement with a distributor, dealer, franchisee, lessee of property, or licensee of a trademark are presumed to be reasonable restrictive time periods. If the restrictive covenant is in connection with the sale of a business the longer of (1) five years or (2) the period during which payments continue to be made to the seller as part of the sale is presumed to be reasonable; and
- Time limitations on confidentiality or trade secret restrictions (non-disclosure provisions) are no longer required so long as the information remains confidential or a trade secret. Under the old rules, nondisclosure provisions had to contain reasonable time limitations.
The new statute should make it easier for Georgia employers to protect their customer relationships, trade secrets, and competitively sensitive business information, but it is yet to be seen how the Georgia courts construe the new statute. Employers with operations in Georgia should position themselves to take advantage of the protections offered by the new statute by revising existing restrictive covenants and incorporating the new rules into future agreements and transactions. Until a body of case law is developed under the new statute, employers seeking to hire a competitor’s former employee should proceed with caution and make sure they understand the terms of any restrictive covenants a potential new hire may have signed.