On November 2, 2010, Georgia voters approved an amendment to the Georgia Constitution that, absent a successful challenge to the validity of its enactment, will dramatically change Georgia law on restrictive covenants. The new measure is designed to authorize legislation that will make such agreements easier to enforce in many instances. With this amendment, Georgia’s laws on restrictive covenants will come closer into line with those in most other states. The law will only affect new agreements, however, and therefore, it is important for Georgia employers to evaluate their current restrictive covenants and consider replacing them with new ones. Georgia employers should also be cautious because a legal challenge to the adoption of the measure is likely.
Georgia law regarding the enforceability of restrictive covenants has historically been unusually strict. The court-made law on restrictive covenants contained numerous potential pitfalls for the drafters of these provisions. It often produced results that could not be anticipated or predicted with confidence so that employers had little assurance that the restrictive covenants in their employment contracts would be enforceable. Adding to the problems associated with tailoring a restrictive covenant to the strictures of the court-made law was the refusal of Georgia courts to permit “blue penciling” – the judicial modification of overly broad restrictive covenants to create reasonable and enforceable provisions.
Georgia legislators perceived that the state’s draconian rules on restrictive covenants could discourage some employers from doing business in Georgia, but a 1990 legislative effort to codify clearer and more flexible rules on restrictive covenants failed when the Georgia Supreme Court held that the Georgia Constitution did not authorize the General Assembly to enact such legislation. The General Assembly eventually came up with a solution to that problem. In 2009, it passed a new law on restrictive covenants in employment agreements with the proviso that the law would go into effect only if the Georgia Constitution was amended to permit the legislation. A referendum for such a constitutional amendment was placed on the ballot for the 2010 General Election, and Georgia voters approved that referendum by a wide margin on November 2, 2010.
The New Georgia Law on Restrictive Covenants
With the passage of the constitutional amendment, the 2009 legislation on restrictive covenants will become effective once the Georgia Secretary of State certifies the election results. Highlights of the 2009 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.
- Acceptance of New Business from Old Customers Can Be Prohibited. Nonsolicitation agreements are an important type of restrictive covenant, and their potential scope will expand under the new law. In the past, even when an employer could prohibit former employees from soliciting certain of its customers, it could not prohibit the passive acceptance of business in a nonsolicitation agreement. In other words, if the customer initiated the contact, the former employee could take on the business even if there was a nonsolicitation agreement in effect. This passive acceptance of business can be prohibited under the new law in certain circumstances, eliminating disputes over who contacted whom.
- 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 removes this 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. When a restrictive covenant is sought to be enforced against a former employee outside of the context of the sale of a business, it will be presumed that a restraint of two years or less is reasonable and that more than two years is unreasonable. In the case of restrictive covenants applicable to former distributors, dealers, franchisees, lessees of real or personal property, or licensees of trademarks, trade dress, or service marks and not made in connection with the sale of a business, three years or less is presumed reasonable and more than three years is presumed to be unreasonable. The presumption in the case of the sale of a business is that five years or less is reasonable and greater than five years is unreasonable.
- 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 as long as 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.
Georgia employers need to keep two things in mind in connection with these developments. First, the new law will not apply to an agreement unless it is entered into after the effective date of the law. Once the Georgia Secretary of State certifies the results of the November 2 election, the new statutory provisions will become applicable to employment agreements entered into on or after November 3, 2010. They will not have retroactive effect with respect to earlier restrictive-covenant agreements, and those agreements will continue to be analyzed under the traditional, court-made rules on restrictive covenants. Thus, if an employer does not get new agreements, it will be stuck under the old law. Second, there is likely to be a legal challenge to this new development. However, if upheld, the new Georgia law on restrictive covenants should give employers greater flexibility in drafting restrictive covenants and considerably greater assurance that the covenants they draft in conformity to the statutory guidelines will be enforceable.
The new Georgia law on restrictive covenants may provide a golden 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.