Just before closing its 2010 session, the Georgia legislature approved a proposed constitutional amendment that, if ratified by Georgia voters in November, will dramatically change the landscape in Georgia with regard to drafting and enforcing agreements containing restrictive covenants.
The Amendment
Georgia voters will be asked this question: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?” If a majority of the voters vote “yes,” then legislation signed by Governor Perdue on April 29, 2009 that vastly broadens the permissible scope of contractual restrictions on competitive activity will become effective immediately.
Current State Of The Law
Currently, Georgia courts enforce restrictive covenants on a case-by-case basis, without statutory standards for determining enforceability. In the employment context, Georgia Courts strictly scrutinize such covenants, which must be narrowly crafted to be enforceable, and have refused to permit “blue penciling” (editing by the court). As a result, even a minor flaw in a restrictive covenant can render the entire covenant unenforceable. Moreover, if one covenant is unenforceable, it can prevent enforcement of other covenants in the same agreement that might otherwise be enforceable. Current case law therefore makes drafting enforceable employment covenants agreements particularly challenging for Georgia businesses.
What Will Change?
The new law would grant Georgia courts the power to blue pencil, “as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.” The law also defines common terms, which definitions appear to expand the permissible scope of certain covenants. For example, a customer nonsolicitation covenant limited to those customers with whom the employee had “material contact” would apply not only to those customers or potential customers with whom the employee dealt, but also to those “about whom the employee obtained confidential information in the ordinary course of business as a result of such employee’s association with the employer.” In addition, nonsolicitation covenants could permissibly restrict a former employee from merely accepting business from customers. Current case law prohibits such restrictions. The bill also sets presumptively reasonable time limits, allowing for enforcement against former employees for up to two years; against a distributor, dealer, franchisee, lessee of property, or licensee of a trademark for up to three years; and against the seller of a business for up to the longer of (a) five years, or (b) the time during which purchase payments are being made to the seller.
Pro-Business Intent?
The new law’s drafters believe that establishing standards for restrictive covenants will make it easier for businesses to draft enforceable covenants that can survive a court challenge, resulting in fewer restrictive covenants lawsuits. On the flip side, some critics warn that the law will make it more difficult for Georgia businesses to recruit desired talent, and litigation—although perhaps less frequent—may prove much more costly because the dispute will focus on fact intensive issues such as the actual services performed by the employee, the geographic territory within which he provided those services, and whether and to what extent the former employer actually competes with the new employer. Under current law, the dispute usually focuses on the language of the covenant itself.
Only Applies To New Contracts
The new law would apply to those agreements entered into on or after the law’s effective date; existing agreements would still be interpreted and enforced under current case law. Given the dramatic change in the permissible scope of covenants under the new law, and the greater ease with which such covenants may be enforced, employers should be prepared to implement new contracts with employees that are designed to extract maximum benefit from the changes.
Please contact one of our Executive Compensation and Employment Law partners for further information.