Georgia’s New Restrictive

Covenant Act:

What Employers Need to Know

Presented by:

Todd D. Wozniak

Brett T. Lane

What are Restrictive Covenants?

• Contractual provisions that serve to

prohibit or limit on an individual’s (or

sometimes an entity’s) future business

activities

• Non-competition, non-solicitation of

customers, non-solicitation of employees,

and non-disclosure provisions are the

most common

Constant Tension

• An employer’s legitimate interests v. an employee’s right to earn a living, especially considering at-will principles

• Free trade and business competition v. protection of business information, training provided and customer relationships

The New Georgia Restrictive Covenant Statute

• Recently Georgia voters passed an

amendment to the Georgia Constitution

• Amendment one: “Shall the

Constitution of Georgia be amended so

as to make Georgia more economically

competitive by authorizing legislation to

uphold reasonable competitive

agreements?”

• Codified at O.C.G.A. § 13-8-51 et seq.

Purpose of the New Law

• The stated purpose of the Act is to “bring Georgia in line with the overwhelming majority of other states and to establish a rule of reasonableness and legal analysis of these agreements.”

• The goal is to decrease litigation, make enforcement more predictable, and provide employers with greater protection.

Significant Changes Brought About By The New Law

NON-COMPETE: GEOGRAPHIC

SCOPE

Old Common Law

• Must be determinable at

the time the agreement

was signed

• Can only cover

geographic areas where

the employee actually

worked

New Statutory Law

• May be determined by

employee’s covered

territory at the time of

termination

• Allows for a good-faith

estimate of the

geographic areas that

may be applicable at

termination

O.C.G.A. § 13-8-53(c)(1)-(2)

NON-COMPETE: SCOPE OF PROHIBITED ACTIVITIES

Old Common Law

• Requires specificity

in defining the

activities an

employee may not

perform for a

competitor

• Covenants

prohibiting

competing “in any

capacity” are

unenforceable

New Statutory Law

• Allows a good-faith estimate of the activities, products, and services that may be applicable at termination

• Ultimately covers activities actually conducted and products/services actually offered.

O.C.G.A. § 13-8-53(c)(1)-(2)

NON-COMPETE: EMPLOYEES WHO CAN BE BOUND BY A NON-COMPETE

Old Common Law

• No express limitation on

the types of employees

who may validly execute

non-competes

New Statutory Law

• Enforcement of non-

competes limited to

employees who regularly

solicit customers or

engage in sales, are

exempt executives or are

considered a key

employee or professional

O.C.G.A. § 13-8-53(a)

NON-COMPETE AND NON-SOLICITATION: TEMPORAL LIMITATIONS

Old Common Law

• Temporal limitations

evaluated on a case by

case basis…no

presumption of

reasonableness

New Statutory Law

• Presumption of

reasonableness

dependent upon the type

of covenant (e.g. 2 years

following termination of

employment, 3 years or

less for sale of business)

O.C.G.A. § 13-8-56

NON-SOLICITATION: EXPANSIVE DEFINITION OF MATERIAL CONTACT

Old Common Law

• Must have reasonable geographic limitation, or must be limited to customers with whom employee had actual contact on behalf of the company

• Must be limited to prohibiting solicitation for products and services competitive with the employer

New Statutory Law

• Provides broad definition of “material contact” with customer required to trigger coverage

O.C.G.A. § 13-8-51(10)

• Does not require provision that defines the types of products or services considered competitive in order for non-solicit to be enforceable

O.C.G.A. § 13-8-53(b)

NON-SOLICITATION: CONNECTION WITH NON-COMPETITION PROVISIONS

Old Common Law

• “Rise and fall” with non-

competition provisions --

if one is unenforceable,

the other is automatically

unenforceable

New Statutory Law

• Judicial modification

allows courts to modify

individual provisions,

likely allowing non-

solicitation covenants to

be evaluated without

regard to enforceability of

non-compete

Under the New Statute Georgia Is No Longer All or Nothing

• Georgia Courts may now change an otherwise overbroad restrictive covenant by removing or severing unenforceable provisions. O.C.G.A. §§ 13-8-51 (11)-(12); 13-8-53(d); 13-8-54(b)

• Modification is not mandatory – Court can refuse to do so, or limit itself

• The only limitations are that the Court should try to “achieve the original intent of the contracting parties” and may not make any “covenant more restrictive with regard to the employee than as originally drafted by the parties.” O.C.G.A. §§ 13-8-53(d); 13-8-54(b)

NON-DISCLOSURE: DURATION

Old Common Law

• Reasonable time limit

required as to non-

trade secret

confidential

information

New Statutory Law

• No time limit

necessary

• Can protect

information as long as

it remains confidential

or a trade secret

O.C.G.A. § 13-8-53(e)

NON-DISCLOSURE: DEFINING “CONFIDENTIAL INFORMATION”

Old Common Law

• No set definition, leading

to challenges to scope of

contractual definitions

New Statutory Law

• Defines “confidential

information” to include

information that relates to

employer’s business, is

valuable, is not known to

competitors and is

disclosed to the

employee because of the

employment relationship

O.C.G.A. § 13-8-51(3)

Economic Hardship Provision

• “In determining the reasonableness of a

restrictive covenant between an employer and an

employee. . . a court may consider the economic

hardship imposed upon an employee by

enforcement of the covenant.” O.C.G.A. § 13-8-

58(d)

JUDICIAL INTERPRETATIONS

• PointeNorth Insurance Group v. Zander (N.D.

Ga. Sep. 30, 2011)

• Found that non-solicitation covenant was

overbroad because it extended to all of the

former employer’s customers

• Court modified the covenant to apply only to

customers with whom employee had contact

while employed by the former employer

– Not an example of “strict blue-penciling”

OPEN QUESTIONS: IS THE NEW

STATUTE CONSTITUTIONAL?

• November 2010 ballot language was

vague, mentioned nothing about

noncompetes or nonsolicits, and could be

construed as manipulative

• The overwhelming majority of voters would

not have known what they were voting for

or against

OPEN QUESTIONS: WHAT LAW APPLIES

– COMMON LAW OR NEW STATUTE?

• Covenants entered into on or after May 11, 2011: New Statute

• Covenants entered on or before November 2, 2010: Common Law

• Between November 2, 2010 and May 11, 2011: ???

OPEN QUESTIONS: HOW WILL COURTS

APPROACH BLUE-PENCILING?

• The new statute arguably permits courts to strike

overbroad provisions or to re-write them (so

long as the covenant is not made more

restrictive)

• Modification is, however, purely discretionary

• Ingrained judicial hostility towards the

enforcement of noncompetes will not disappear

overnight (especially if it appears the employer

has overreached in drafting the covenant)

OPEN QUESTIONS: WHAT TYPES OF EMPLOYEES

ARE SUBJECT TO NON-COMPETES?

• True non-competes are not enforceable against all types of employees under the new statute

• “Key employee” and “professional” definitions are especially subject to interpretation

– Expect this area to be litigated

OPEN QUESTIONS: WHAT IS THE FATE OF FORUM

SELECTION AND CHOICE OF LAW CLAUSES?

• Georgia courts have long held that, in a restrictive covenant context, they will not apply the law of a foreign jurisdiction if that law would contravene Georgia’s public policy

• Recently, the Georgia Court of Appeals went even further in Bunker Hill Int’l Ltd. v. Nationsbuilder Ins. Services, Inc. (Ga. Ct. App. 2011) (decided under common law) and held that a party can invalidate a forum selection clause in an agreement containing restrictive covenants if it can show:

(a) at least one of the covenants violates Georgia public policy and

(b) that covenant is likely enforceable in the state provided for in the forum selection clause

OPEN QUESTIONS: WHAT IS THE FATE OF FORUM

SELECTION AND CHOICE OF LAW CLAUSES?

• The new statute espouses a new public policy, which covenants drafted thereunder will be much less likely to violate

• So far, at least two federal courts in Georgia have refused to apply the “new public policy” to covenants entered into before May 11, 2011 – Georgia state courts may disagree, however

• For covenants drafted on or after May 11, 2011, may be able to utilize forum selection clauses and choice of law clauses to avoid Georgia law (although employers may not want to avoid Georgia law under the new statute)

SHOULD I HAVE MY EMPLOYEES SIGN

NEW RESTRICTIVE COVENANTS?

• Georgia law does not require additional consideration to support a new agreement signed by a current employee

• Is there a question of validity under common law? If so – likely YES

• Is there a strong possibility that the employee cannot be subject to a non-compete under the new statute? If so – NO (as to non-compete)

• May have the opportunity to streamline restrictive covenants and make them easier to administer

BROADER IMPLICATIONS FOR NATIONWIDE

EMPLOYERS AND RECOMMENDED APPROACHES

FOR DRAFTING

VARIOUS STATES: FOUR APPROACHES TO ENFORCEMENT

1] Presumptively Void (e.g.,

California, North Dakota)

2] All or Nothing (e.g., South

Carolina, formerly Georgia)

3] Blue Pencil

4] Reasonable Alteration

NOTE THAT, depending on the State, restrictive covenant law

may be governed by: a statute of general application, a

statute specific to a profession or circumstances, by common

law, or a combination of the foregoing

RECOMMENDED APPROACH

TO DRAFTING

• What legitimate business interests need to

be protected?

• What states are in play for enforcement?

• What is the company trying to achieve with

its restrictive covenants?

RECOMMENDED APPROACH

TO DRAFTING • Utilize a tiered approach

• Identify categories of employees and determine what type of restrictions are necessary – Group A – no competitive threat … secretaries and

administrative personnel (form non-disclosures and non-interference with employees)

– Group B – worried about soliciting customers but not worried about competitive harm (form non-solicitations, non-interference with employees and non-disclosures)

– Group C – worried about competitive harm (tailored non-compete combined with non-solicit and non-disclosure)

PUTTING IT INTO PRACTICE

• ABC Company (“ABC”) manufactures microprocessors. ABC wants to hire a new VP of Sales and Business Development and include restrictive employment covenants in the employment agreement. The President of ABC has insisted that the agreement contain a non-compete. ABC’s corporate headquarters is located in Atlanta, Georgia, but it has significant operations in South Carolina, Florida and California. The new VP will work out of ABC’s Miami, Florida office, but will be primarily responsible for ABC’s sales and business development efforts throughout the U.S. ABC’s principal competitors are located in California, South Carolina and Georgia.

PUTTING IT INTO PRACTICE

• What will ABC need to protect upon the

VP’s departure?

• What will the litigation look like if the VP

refuses to comply with the agreement?

– Where will the VP likely go if he leaves?

– Where will the litigation likely happen?

– What law will apply?

QUESTIONS