Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

By Bob Stevens and Daniel Hart

As we have discussed on this blog before, on May 11, 2011, Georgia reissued its new Restrictive Covenant Act (the “New Act”). The New Act reflected a fundamental change in Georgia’s law regarding restrictive covenants because it permitted Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under then-existing Georgia case law. While the New Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so.

For the first time since Georgia passed the New Act, a Court in Georgia has elected to exercise its discretion to blue pencil restrictive covenants that it found to be overbroad. In Pointenorth Insur. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N. D. Ga. Sept. 30, 2011), the Court found that, among other things, the non-solicitation covenant contained in the employment agreement at issue was overbroad because it extended to any of the former employer’s clients, not just the ones with whom the former employee had contact during her employment. 

Rather than attempting to excise or mark out the overbroad provision and enforce the remaining restrictive covenants, the Court modified or altered the restrictive covenant and enjoined the former employee only from soliciting the clients with whom she had contact while employed by the plaintiff. The Court also enjoined the new employer from soliciting the same clients. 

This suggests that at least the Court interprets the New Act as providing it with the discretion to re-write restrictive covenants to make them enforceable, rather than merely providing a court with the power to remove overbroad covenants. It remains to be seen if other courts in Georgia follow the Pointenorth Court’s lead and use the New Act as a basis for re-writing restrictive covenants that are found to be overbroad. For the time being, this decision represents the lone voice on the stage and indicates that there may be a willingness to modify restrictive covenants instead of simply excising them and enforcing the remaining provisions.

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By Dan Hart

As we have written on this blog before, on May 11, 2011 Georgia reissued its new Restrictive Covenant Act (“New Act”) in order to resolve concerns about the constitutionality and effectiveness of a nearly identical statute that the state’s legislature had previously enacted in 2009. The 2009 version of the statute was contingent on voters’ approval of a ballot referendum to amend the Georgia Constitution, which voters overwhelmingly approved on November 2, 2010. The 2009 statute was clear that it was not retroactive and did not apply to contracts entered into before the purported effective date of the statute (November 3, 2010). Following the same approach, the New Act is also clear that it is not retroactive and does not apply to agreements entered into before May 11, 2011.

Despite the clear inapplicability of the New Act to agreements entered into before May 11, 2011, a question has emerged about whether courts must nonetheless apply Georgia’s current public policy when deciding whether to honor choice of law provisions in agreements that predate the New Act.

We previously reported about the recent decision of a federal district judge in the Northern District of Georgia in Boone v. Correstaff Support Servs., Inc., 2011 WL 2358666 (N.D. Ga. June 9, 2011). In that case, the court held that, when deciding whether to honor a choice of law provision in an agreement with restrictive covenants, a court should look to Georgia’s current public policy rather than the public policy that existed at the time that the agreement was signed. The court has now reversed course and held that it must apply Georgia’s public policy as it existed at the time that the agreement was signed, even though the state’s public policy has now changed. Boone v. Correstaff Support Servs., Inc., 2011 WL 3418382 (N.D. Ga. Aug. 3, 2011).

In the Boone case, a former employee and his current employer sought a declaratory judgment and injunctive relief prohibiting the employee’s former employer from enforcing a non-compete agreement. Although the employee resided in Georgia, the agreement in question contained a Delaware choice-of-law provision. Before the plaintiffs filed their declaratory judgment action in Georgia, the defendants had filed their own lawsuit in Delaware seeking to enforce the agreement. The defendants, therefore, moved the Georgia court to dismiss the declaratory judgment action so that the Delaware could rule on the enforceability of the agreement under Delaware law.

The Georgia federal district court initially granted the defendants’ motion, reasoning that, although Georgia’s public policy at the time the agreement was signed was hostile to restrictive covenants, Georgia’s public policy has now shifted such that Georgia law is no longer inconsistent with Delaware law (which is more lenient toward restrictive covenants than was prior Georgia law). The court thus reasoned that application of Delaware law to the dispute would not violate Georgia’s public policy and that a court in Delaware would be in a better position to apply Delaware law than a court in Georgia.

After the plaintiffs filed a motion for reconsideration, the court reversed its own earlier judgment and denied the motion. In reversing course, the court cited the Georgia Court of Appeals’ recent decision in Bunker Hill Int’l, Ltd. v. Nationsbuilder Ins. Servs., Inc., 710 S.E.2d 662 (Ga. Ct. App. 2011). In that case, the Georgia Court of Appeals had refused to honor an Illinois choice of law provision in a restrictive covenant agreement between a Georgia employee and his former employer. Although the Court of Appeals recognized that Georgia law changed in November 2010 with Georgia voters’ adoption of a constitutional amendment permitting broader enforcement of restrictive covenants, the agreement at issue was entered into in 2008. Thus, the Court of Appeals applied the law that existed in Georgia prior to the constitutional amendment.

The federal court in Boone interpreted the Bunker Hill decision as requiring it to apply Georgia’s public policy as it existed at the time that the agreement at issue was entered into – and not the state’s current public policy – when determining whether to enforce the Delaware choice-of-law provision. The court also cited two other opinions of the Georgia Court of Appeals that, at least in the federal court’s view, had reached the same conclusion. See Gordon Document Products, Inc. v. Serv. Techs., Inc., 708 S.E.2d 48, 52 n.5 (Ga. Ct. App. 2011) (“Our analysis in this case is unaffected by any recent legislative proposals or changes.”); Cox v. Altus & Hospice, Inc., 706 S.E.2d 660, 663-64 (Ga. Ct. App. 2011) (“We therefore apply the law of restrictive covenants as it existed before [ratification of the constitutional amendment in November, 2010].”). Because the federal court previously had applied Georgia’s current public policy to the case, the court reasoned that it had made a clear error of law in its prior order and, accordingly, reversed its prior decision.

At first glance, the federal court’s newest decision in Boone may seem to suggest conclusively that courts may never consider Georgia’s current public policy on restrictive covenants when interpreting agreements entered into before the effective date of the New Act and/or the related constitutional amendment. On closer inspection, however, that answer appears less conclusive because the Boone court did not consider one important procedural nuance. The Boone court noted that the Georgia Court of Appeals’ decision in Bunker Hill came “after the effective date of the New Act.” Although that is a correct observation, the Boone court neglected to note that the lower court judgment that was on appeal in Bunker Hill was entered on October 6, 2010 – long before the effective date of the New Act and nearly a month before voters approved the constitutional amendment ballot referendum on November 2, 2010. The lower court judgments that were on appeal in the other two cases cited by the Boone court likewise were entered prior to the effective date of either the New Act or the constitutional amendment – specifically, the Cox judgment was entered on March 3, 2010, while the Gordon judgment was entered on December 17, 2009.

This fact is significant because, at the time that the lower courts entered their judgments in those cases, Georgia’s current public policy was not yet in effect. Since the Georgia Court of Appeals’ jurisdiction on appeal was limited to determining whether the lower courts had committed reversible error, the Court was required to consider the public policy that existed at the time that the lower courts issued their opinions and not the public policy that existed at the time that the Court of Appeals issued its decisions in those cases. A far different scenario exists where a trial court is tasked with making a de novo determination about whether enforcement of a contractual choice of law provision would contravene Georgia’s public policy regarding restrictive covenants. In such situations, a trial court arguably is required to apply the public policy of Georgia as it currently exists, even if that public policy contravenes the public policy that existed in Georgia at the time that the agreement in question was entered into. Only time will tell whether Georgia courts follow this approach or the approach followed by the Boone court.

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By Dan Hart, Atlanta

Following Georgia Governor Nathan Deal’s signing of House Bill 30 (“H.B. 30”) on May 11, Georgia’s Restrictive Covenant Act is now law, effective immediately. The Governor’s signing of the bill caps months of debate and speculation about the effective date of a nearly identical bill that the Legislature enacted in 2009. That legislation, H.B. 173, was contingent on voters’ approval of a ballot referendum to amend the Georgia Constitution – a measure that voters overwhelmingly approved last November. Although the legislature clearly intended the 2009 bill to become effective the day after last November’s election, uncertainty about the effective date of the constitutional amendment raised concerns about the effective date of the statute.  Accordingly, the legislature enacted H.B. 30 to fix these problems. (For our previous posts on this issue, see here and here.)   The new law thus applies to all restrictive covenants entered into on or after the statute’s May 11 effective date.

The statute effects a sea-change in the law in Georgia, which historically has been an inhospitable forum for employers seeking to enforce restrictive covenants against former employees. Among other changes, the Act creates statutory presumptions under which courts must presume that restraints two years or less in duration are reasonable in time and that restraints more than two years in time are unreasonable. It also eases the drafting requirements for specific restrictive covenants, abolishes the previously existing requirement of a time-restriction for non-disclosure provisions, and creates a statutory burden-shifting regime whereby, if employers can meet an initial burden of showing that restrictive covenants are in compliance with the statute, parties challenging such restrictive covenants bear the burden of establishing that the covenants are unreasonable. Perhaps most significantly, the new law also permits Georgia courts to “blue pencil” (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under existing Georgia case law.

With the new law now officially enacted, should employers now assume that Georgia courts will always uphold restrictive covenants against their employees? Not exactly. As ESPN’s Lee Corso might say, “Not so fast, my friends!” Employers should continue to exercise caution in this area for at least three reasons:

First, the Restrictive Covenant Act applies only to restrictive covenants entered into on or after May 11, 2011.   Existing Georgia case law applies to restrictive covenants entered into on or before November 2, 2010 (the day that Georgia voters approved a constitutional amendment upon which the new law depends), and might also apply to restrictive covenants entered into between November 3, 3010 and May 10, 2011. For that reason, employers may continue to face an uphill battle in enforcing restrictive covenants that predate the new law unless they meet the narrow requirements that previously existed under Georgia law.

Second, while the Act permits Georgia courts to partially enforce overbroad restrictive covenants, it does not require that they do so. Until case law develops under the new statute, employers and their lawyers cannot be certain of what situations Georgia courts will exercise or decline to exercise their blue-penciling power. Based on law in other jurisdictions, however, it appears likely that Georgia courts may decline to exercise their blue-penciling power in cases where they believe that employers have unreasonably overreached for the purpose of creating an in terrorem effect on employees. Thus, employers should continue to exercise restraint when drafting restrictive covenants and should avoid drafting unreasonably broad covenants with the expectation that they will be fixed by the courts.

Third, although most provisions of the Act are beneficial to employers, the Act places restrictions on the types of employees who may be subjected to true non-compete provisions (as opposed to non-solicitation or nondisclosure provisions). Such provisions may be enforced only against employees who:

·        “Customarily and regularly solicit for the employer customers or prospective customers;”

·        “Customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others;”

·        Perform specified management duties (which are set forth in the Act using language that closely follows the U.S. Department of Labor’s (“DOL) definition of the Fair Labor Standards Act’s (“FLSA”) “executive” exemption);

·        Perform the duties of a “key employee” (which the Act defines as “ an employee who . . . has gained a high level of influence or credibility with the employer's customers, vendors, or other business relationships or is intimately involved in the planning for or direction of the business of the employer or a defined unit of the business of the employer” or “an employee in possession of selective or specialized skills, learning, or abilities or customer contacts or customer information who has obtained such skills, learning, abilities, contacts, or information by reason of having worked for the employer”); or 

·         Perform the duties of a “professional” (which the Act defines using language that closely follows the DOL’s definition of the FLSA’s “professional” exemption.

Before requiring employees to execute new non-compete agreements, employers should ensure that employees who are subject to the restriction fall within one of the definitions included in the statute.

Notwithstanding these necessary precautions, employers might consider revamping their standard restrictive covenants to take full advantage of the changes created by the Act. When undertaking such an effort, employers may want to consider the following issues:

·        Are your non-solicitation provisions consistent with the language approved by the Act? The Act provides that “[a]ny reference to a prohibition against ‘soliciting or attempting to solicit business from customers’ or similar language shall be adequate [for non-solicitation restrictions] and narrowly construed to apply only to: (1) such of the employer’s customers, including actively sought prospective customers, with who the employee had material contact; and (2) products and services that are competitive with those provided by the employer’s business.” Because this provision loosens the previously-existing rules for drafting non-solicitation covenants, employers may be able to streamline the language that they use for such covenants.

·        Are your definitions of restricted geographic territories and competitive activities consistent with the language approved by the Act? The Act provides that “[a]ctivities, products, or services [covered by a restrictive covenant] shall be considered sufficiently described if a reference to the activities, products, or services is provided and qualified by the phrase ‘of the type conducted, authorized, offered, or provided within two years prior to termination’ or similar language containing the same or a lesser time period.” Likewise, the Act provides that “[t]he phrase ‘the territory where the employee is working at the time of termination’ or similar language shall be considered sufficient as a description of geographic areas if the person or entity bound by the restraint can reasonably determine the maximum reasonable scope of the restraint at the time of termination.” These provisions significantly loosen rules that previously existed for drafting restrictive covenants in Georgia and may likewise provide some employers with an opportunity to streamline their agreements.

·        Are your nondisclosure provisions drafted as broadly as reasonable? Existing case law in Georgia requires nondisclosure provisions to bear a reasonable time limitation (usually a period of two years or less) with respect to any information that does not constitute a “trade secret” as defined by relevant law. Consistent with this requirement, many employers in Georgia historically have drafted their nondisclosure covenants to apply to a period of two years or less. Because the Act abolishes the requirement of a time limitation for nondisclosure covenants, employers should consider whether they want to revise the language in their existing nondisclosure covenants.

If you are interested in reviewing your existing restrictive covenant agreements for compliance with the new statute, or if you would like assistance drafting such agreements for your workforce, contact a Seyfarth Shaw Trade Secrets Group attorney.

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Aimed at eliminating a potential issue regarding the effective date of the earlier statute and to fix certain drafting anomalies identified after previous passage, Georgia's Restrictive Covenant Act  (version 2011), is now law, as the Governor signed the bill as passed by the House and Senate late this afternoon (May 11, 2011). 

The legislature made clear that the impetus for the re-enactment of the Restrictive Covenant Act was the potential issue regarding the effective date.  In Section 1 of the Act, the legislature wrote:

The primary substantive change to O.C.G.A. Section 13-8-56, which is now clarified to show that it applies both to in-term covenants and to post-term covenants.  No substantive changes were made to other sections in the statute as they were in the version passed by the General Assembly and signed by the Governor in 2009. 

The Governor's signing should end a period of uncertainty since the enabling amendment was passed.  (For our previous post on that issue, see here.) 

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As we have noted in an earlier blog posting, many have raised questions about the effective date of Georgia's new Restrictive Covenant Act.  The questions derive from inconsistencies in the effective dates between the amendment that gave life to the statute and the statute itself.  To cure this potential issue, Rep. Wendell Willard, Vice Chairman of the Rules Committee and Chairman of the Judiciary Committee, has introduced HB 30 to re-enact the statute.  In Section 1 of the Bill, the purpose of introducing HB 30 is set forth:

During the 2009 legislative session the General Assembly enacted HB 173 (Act No. 64, Ga. L. 2009, p. 231), which was a bill that dealt with the issue of restrictive covenants in contracts and which was contingently effective on the passage of a constitutional amendment. During the 2010 legislative session the General Assembly enacted HR 178 (Ga. L. 2010, p. 1260), the constitutional amendment necessary for the statutory language of HB 173 (Act No. 64, Ga. L. 2009, p. 231), and the voters ratified the constitutional amendment on November 2, 2010. It has been suggested by certain parties that because of the effective date provisions of HB 173 (Act No. 64, Ga. L. 2009, p. 231), there may be some question about the validity of that legislation. It is the intention of this Act to remove any such uncertainty by substantially reenacting the substantive provisions of HB 173 (Act No. 64, Ga. L. 2009, p. 231), but the enactment of this Act should not be taken as evidence of a legislative determination that HB 173 (Act No. 64, Ga. L. 2009, p. 231) was in fact invalid.

The speed with which this may pass through the legislature when it reconvenes on January 10 is unknown.  As of today, it is not yet on the legislative calendar.   

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The question has been raised:  What is the effective date of Georgia’s new non-compete statute, O.C.G.A. § 13-8-50 et seq.?

This Act shall become effective on the day following the ratification at the time of the 2010 general election of an amendment to the Constitution of Georgia providing for the enforcement of covenants in commercial contracts that limit competition and shall apply to contracts entered into on and after such date and shall not apply in actions determining the enforceability of restrictive covenants entered into before such date. If such amendment is not so ratified, then this Act shall stand automatically repealed.

Georgia’s electorate ratified Amendment 1 - the Constitutional amendment that enables the changes to Georgia’s restrictive covenant law - with 67.6% of the cast ballots. 

Article X, Section I, Paragraph VI of the Georgia Constitution, however, provides that amendments become effective on January 1 following an election “[u]nless the amendment or the new Constitution itself or the resolution proposing the amendment or the new Constitution shall provide otherwise.”  The enabling amendment and the resolution proposing the amendment are silent as to the effective date. 

Hence, already there is debate as to when the amendment will take effect. 

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What does the new law do?  Although the changes are extensive, and the effect of those changes will differ depending on the circumstances, we reviewed the statute when it was passed in 2009 and published an overview in the Georgia Bar Journal.   We also published a technology article, focusing on its effects on technology companies.  

As we noted yesterday, not all agreements need to be rewritten as the statute is not retroactive, but given that many agreements are unenforceable as written under the common law, the new law provides a new opportunity to conform agreements.  

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On November 2, Georgians voted overwhelmingly in favor of updating Georgia's restrictive covenant law. The new law is codified at O.C.G.A. 13-8-50 et seq. 

The law is not retroactive, so it does not affect existing contracts.  However, for many businesses who have learned that their agreements are not enforceable under Georgia law as it existed previously, now is the time to review the statute and consider updating the agreements.  The law affects not only employer-employee agreements but also franchisor-franchisee, distributorship, lease, partnership and employer-employer agreements.  

In the law, Georgia also adds blue-penciling to the mix for the first time for many agreements (previously, the courts would blue pencil in the instance of sale of business and in some cases partnership agreements, but the blue pencil was not applied uniformly).  

This is a new day in Georgia and there will be much to be watched, written, and learned about the new law and courts' interpretations of the statutory language in the next few months.  Stay tuned.  

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On August 19, 2010, the Eleventh Circuit Court of Appeals reversed a district court's denial of a motion for injunctive relief regarding enforcement of an employer's non-compete and non-solicitation provisions. Mohr v. Bank of New York Mellon Corp., No. 10-11890, 2010 WL 3273059 (11th Cir. Aug. 19, 2010). Applying Georgia law, the Court found the non-compete agreement to be enforceable, despite the fact that it forbid two employees from working within 50 miles of 27 cities in Georgia and South Carolina and 16 cities in 12 other states. The agreement was signed as part of the sale of a business, a situation that is afforded the most latitude under Georgia restrictive covenant law.

The Court supported its decision by citing mostly other Georgia decisions that involved a single city. The Court did not consider whether the employees had contacts within each of the 43 cities, but rather focused on the Bank's business territory. Because the agreement was entered into as part of the sale of a business, the Court only considered the employer's contacts and not the employees'.

The Court held that a preliminary injunction should have been issued to enforce the non-compete because, without the injunction, the Bank would be deprived of the benefit of its bargain in buying the business.

The Court's decision indicates a new willingness to enforce a geographically expansive non-compete under Georgia law. The effect of this decision on future litigation is unknown, but will certainly be interesting to watch.

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The Georgia Court of Appeals issued two decisions in July addressing restrictive covenants in Georgia. In both instances, the Court of Appeals upheld trial court findings that the covenants were unenforceable under existing Georgia law.

In Peachtree Fayette Women’s Specialists, LLC, v. Turner, the Court of Appeals agreed with Superior Court Judge Tommy Hankinson of the Griffin Judicial Circuit that a non-compete provision is unenforceable if it covers any territory in which the employee did not work. The non-compete provision in question restricted Dr. Heather Turner from practicing at a number of hospitals, including Piedmont Hospital in Atlanta. The record reflected that Dr. Turner never worked at Piedmont Hospital and that the physicians at Peachtree Fayette Women’s Specialists had resigned their staff privileges there. PFWS argued that because its principal, Dr. William Cook, had worked previously at Piedmont and established it as a referral source, it had a legitimate interest in preventing competition there. The Court of Appeals rejected this argument, noting that Dr. Turner did not work at Piedmont and therefore that PFWS did not have an interest in preventing her from working there. Because current Georgia law does not permit modification of restrictive covenants in employment agreements, the entire non-compete was invalidated, including the provisions that did protect PFWS’s legitimate interests.

In Fine v. Communication Trends Inc., the Court of Appeals agreed with Fulton County Superior Court Judge Melvin Westmoreland that a customer non-solicitation provision was unenforceable because it prevented contact with customers with an eye to providing competitive services. The case was contested between Communications Trends, a business engaged in media planning, purchasing, and cable network programming, on the one hand and its former employee Lynette Fine, on the other. Fine’s new employer, Allscope Media, was also a party. The non-solicitation covenant at issue stated as follows:

4. Nonsolicitation of Clients. The Employee hereby also agrees and covenants with [CTI] that throughout the period of his employment and for a period of two (2) years immediately following cessation of Employee's employment with [CTI], the Employee shall not solicit advertising media placement business similar to [CTI] on behalf of any persons or entity other than [CTI], either directly or indirectly, whether as a shareholder, partner, joint venturer, consultant, employee, officer, agent or otherwise, from any person or entity (or otherwise contact, call upon, communicate with or attempt to communicate with any such person or entity with a view to providing advertising media placement services competitive or potentially competitive with [CTI][.] )

(Emphasis added.) The trial court found and the Court of Appeals agreed that the highlighted portion rendered the entire provision unenforceable because it would prevent Fine from communicating with customers that seek her out. Georgia law permits employers from preventing competitive solicitation by former employees, but it forbids covenants that purport to prohibit acceptance of business. The Court of Appeals found that CTI’s covenant ran afoul of this rule.

(As an aside, the trial court’s finding that the covenant was unenforceable prevented the resolution of a very interesting factual question. The record reflected that Fine attended a large cable industry dinner after joining Allscope and provided her new Allscope business cards to executives affiliated with CTI’s clients.  Fine testified that she informed CTI’s clients that she was not allowed to solicit them and that they would have to provide a statement in writing that she had not done so in order to continue doing business with her at Allscope. Fine further testified that if CTI’s clients contacted her and sent emails stating that they had not been solicited, she accepted their business. Fine’s activity falls in the gray area of solicitation and would have presented a difficult question for a fact-finder.)

The Court of Appeals also found that Fine did not violate the non-disclosure of confidential information provision of her agreement with CTI when she provided revenue projections to Allscope. The fact that the revenue information was not client-specific proved to be decisive.

The Court of Appeals did, however, reverse the trial court’s decision to grant Fine’s motion for summary judgment on a duty of loyalty claim brought by CTI. CTI alleged that Fine breached her duty of loyalty by: (1) making detailed disclosures to Allscope regarding the revenues generated by various CTI clients; (2) failing to provide adequate notice prior to her resignation; and (3) deleting client contact information and destroying CTI’s files that had been in her possession. The Court of Appeals found that the former two allegations were insufficient to state a claim for breach of the duty of loyalty, but the final allegation was sufficient. 

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Georgia moved one step closer this week to amending its Constitution to allow the General Assembly to enact legislation regarding commercially applicable (non-real estate) restrictive covenants.  HR 178  passed out of the House (158 yeas - 12 nays) on Monday, March 22, 2010 and is headed to the Senate.  Word is that it is expected to pass without problem.  The House Resolution provides that it is

A RESOLUTION proposing an amendment to the Constitution so as to allow the enforcement of contracts that restrict competition during or after the term of employment or of a commercial relationship so long as such contracts are reasonable in time, area, and line of business; to provide that courts may modify such contracts to achieve the intent of the contracting parties; to provide for the submission of this amendment for ratification or rejection; and for other purposes.

If passed by the Georgia Senate, the proposed amendment will appear on the general election ballot in November 2010.

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Because the laws of various states regarding non-compete clauses differ significantly, cases involving these provisions often entail fights at the outset as to the proper venue. The Eastern District of Pennsylvania recently faced just such an issue in CertainTeed Corp. v. Nichiha USA, Inc., Civil Case No. 09-CV-3932-LS, 2009 WL 3540796 (E.D. Pa. Oct. 29, 2009). In that matter, CertainTeed contested with Bruno Demey, its former Director of Manufacturing and Technology, and Nichiha, Demey’s new employer, over whether litigation between the parties should go forward in Pennsylvania or Georgia.

CertainTeed’s headquarters are located in Valley Forge, Pennsylvania, and it has manufacturing plants in Indiana, North Carolina, and Oregon. Its confidential information, trade secrets, and computer servers are located in Valley Forge. CertainTeed hired Demey in March 2003. Demey executed a non-compete agreement with CertainTeed in September 2004. During his employment with CertainTeed, Demey resided in South Carolina and made numerous trips to Valley Forge for meetings.

The timeline of events relevant to the litigation are as follows: 

1.         Demey resigned from CertainTeed on August 20, 2009.

2.         Demey filed a complaint and motion for a preliminary injunction in the Superior Court of Fulton County, Georgia on August 24, 2009. Demey stated that he intended to move to Georgia to work for Nichiha and therefore sought injunctive relief against CertainTeed setting forth: (a) that the non-compete and non-disclosure terms of the non-compete agreement are unenforceable under Georgia law; and (b) that CertainTeed could not take action to enforce the covenants against Demey or otherwise preclude Demey from working for Nichiha.

3.         On August 26, 2009, CertainTeed removed the state court action to the United States District Court for the Northern District of Georgia. 

4.         CertainTeed filed an action against Demey and Nichiha in the Eastern District of Pennsylvania on August 28, 2009. CertainTeed alleged a breach of contract claim and breach of fiduciary duty claim against Demey, a tortious interference with contractual relations claim and an unfair competition claim against Nichiha, and violations of the Pennsylvania, South Carolina, North Carolina, Indiana, and Oregon trade secrets acts, as well as a civil conspiracy claim, against Demey and Nichiha.

5.         On August 31, 2009, CertainTeed requested a preliminary injunction and temporary restraining order.

6.         On September 2, 2009, the Georgia district court granted Demey’s motion for a temporary restraining order and enjoined CertainTeed from enforcing the non-competition covenant in Georgia. On that same date, Nichiha filed a motion to dismiss, transfer or stay the Pennsylvania action.

7.         On September 3, 2009, CertainTeed filed a first amended complaint in the Pennsylvania action, removing any claim to enforce the non-compete covenant in Georgia.

The Pennsylvania district court ultimately decided to deny Nichiha’s motion to dismiss, stay, or transfer and therefore let CertainTeed proceed with its claims in Pennsylvania. In its order, the Pennsylvania court addressed three issues. First, it rejected Nichiha’s claim that the first-filed rule required that the matter progress exclusively in Georgia. The court found that the Pennsylvania action was not “truly duplicative” of the Georgia action because the former included a number of claims that were not present in the latter. The court rejected Nichiha’s assertion that the claims asserted by CertainTeed were mandatory counterclaims in the Georgia action, instead finding that the trade secret claims were not so related to the non-compete claims that separate trials would lead to “substantial duplication of efforts.”

The district court next addressed the issue of venue. It decided that a substantial portion of the events at issue took place in Pennsylvania. Specifically, it cited CertainTeed’s allegations that: (a) Demey and Nichiha would be sharing and utilizing confidential information and trade secrets that originated, and are stored, in Valley Forge, Pennsylvania; and (b) Nichiha and Demey conducted negotiations while Demey was in Pennsylvania.

Finally, the district court answered the question of whether it should transfer the case to Georgia in the negative. After recognizing that a plaintiff’s choice of forum is a “paramount consideration,” the court remarked that CertainTeed’s key witnesses and documents are maintained on servers located in Valley Forge. The court also decided that the Eastern District of Pennsylvania is as convenient as the Northern District of Georgia for non-party witnesses. Thus, for the time being, the case between CertainTeed, Demey, and Nichiha will proceed on two fronts.

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A recent trial court decision from Superior Court Judge Tommy Hankinson of the Griffin Judicial Circuit illustrates one of the many difficulties of enforcing a non-compete provision in Georgia. Specifically, the case – Turner v. Peachtree Fayette Women’s Specialists, LLC, Civil Action File No. 2009V-0746, slip op. (2009) – illustrates that when an employer drafts the geographic scope of a non-compete provision, it had better be sure that the signing employee is going to work in all of the specified areas.

The Plaintiff, Dr. Heather Turner, starting working for Defendant Peachtree Fayette Women’s Specialists (“PFWS”) in October 2006. At the outset of her employment, Dr. Turner signed a non-compete provision that prevented her from providing obstetrical and gynecological services for a two-year period after the end of her employment in the following territory: (1) the area within a five-mile radius of PFWS’s office; (2) Piedmont Fayette Hospital in Fayetteville; and (3) Piedmont Hospital in Atlanta. The case turned on the last of the three areas.

Dr. Turner announced her intention to resign on March 16, 2009, and then filed a declaratory judgment action on April 28, 2009, arguing that the non-compete provision was unenforceable. PFWS counterclaimed for a declaratory judgment, injunctive relief, and attorneys’ fees. After conducting an evidentiary hearing, Judge Hankinson found that Dr. Turner never worked or treated patients at Piedmont Hospital in Atlanta, although she did have staff privileges there. Other PFWS physicians treated patients at Piedmont Hospital earlier in Dr. Turner’s employment with PFWS, but they were not doing so and had not renewed their staff privileges there by the time that Dr. Turner resigned. 

The Court concluded that Dr. Turner did not perform work throughout the territory covered by the non-compete provision and that, as a result, the provision was unenforceable. The Court rejected PFWS’s argument that it received referrals from Piedmont Hospital in Atlanta, noting that Dr. Turner had no relationships there from which to obtain referrals. Because Georgia does not permit blue-penciling or modification of unenforceable provisions, the Court’s conclusion leaves Dr. Turner completely free of the non-compete restriction. PFWS has filed a notice of appeal, so the Georgia Court of Appeals will have an opportunity to opine on the case.

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In Atlanta Bread Co. Int’l, Inc. v. Lupton-Smith, S08G1815, 2009 WL 1834215 (Ga. Jun. 29, 2009), the Georgia Supreme Court today confirmed that in-term restrictive covenants are subject to the same strict scrutiny standard applied to post-term covenants and the same reasonableness standards of time, territory, and scope. 

The question presented in Atlanta Bread Company was whether the in-term non-compete covenant in a franchise agreement between Atlanta Bread Company and Sean Lupton-Smith is enforceable under Georgia law. The covenant at issue states as follows:

During the term of this Agreement, neither [Lupton-Smith] nor any Principal Shareholder, for so long as such Principal Shareholder owns an Interest in [Lupton-Smith], may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.

During the term of the franchise agreements, Lupton-Smith opened and began operating a P.J.’s Coffee & Lounge in Atlanta, Georgia. Atlanta Bread Company sent a notice terminating the franchise agreement and litigation ensued. The trial court and Court of Appeals both found that the in-term non-compete provision was unenforceable under Georgia law because it failed to “meet[] the reasonableness standards promulgated in Georgia.” 

The Supreme Court rejected Atlanta Bread Company’s argument that the provision is a loyalty provision rather than a non-compete provision, noting that

[a] plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.

The Court rejected any contention that a franchise relationship should be treated differently, confirming that the court has held time and again” that franchise agreements and employment agreements are subject to the same strict scrutiny (meaning, among other things, that it cannot be blue-penciled). This analysis removes any doubt that the Court’s analysis in Atlanta Bread Company also will apply to in-term restrictive covenants in an employment agreement. 

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On April 29, 2009, Governor Sonny Perdue signed HB 173, legislation intended to revamp the way that non-compete, non-solicit and non-disclosure agreements are enforced in Georgia. 

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On April 1, 2009, the Georgia Senate passed HB 173 on restrictive covenants.  The vote tally was 45 in favor and 2 opposed.   The legislation will now await Governor Sonny Perdue's signature. 

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In Azzouz v. Prime Pediatrics, P.C., Case No. A08A2340, 2009 WL 619189 (Ga. App. Mar. 12, 2009), the Georgia Court of Appeals upheld a trial court’s grant of an interlocutory injunction on behalf of Prime Pediatrics, P.C. against Dr. Rami Azzouz. Dr. Azzouz entered into a detailed non-competition provision upon the commencement of his employment with Prime. The provision is as follows:

Employee hereby covenants and agrees with Employer that during his employment pursuant to the terms of this Agreement and for a period of two (2) years following the termination of his employment for any reason, the Employee shall not practice pediatric medicine or any pediatric sub-speciality within the following counties located in the State of Georgia: Whitfield, Murray, Gordon, Catoosa, and Walker except as an Employee of the Employer pursuant to the terms of this Employment Agreement.

Nothing contained herein however shall be construed so as to prohibit the Employee from practicing medicine as a pediatrician outside the territory set forth above before the expiration of said two (2) years, or within the territory as described above after the expiration of two (2) years, nor from prohibiting the Employee from practicing specifically any specialty of medicine other than pediatrics....

The parties agree that prohibited competition shall include maintaining pediatric privileges at any hospital located in the prohibited area, advertising in any form, including but not limited to, telephone, white and yellow pages, radio, newspaper advertisements, signage advertising, keeping or maintaining an office within the prohibited geographical area, posting web-sites showing business locations in the prohibited geographical area, or mailings to patients of Employer within the prohibited geographical area.

Non-compete provisions in Georgia typically are limited to the language of the first paragraph of Dr. Azzouz’s non-compete section: a prohibition on competing in a specific field and a specific geographic area for a specific period of time. Prime Pediatrics added the subsequent paragraphs that have the effect of providing greater detail as to what is and is not prohibited by the provision. These subsequent paragraphs proved important when Dr. Azzouz left Prime Pediatrics to open a competing practice and litigation ensued.

Dr. Azzouz argued that the third paragraph barred him from working in any hospital that advertises within the five-county area covered by the non-compete provision. If this interpretation were correct, then the non-compete provision would have been overly broad and unenforceable. The Court of Appeals found that this paragraph was “not constructed perfectly” and then proceeded to add in semicolons to make the provision clearer:

The parties agree that prohibited competition shall include ..., advertising in any form, including but not limited to [ (1) ] telephone, white and yellow pages, radio, newspaper advertisements, signage advertising, keeping or maintaining an office within the prohibited geographical area[; (2) ] posting to web sites showing business locations within the prohibited geographical area [;] or [3] mailings to patients of Employer within the prohibited geographical area.

In so doing, the Court of Appeals relied on O.C.G.A. § 13-2-2(6), which provides that the rules of grammatical construction may be disregarded when interpreting a contract in order to give effect to the parties’ intent. Although the Court of Appeals’ action could be construed as blue-penciling (which is prohibited in Georgia for restrictive covenants in the employment context), the Court of Appeals was able to rely on statutory and common law authority that permits minor changes for grammatical purposes.

The Court of Appeals also cited the second paragraph of the non-compete section, noting that Dr. Azzouz’s construction of the third paragraph was inconsistent with the provision of the second paragraph stating that Dr. Azzouz was free to practice any specialty of medicine other than pediatrics. In the end, the additional paragraphs following the basic non-compete provision first gave Dr. Azzouz an angle of attack and then negated that angle.

Azzouz is interesting because Court of Appeals assumed that the trial court’s factual conclusions were correct. Yet, in other instances, the Court of Appeals has refused to enforce non-compete provisions based on fact-specific arguments made by defendants before a trial court. For instance, in Beacon Sec. Technology, Inc. v. Beasley, 286 Ga. App. 11, 648 S.E.2d 440 (2007), the Court of Appeals refused to enforce a non-compete provision because the record reflected that the employer did not prove that the employee performed each of the prohibited activities in each of the counties listed in the non-compete provision. It is possible that Azzouz could have made a similar argument regarding his provision of pediatric services in the five-county area covered by the non-compete provision, but he failed to get a transcript of the proceedings below.

Azzouz further illustrates that non-compete provisions, although disfavored under Georgia law, are useful in certain professions. Georgia has a strict rule that a non-compete provision has to be limited to the geographic area worked by an employee. This can create problems for employees who have very large assigned areas (such as sales personnel with nationwide books of business) or employees who have no assigned areas (such as research scientists). Physicians, on the other hand, typically see patients from defined geographic areas. As such, it often can be easier to draft and enforce a non-compete provision against a doctor.

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In Global Link Logistics, Inc. v. Briles, No. A08A1871, (Ga. App. Feb. 18, 2009), the Georgia Court of Appeals recently reiterated Georgia court’s requirements for non-compete and non-disclosure covenants. The case involved the departure of Jim Briles from Global Link Logistics to a competitor. Briles moved for a declaratory judgment stating that the restrictive covenants in his employment agreement – a non-compete provision and a non-disclosure of confidential information provision – were unenforceable. Global Link answered and moved to compel arbitration. The trial court found that the restrictive covenants were unenforceable.

The Court of Appeals upheld the trial court’s finding. It held that the non-disclosure provision was unenforceable because it purported to cover Briles’s “observations” and was therefore overly broad. The provision also lacked a time limit, as required by Georgia law. As far as we know, Georgia is unique among all 50 states in the latter requirement. 

The Court of Appeals held that the non-compete provision was unenforceable for two reasons. First, it purported to prevent Briles from working as an “owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise.” As such, the prohibition was an impermissible “in any capacity” restriction. Second, it purported to bar solicitation of all of Global Link’s customers, regardless of whether Briles had material contact with them. 

Faced with hostile law, Global Link made two additional arguments. It asserted that Briles’s agreement should be viewed under Georgia’s more lenient degree of scrutiny afforded to restrictive covenants executed in connection with the sale of a business. The Court of Appeals rejected this argument, concluding that Briles did not own an interest in Global Link’s predecessor when he executed the agreement in question. Thus, the fact that he acquired an equity stake in Global Link when it purchased the predecessor was immaterial. 

Global Link also argued that the trial court’s order ignored Georgia’s policy of deferring to actions previously filed in other jurisdictions, as well as the parties’ own forum selection clause, and that it undermined state and federal policy favoring arbitration. The Court of Appeals dismissed each of these arguments. It found that Briles had obtained relief from the trial court after Global Link had dismissed an action filed against Briles in Delaware and before either party commenced arbitration. Moreover, the Court of Appeals cited to the language of the arbitration provision in Briles’s employment agreement, which specifically stated that the parties could obtain injunctive relief in court prior to arbitration.

Global Link illustrates the difficulties in enforcing a restrictive covenant in Georgia. The Court of Appeals was able to pick from any one of a number of rules to knock out the restrictive covenants. The decision also highlights the fact that the relaxed scrutiny for restrictive covenants in the sale of a business context applies only if the covenant was signed as part of the actual sale.

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Yesterday afternoon, the Georgia House of Representatives passed HB 173, a bill that would set forth a comprehensive statutory framework for interpreting restrictive covenant agreements. The current version of the bill is linked here. The final vote was a resounding 137 in favor and 22 against. HB 173 will now progress to the Georgia Senate for consideration. The bill passed the House on cross-over day, the last day in which a bill can pass one house of the Georgia Assembly in order to be considered by the other.

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HB 173, which we have written about before, heads to a vote before the Georgia House of Representatives today.  The legislation  dramatically changes the way Georgia court's will review restrictive covenants (non-competes, non-solicitation agreements) and fixes the time limit imposed on confidentiality restrictions (eliminating the two-year restriction).  To find out how to reach your State Representative to express your views, click here.  

If the bill does not pass today, it is my understanding that it will not be given any further consideration this session.

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This afternoon, the Judiciary Committee of the Georgia House of Representatives unanimously passed HB 173 and HR 178, which would set forth a statutory and constitutional framework for interpreting restrictive covenant agreements related, in particular, to employment. 

The House Civil Judiciary Subcommittee debated HB 173, leading to a number of changes. Specifically, the Subcommittee added language setting forth a test (analogous to the exempt/non-exempt test under the Fair Labor Standards Act) to determine whether an employee can be subject to a non-compete provision.  Additionally, the Subcommittee added in language permitting courts to take the economic hardship of an employee into account when deciding whether to enforce a restrictive covenant.  Finally, the Subcommittee added in language to ensure that courts cannot expand the scope of a restrictive covenant; they can only strike language or reduce the scope of the restrictions based on a rule of reasonableness.  The bill passed out of the Subcommittee on March 2, 2009 with a “do pass” recommendation.

The full Judiciary Committee considered the legislation this afternoon.  After brief explanatory remarks from the bill’s chief sponsor, Rep. Kevin Levitas, Committee Chairman Wendell Willard expressed happiness with the changes to the bill over the past year.  The Committee then passed the bill unanimously. 

HB 173 and its companion, HR 178 (a recommended constitutional amendment related to the legislation), will now be before the House Rules Committee.  If the Rules Committee passes the bill and the resolution, then they will be eligible for consideration by the House of Representatives itself before teh session ends.

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The Georgia House of Representatives is hard at work on the restrictive covenant bill (HB 173 - note that the linked version is not the most current as we understand it).  The House Civil Judiciary Subcommittee (led by Rep. Mike Jacobs) has been reviewing the proposed legislation.  Although a vote was anticipated earlier this week, the bill was held over so the subcommittee could look at adding language to ensure that the statute did not have the unintended consequence of reaching employees who were not involved in sales and whose duties would not normally involve interacting with customers or access to trade secrets and confidential information. 

On Tuesday of this week, HR 178, the companion resolution recommending an amendment to the Georgia constitution "so as to allow the enforcement of contracts that restrict competition during or after the term of employment or of a commercial relationship so long as such contracts are reasonable in time, area, and line of business; to provide that courts may modify such contracts to achieve the intent of the contracting parties; to provide for the submission of this amendment for ratification or rejection; and for other purposes," was cleared through the subcommittee with a "do pass" recommendation. 

We are not sure when we will see a new draft of the proposed legislation, but we will post a link when it is available.

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Representative Kevin Levitas's HB 173 is headed for another hearing on Monday at the Georgia Capitol.  It may be up for a vote before the full Judiciary Committee as soon as Tuesday, February 17, 2009.  

Subcommittee chairman Representative Mike Jacobs led the latest hearing on Tuesday, February 10, 2009.  The subcommittee heard support for the bill from Reed Elsevier, Inc. and Gould Hagler, the Executive Director of the Independent Insurance Agents of Georgia, Inc. (who also suggested a few potential modifications) among others.  

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Just before the end of 2008, Georgia's House Study Committee on Restrictive Covenants in the Commercia Arena, chaired by Representative Kevin Levitas, issued its final report, asking for support to "[m]oderniz[e] Georgia law" and to "attract new business to our great state and retain those companies that are already located here." 

Following two hearings involving testimony and letters from a number of witnesses (in full disclosure, I participated in providing testimony), the Committee concluded that "[t]he time has come for a change in Georgia law, both to bring our state in line with the overwhelming majority of other states as well as to establish a rule of reasonableness in the analysis of restrictive covenants." 

Additionally, the Committee recommended that Georgia courts be allowed to "blue pencil" restrictive covenants in connection with employment agreements (blue-pencling in connection with agreements relating to sale of a business already is allowed).  A couple of practitioners who testified before the Committee expressed concern that blue-penciling would make it more difficult to predict outcomes; that is that there is no certainty until the litigation concludes.  Proponents of blue-penciling countered that argument by noting that blue-penciling may lead to more negotiated settlements of disputes. 

It appears that the legislation may be headed for a hearing this session.   The question that remains is whether a constitutional amendment will be required.  Previous attempts by the General Assembly to bring clarity to Georgia's law were struck down by Georgia's Supreme Court as violating Art. III, Sec. VI, Par.  V(c) of the Constitution of Georgia of 1983, which reads: "The General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, or encouraging a monopoly, which are hereby declared to be unlawful and void."  So, in addition to making it through the General Assembly, we may also see support for a constitutional amendment to avoid uncertainty in the Georgia's courts.

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Earlier this year, the Georgia Court of Appeals made news in Atlanta Bread Company Int'l v. Lupton-Smith, Court of Appeals Case No. A08A0348, when it struck down in-term restrictive covenants of a franchisee on the grounds that the in-term restrictive covenants did not pass the test of reasonableness applied to post-term restrictive covenants.  In this case, the franchisee had opened several allegedly competing stores at the same time that he was operating Atlanta Bread Company franchises.  Atlanta Bread Company then terminated his franchise.   The Court of Appeals ruled that the post-term restrictive covenants and the in-term covenants were inextricably tied and because the post-term restrictive covenants did not pass muster, the in-term covenants also failed. 

The case has sparked great interest within the franchise community, as the International Franchise Association has indicated that the lower court decision would wreak havoc on franchise systems in Georgia by  rendering  "unenforceable the in-term restrictive covenants in the vast majority of franchise contracts for businesses operated in Georgia, including many of the most well-known and respected franchises in the world."   The Court of Appeals ruling was cast as opening the door for franchisees potentially to compete with their own franchisors during the term of the franchise agreement.  Georgia applies strict scrutiny review to post-termination restrictive covenants between franchisees and franchisors, which is the same standard applied to such agreements between employees and employers.  As a result, Georgia will not blue pencil such an agreement, even though it will blue pencil a non-competition covenant contained in the sale of a business.  

On October 6, 2008, The Georgia Supreme Court granted Atlanta Bread Company's petition for certiorari.  The Court agreed to hear, in particular, the following questions:

1. Did the [Court of Appeals] err in holding that under Jackson & Coker v. Hart, 261 Ga. 371 (1991), the reasonableness standard applicable to post-termination restrictive covenants also applies to in-term restrictive covenants?

2. Did the [Court of Appeals] err in applying to in-term restrictive covenants in franchise agreements the rule against allowing the blue-pencil doctrine of severability.

The Supreme Court's decision to grant certiorari means that oral argument is mandatory.  The case will proceed on the January 2009 oral argument calendar. 

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This morning (September 24, 2008), Rep. Kevin Levitas and Sen. Judson Hill from the Georgia Legislature convened the first meeting of a legislative study committee reviewing the law of Georgia with respect to restrictive covenants in employment and business relationships. The House Committee is chaired by Representative Kevin Levitas, and includes the following members: Representative Tim Bearden; Representative Butch Parrish; Representative Richard Smith; Representative Brian Thomas; and Representative Al Williams. As Representative Levitas previously remarked,

“It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties. . . .

 “It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.

“Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted th[at] he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

Erika Birg, a partner with Seyfarth Shaw’s Trade Secrets, Non-Competes, and Computer Fraud team, led off the morning’s testimony, highlighting the background of restrictive covenant law in Georgia. A lively question-and-answer session followed between the committee members and Ms. Birg. The committee’s questions, although varied in substance, primarily involved how a court or a legislature would determine whether a covenant is “reasonable,” as well as how the legislature might craft legislation (and a constitutional amendment if needed) that would address the concerns of both Georgia employers and their valued employees. 

J. Henry Walker IV, a partner with the litigation group of Kilpatrick Stockton and former in-house litigation counsel for BellSouth, spoke, representing the Georgia Chamber of Commerce. Mr. Walker noted the Chamber’s support for the committee’s work directed towards re-vamping Georgia’s law to provide certainty for both employers and employees. Mr. Walker also discussed BellSouth v. Forsee, 265 Ga. App. 589 (2004), a case in which BellSouth lost the ability to enforce a non-compete for a high-level executive because of Georgia court’s prohibition on enforcing a non-compete that is not certain at the time of execution of the agreement. He highlighted that certainty in the law benefited all concerned – employers and employees alike. 

The committee then heard from R. Samuel Snider, Vice President and Lead Acquisition Counsel for LexisNexis, a subsidiary of Reed Elsevier, regarding the effect of Georgia’s admittedly confusing law on the company’s decision to relocate to Georgia following its acquisition of ChoicePoint. Mr. Snider focused on the needs of technology companies to protect both intangible intellectual property but also protect the companies’ investments in highly compensated and sought-after personnel. He noted that in such instances, restrictive covenants may be part of a negotiated employment arrangement.

The study committee is set to meet again this fall, before the Legislature reconvenes in January. As the date and time are set, we will post the information here.

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 Following is a Press Release from the Georgia House of Representatives.

Speaker Richardson Appoints Representative Kevin Levitas to Chair House Study Committee on Restrictive Covenants in the Commercial Arena

ATLANTA –Speaker of the House Glenn Richardson (R-Hiram) has appointed Representative Kevin Levitas (D-Atlanta) to chair the House Study Committee on Restrictive Covenants in the Commercial Arena.

“I am confident that Representative Levitas will be an asset to this study committee. He is an extremely diligent worker, and I know he will work well with the other Representatives appointed to this committee,” Richardson said.

House Resolution 1879 established the House Study Committee on Restrictive Covenants in the Commercial Arena to examine the proper functioning of restrictive covenants in today’s marketplace and to fulfill the legislature’s role in defining public policy in this area.  

A restrictive covenant is an agreement between an employer and an employee (or an independent contractor) that limits the ability of a former employee to unfairly compete against the employer after termination of employment. 

In the absence of clear direction from the General Assembly, Georgia courts have issued conflicting decisions and voided many of these agreements in their entirety, often on the basis of a strict reading of a technical defect in one part of an agreement. 

Levitas said, “It is time that the legislature studied this issue in depth and provided clear guidance to the courts regarding the sustainability of these private agreements between private contracting parties and how to make them fair to all parties.” Levitas said that the study committee will examine court precedent and hear testimony from witnesses regarding the effect of the current state of the law.

“I am honored that Speaker Richardson has appointed me to chair this study committee,” noted Levitas. “The history and treatment of restrictive covenants in Georgia have never been fully studied before by the General Assembly. It is imperative that we carefully examine all aspects of this important issue so that both employer and employee can know their rights and duties after employment has ended.”

Levitas remarked, “Both parties need to know with certainty what they can and cannot do, and that is why legislation in this area is so important. In addition to providing certainty to the parties, clarifying the law will have a significant impact on Georgia’s economy and the ability of the state to attract businesses to this state and to keep them here.”

Levitas noted the he expects that the committee will hear from a diversity of witnesses with differing viewpoints on the subject. Levitas said that he intends for the committee “to bring together all necessary points of view and to gather all of the facts so that we can, once and for all, clearly define and bring certainty to this important area of the law.”

The committee will hold its first meeting at 9:00 a.m. on Wednesday, September 24, in Room 132 of the State Capitol. The other members of the committee are: Representative Tim Bearden (R-Villa Rica), Representative Butch Parrish (R-Swainsboro), Representative Richard Smith (R-Columbus), Representative Brian Thomas (D-Lilburn) and Representative Al Williams (D-Midway).

###

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In an order dated July 25, 2008, the Georgia Court of Appeals reiterated that non-compete provisions in Georgia cannot prohibit an ex-employee beyond performing services related to the employer’s business. Avion Systems, Inc. v. Thompson, No. A07A1488, 2008 WL 2854300 (Ga. App. Jul. 25, 2008). In Avion Systems, the Court of Appeals was asked to determine whether the following non-compete provision was enforceable:

For a period of twelve (12) months following the completion of project, the Employee unconditionally agrees to not deal directly, indirectly, or by any other means, either individually or in association with another individual or organization for any pecuniary gain with Corporation's customer or their client to whom he is assigned at the particular job site for that particular division or subdivision with whom Employee had contact....

Despite the fact that the non-compete provision was limited to 12 months in duration and to the customer to whom the employee was assigned, the Court of Appeals held that the provision was unenforceable. The restriction ran afoul of the prohibition in Georgia against “in any capacity” restrictions:

Here, the covenant did not specify the activities in which Thompson was prohibited from engaging, but instead prohibited her from dealing with a client “for any pecuniary gain,” regardless of whether her activities were related to Avion’s business. The provision was thus overbroad and unenforceable, as it is not reasonably necessary to protect the interests of Avion.

Avion Systems stands as a reminder that Georgia has very particular requirements for the enforcement of non-compete provisions and that an employer must pay attention to those requirements to have any chance of enforcing post-employment restrictions.

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