By Daniel Hart and Bob Stevens
Friday, May 11, 2012 marked the one-year anniversary of Georgia’s new Restrictive Covenant Act ("New Act"). As we have written on this blog before (here and here), passage of the New Act marked a dramatic change in Georgia’s public policy regarding restrictive covenants in employment agreements. Prior to passage of the New Act, Georgia was one of the most difficult jurisdictions for employers to enforce restrictive covenants against former employees. With the passage of the New Act, Georgia is now a comparatively favorable forum for employers seeking to enforce restrictive covenants against former employees.
Among other changes, the New Act creates statutory presumptions under which courts must presume that restrictive covenants two years or less in duration are reasonable in time and that restrictive covenants 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 Act also permits Georgia courts to "blue pencil" (i.e., partially enforce) restrictive covenants that otherwise would be overbroad and, therefore, completely unenforceable under prior Georgia law. Because the New Act applies only to restrictive covenants entered into on or after May 11, 2011, few court decisions have construed the New Act in the one-year since its passage. But in one decision, the United States District Court for the Northern District of Georgia exercised its power under the New Act to modify a restrictive covenant that would have been unenforceable under previous Georgia law.
In that decision, Pointenorth Ins. Group v. Zander, No. 1:11-cv-3262-RWS, 2011 U.S. Dist. LEXIS 113413 (N.D. Ga. 2011), an employer sought to preliminarily enjoin its former employee from violating customer nonsolicitation covenants in an employment agreement that she signed on May 11, 2011 – the same day that the New Act went into effect. The covenant prohibited the employee from soliciting, accepting, or attempting to solicit or accept, "any of the Employer’s clients which would be in competition with the products or services offered by the Employer, including actively sought prospective clients, with whom Employee had any contact or who were clients of Employer within the three months immediately preceding such termination of this Agreement." The district court granted the employer’s motion for preliminary injunction. Although the covenant was overbroad because it extended to all of the employer’s customers, and not merely those with whom the employee had interacted, the court blue-penciled the provision to prohibit the employee only from soliciting customers whom she had contacted and assisted with insurance. By prohibiting the employee only from "soliciting" these customers, the court also effectively struck the term "accepting" from the provision.
The Pointenorth decision remains significant in that it is the first – and, to date, only – published opinion in which a court has used its power under the New Act to modify an overbroad restrictive covenant. Although only time will tell whether other courts follow the lead of the Pointenorth court, this decision – and the language of the New Act itself – suggest that employers will have considerably greater ease in enforcing restrictive covenants in Georgia than they did prior to enactment of the New Act.
Despite this positive trend for employers, it is also clear that Georgia courts will continue to apply previous Georgia law to agreements that pre-date the New Act, as illustrated by another decision of the United States District Court for the Northern District of Georgia that we previously discussed here. In that case, Boone v. Volt Information Sciences, Inc. v. Corestaff Support Servs., Inc., No. 1:11-CV-1175-RWS 2011, U.S. Dist. LEXIS 119297 (N.D. Ga. 2011), a former employee and his new employer filed a declaratory judgment action against a former employer, seeking a declaration that a noncompete agreement between the employee and former employer was unenforceable under Georgia law. The noncompete agreement had a Delaware choice-of-law provision, and the district court initially concluded that Delaware law would apply to the agreement because Delaware law is in accord with Georgia’s new public policy position on restrictive covenants in employment agreements. On a motion for reconsideration, the district court vacated its prior order, holding that, under the Georgia Court of Appeals’ decision in Bunker Hill Int’l, Ltd. v. Nationsbuilder Ins. Servs., Inc., 710 S.E.2d 662 (Ga. Ct. App. 2011), courts must apply Georgia public policy in effect at the time the agreement was entered into. Because the agreement was signed in 2008, it was subject to Georgia’s old public policy, which was not in accord with Delaware law. Finding that the noncompete agreement was unenforceable as a matter of law under old Georgia law, the court granted summary judgment to the plaintiffs on their claim for declaratory relief.
Despite the limited number of published decisions that have interpreted the New Act in the first year of its existence, three trends appear clear: (1) Georgia courts are considerably more likely to enforce restrictive covenants under the New Act than they were under prior Georgia law, (2) Georgia courts will "blue pencil" overbroad restrictive covenants, and (3) Georgia courts will continue to apply prior Georgia law to agreements that predate the New Act. If you have employees in Georgia and have not yet updated your standard restrictive covenant agreements to take advantage of the New Act, now is an excellent time to take advantage of this change in the law. If you are interested in reviewing your existing restrictive covenant agreements for compliance with the New Act, or if you would like assistance drafting such agreements for your workforce, contact a Seyfarth Shaw Trade Secrets Group attorney.