By Bob Stevens and Dan Hart.
Three years ago last week, Georgia voters overwhelmingly approved a constitutional amendment that substantially altered Georgia’s public policy on restrictive covenants.
Prior to enactment of the amendment, Georgia’s public policy was actively hostile to restrictive covenants in employment agreements — so much so that a provision of the state constitution enshrined the state’s public policy and declared covenants that defeat or lessen competition to be “unlawful and void.” Applying this constitutional provision, Georgia courts developed a number of drafting rules that rendered all but the most limited restrictive covenants unenforceable. This was the case even when the employee subject to the covenant was a high-ranking executive like the former vice chairman of a Fortune 500 telecommunications company who successfully challenged his non-compete agreement in the Georgia Court of Appeals’ 2004 decision in BellSouth Corp. v. Forsee, 595 S.E.2d 99 (Ga. Ct. App. 2004). As a practical consequence, Georgia was one of the most difficult jurisdictions in the country for employers to enforce restrictive covenants against former employees. Making matters worse for the state’s business community, the Georgia constitutional provision against restrictive covenants thwarted legislative attempts to reform and modernize Georgia law on restrictive covenants.
Voters’ approval of a constitutional amendment in November, 2010 removed the constitutional roadblocks, reversed the state’s longstanding public policy against restrictive covenants, and ultimately paved the way for Georgia’s enactment of its new Restrictive Covenants Act, which the Georgia General Assembly enacted after a tortuous legislative history that we previously reported here, here, and here. As we previously reported, Georgia’s new Restrictive Covenants Act makes it much easier for employers to enforce restrictive covenants against former employees than was permitted by prior Georgia law and arguably reverses decades of Georgia court decisions.
The new law only applies to contracts entered into on or after May 11, 2011, the date that the Act became law. As a result, judicial decisions interpreting the new statute are still limited in number. Nevertheless, with the passage of three years since voters approved the constitutional amendment that made the new law possible, we can now identify general trends in judicial decisions. Although lawyers might disagree on which trends are the most notable, the following are, in our view, the top five trends about which Georgia employers and their counsel should be aware.
1. Covenants dated on or after May 11, 2011 are more likely to be enforced. Our first trend is a no-brainer, but we would be remiss in not stating it: employers will have less difficulty enforcing covenants executed on or after the effective date of the Restrictive Covenant Act than they will have in enforcing covenants entered into before passage of the new Act. Because continued at-will employment is usually considered sufficient consideration in Georgia for a new restrictive covenant agreement, employers in Georgia would be wise to update their existing agreements with employees if they have not already done so.
2. Georgia courts will continue to apply old law to covenants dated before May 11, 2011. Our second trend is a corollary of the first: because the law applies only to agreements entered into on or before May 11, 2011, courts continue to apply pre-Act Georgia law to covenants made before the effective date of the Act (May 11, 2011). As we discussed here, this appears to be the case even where the covenant was signed before the 2011 Act but after voters approved the constitutional amendment that made way for the new Act. As courts continue to interpret contracts that predate the new Act, courts will likely continue to apply the old law in a number of cases. Anticipating the new law when voters approved the constitutional amendment, some Georgia employers immediately updated their agreements with employees between November 2, 2010 and May 11, 2011. Because these agreements may actually be subject to old Georgia law, employers in this situation should consider updating their agreements again to avoid application of old Georgia law.
3. Georgia courts will continue to apply Georgia’s old public policy in cases involving pre-Act covenants, even though Georgia’s old public policy is inconsistent with the current public policy. Although this trend is also a corollary of the first two trends, it’s not as obvious. When courts are asked to enforce choice-of-law provisions in pre-Act agreements, courts have to consider whether application of the chosen’s state’s law would violate Georgia’s public policy. But what public policy do courts apply: the public policy as it exists now, or the public policy that existed when the agreement was executed? As demonstrated by the Boone case discussed here, Georgia courts appear to have settled on the latter option and continue to invoke old (and now rejected) public policy when reviewing choice-of-law provisions in pre-Act covenants. This is the case even though the chosen state’s law may be consistent with Georgia public policy as it exists now. We expect Georgia courts to continue to reject choice-of-law provisions in pre-Act agreements that are inconsistent with Georgia public policy as it existed pre-Act.
4. Georgia courts will “blue-pencil” overbroad restrictive covenants that are entered into on or after May 11, 2011. The new Restrictive Covenant Act provides that, “if a court finds that a contractually specified restraint does not comply with the provisions of [the Restrictive Covenant Act], then the court may modify the restraint provision and grant only the relief reasonably necessary to protect such interest or interests and to achieve the original intent of the contracting parties to the extent possible.” O.C.G.A. § 13-8-55(b). As demonstrated by the Pointenorth Insurance Group decision that we discussed here, Georgia courts can and will apply their power to “blue-pencil” overbroad restrictive covenants executed on or after the effective date of the Act. Nevertheless, it is not yet clear whether Georgia courts may only excise grammatically severable language or if they can effectively rewrite the parties’ agreement by adding or inferring terms. Over the next few years, Georgia courts will likely better clarify the scope of their power to modify overbroad restrictive covenants and explain the situations in which they will exercise that power. Until the courts rule otherwise, prudent employers should assume that Georgia courts can only excise grammatically severable language and that they will use this power sparingly.
5. Georgia courts will enforce true non-compete covenants only against employees who meet one or more of statutory definitions. Although the new Restrictive Covenant Act is most favorable to employers who seek to enforce restrictive covenants, in one area the new law is arguably more restrictive than prior Georgia law. The new Act provides that “enforcement of contracts that restrict competition after the term of employment, as distinguished from a customer nonsolicitation provision . . . or a nondisclosure of confidential information provision . . . shall not be permitted against any employee who does not, in the course of his or her employment:
(1) Customarily and regularly solicit for the employer customers or prospective customers;
(2) Customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others;
(3) Perform the following duties:
(A) Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
(B) Customarily and regularly direct the work of two or more other employees; and
(C) Have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees; or
(4) Perform the duties of a key employee or of a professional [which are defined elsewhere in the statute].
O.C.G.A. § 13-8-53(a). To date, very few (if any) reported decisions have construed these statutory definitions. Over the next few years, Georgia courts likely will be called upon to apply these statutory definitions and determine whether certain classes of employees are appropriately subject to true non-competes (as opposed to non-solicitation or non-dislosure covenants). Until the Georgia courts provide clearer guidance, Georgia employers should pay close attention to the language of the new statute when deciding which employees should have true non-competes in their agreements.
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.