A recent decision by the Georgia Court of Appeals, Holland Ins. Group, LLC v. Senior Life Ins. Co., 766 S.E.2d 187 (Nov. 20, 2014), includes several excellent reminders regarding the enforceability (and unenforceability) of restrictive covenants in Georgia.
Relevant Facts and Holding
William Holland and Senior Life Insurance Company entered into an agreement (“Agreement”) authorizing Holland to sell Senior Life’s insurance products as an independent agent. Senior Life subsequently terminated the Agreement and notified Holland that it had “suspended” payment of commissions to Holland pending an investigation into whether Holland had violated restrictive covenants contained in the Agreement. Holland then filed a complaint against Senior Life seeking injunctive relief and a declaratory judgment that the Agreement’s restrictive covenants were overbroad and thus, unenforceable. Holland also filed a motion for judgment on the pleadings, which sought a declaratory judgment that: “(1) the non-solicitation and confidentiality provisions of the [Agreement] are unenforceable as a matter of law; and (2) the liquidated damages of the [Agreement] are void[.]” The trial court denied Holland’s motion, and Holland appealed.
Although the Court of Appeals found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to the Agreement’s non-solicitation and confidentiality provisions, it did reverse the trial court’s decision that the Agreement’s liquidated damages provision was valid. The Court’s analysis on both of these issues is worth examining.
First, Holland contended that Section 5.5 of the Agreement, entitled “Confidentiality,” was overly broad. The provision provides, in relevant part, that “[u]ntil this Agreement terminates and at all times thereafter, you will hold in the strictest confidence and not use in any manner detrimental to us, or disclose, publish, or divulge, directly or indirectly, to any individual or entity any Confidential and Proprietary Information[.]” Section 5.5 defines “Confidential Proprietary Information” as:
certain confidential and proprietary information relating to our business, including, but not limited to, certain lists of or data relating to our Customers and Prospective Customers … and certain other information relating to our services, marketing techniques, business methods or finances, which information is generally not known to the public…. [Senior Life] take[s] all reasonable steps necessary to ensure that each and every component of the Confidential and Proprietary Information constitutes a “Trade Secret.”
Holland contended that the “Confidential and Proprietary Information” defined in Section 5.5 did not constitute a trade secret and, thus, the confidentiality covenant was void because it did not contain a time limit. While Georgia law does not require a time limit to safeguard trade secrets, it is well established that a “nondisclosure clause with no time limit is unenforceable as to information that is not a trade secret.” (Citation omitted.) Allen v. Hub Cap Heaven, Inc., 225 Ga. App. 533, 539, 484 S.E.2d 259 (1997).
Ultimately, the Court of Appeals determined that it could not conclude as a matter of law that the “Confidential and Proprietary Information” defined in Section 5.5 of the Agreement was not a trade secret. Instead, the Court believed that additional facts beyond those set forth in the relevant pleadings was needed to determine whether the information defined as Senior Life’s “Confidential and Proprietary Information” is a legitimate trade secret or merely confidential information relating to its business. As a result, the Court found no error in the trial court’s denial of Holland’s motion for judgment on the pleadings as to this provision.
Second, Holland contended that Section 5.7 of the Agreement, entitled “General Remedies and Damages,” was unenforceable because the section included an overbroad non-compete clause. Section 5.7 provides a “formula” for determining liquidated damages as well as other damages that could be imposed if it is found that Holland violated “the terms of this Agreement[.]” That section also includes the following non-compete clause:
[n]otwithstanding our proprietary interest in our Customers and Prospective Customers, we recognize that upon termination of this Agreement, certain of our Customers may choose to sever their respective relationship with us in favor of you or any person engaging you after the termination of this Agreement, without any direct or indirect solicitation by you in violation of the terms of this Agreement. As such, … you hereby agree that, with respect to any Customer of ours who completely or partially severs his/her relationship with us in favor of you … you shall pay us an amount equal to 100% of the commissions you earned (whether accrued or actually received) from us with respect to the Severing Customer during the twenty-four (24) month period immediately preceding the termination of this Agreement.
The Court noted that, generally speaking, a restrictive covenant in Georgia “may not validly preclude the employee from accepting unsolicited business from customers of his former employer.” Vulcan Steel Structures, Inc. v. McCarty, 329 Ga. App. 220, 764 S.E.2d 458 (2014). While an employer may properly protect itself from the risk that a former employee “might appropriate its customers by taking unfair advantage of client contacts developed while working for that employer,” the employer “cannot prevent [the employee] from merely accepting overtures from those customers.” (Citation and punctuation omitted.) Id. Accordingly, the Court held that “because the plain language of Section 5.7 penalizes Holland from accepting the unsolicited business from Senior Life’s former clients, regardless of who initiated the contact, it is unreasonable and unenforceable.”
Holland Ins. Group reinforces several important aspects of Georgia restrictive covenant law that one should take into account when including these types of restrictions in employment agreements:
- Do not use the phrase “confidential information” interchangeably with “trade secrets.” “Confidential information” and “trade secrets” are very separate and distinct legal terms. If you do not fully appreciate the legal differences, it will likely result in severe enforceability issues.
- Utilizing a liquidated damage provision can be a very beneficial way to streamline litigation, but only if it is properly applied. Tacking on a liquidated damages provision to a non-solicitation provision without first understanding Georgia non-solicitation law (and the interchange between the two) is never advisable.
If you have any questions about whether your restrictive covenant agreements comply with Georgia law, contact a Seyfarth Shaw trade secrets lawyer.