New Era in Georgia for Post-Employment Restrictive Covenants
On November 2, 2010, Georgia voters passed an amendment to the State's constitution, which will operate to eradicate Georgia's longstanding hostility toward post-employment restrictive covenants. Under the State's preexisting case law, noncompete and customer nonsolicitation covenants are subject to a "strict scrutiny" standard, under which most post-employment restrictive covenants are vulnerable to enforceability challenges. The "strict scrutiny" standard consists of a maze of highly technical rules that are so difficult to follow that even the Georgia Supreme Court has lamented that "ten Philadelphia lawyers could not draft an employer-employee restrictive covenant agreement that would pass muster."1 The Georgia courts compounded the problem by adopting an "all-or-nothing" rule, under which an overbroad noncompete clause automatically invalidates both the noncompete covenant and any nonsolicitation covenant contained in the same agreement (and vice versa). For good reason, Georgia came to be regarded as one of the most undesirable jurisdictions for enforcing post-employment covenants, as well as a favorite "forum shopping" destination for former employees seeking to invalidate their covenants through preemptive "declaratory judgment" suits. The recent amendment to the Georgia Constitution will trigger a new era for post-employment restrictive covenants in Georgia.
The passage of the amendment gave immediate effect to a restrictive covenants statute that was enacted in the Spring of 2009 ("Statute" or "Act").2 The Statute replaces the "strict scrutiny" standard with pragmatic and flexible rules for determining enforceability. The Act also eliminates the draconian "all-or-nothing" rule, and allows courts to modify covenants that are found to be overly-broad. Importantly, however, the Act applies only to agreements that are entered into on or after November 3, 2010 (the Statute's effective date). Agreements executed prior to that date will remain subject to strict scrutiny and the "all-or-nothing" rule.
Highlights of the New Statute
The Statute addresses three types of post-employment covenants: (1) covenants that prohibit an array of competitive activities/endeavors ("noncompete covenants"); (2) covenants prohibiting the solicitation of customers ("nonsolicitation covenants"); and (3) covenants not to use/disclose confidential information ("nondisclosure covenants").3 The statutory provisions regarding each type of covenant are discussed, in turn, below.
On the whole, the Act requires courts to honor the intent of the contracting parties and give appropriate deference to the legitimate business interests that the covenants aim to protect. Indeed, the Statute expressly provides that "[a] court shall construe a restrictive covenant to comport with the reasonable intent and expectations of the parties . . . and in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement."4 This represents a dramatic departure from the preexisting "strict scrutiny" standard, under which the enforceability question often turns on technical "wordsmithing" requirements, and the parties' intent and reasonable expectations are largely ignored. This major policy shift also is exemplified by how the Statute treats overly broad covenants. Specifically, as mentioned above, the Act allows a court to "modify a covenant that is otherwise void and unenforceable" so as to protect the employer's legitimate interests.5
Under the Act, a noncompete covenant is enforceable so long as its restrictions are reasonable in time, geographic area, and scope of prohibited activities.6 This three-pronged test is identical to the enforceability test that existed prior to the Statute's enactment. However, the Act adopts new rules and standards for determining whether a given covenant satisfies the various components of this test. With respect to noncompete covenants, the Statute's most significant features are its flexible and common-sense rules for gauging compliance with the "geographic scope" and "prohibited activities" prongs of the test.
Both the preexisting case law and the new Statute require the scope of a noncompete to be in line with the employee's actual territory and duties at the time of termination (when the restrictions will go into effect). However, as part of the preexisting "strict scrutiny" standard, the courts also require that the covenant describe the territorial scope and prohibited activities with enough specificity to enable the employee to ascertain, on the front end, exactly what his/her future obligations will be. Under this "front-end certainty" test, noncompetes containing geographic restrictions such as "the territory where the employee is working at the time of termination" are unenforceable because the precise contours of the restrictions cannot be ascertained until the time of termination. But, any covenant that provides the requisite front-end certainty is vulnerable to a different sort of enforceability challenge in that any subsequent change in the employee's territory or job duties will likely make the covenant overbroad. The Statute eliminates this Catch-22 by altogether abolishing the front-end certainty requirement.
The Statute expressly endorses phrases such as "the territory where the employee is working at the time of termination" as adequate descriptions of a covenant's geographic scope.7 The Act also declares that "any good faith estimate of the activities, products, and services, or geographic areas, that may be applicable at the time of termination" is sufficient, even if the estimate "is generalized or could possibly be stated more narrowly to exclude extraneous matters" and even if it "ultimately proves to include extraneous activities, products, and services, or geographic areas."8 In keeping with its emphasis of honoring the intent of the contracting parties, the Statute deals with such inadvertent over-breadth issues by simply requiring that the covenant "be construed ultimately to cover only so much of such estimate as relates to the activities actually conducted, the products and services actually offered, or the geographic areas actually involved within a reasonable period of time prior to termination."9
With respect to the "reasonable timeframe" prong of the enforceability test, the Act adopts a new rule of thumb under which post-employment restrictions of two years or less are presumptively reasonable.10 While this rule of thumb will insulate most two-year restrictions from over-breadth challenges, it also may be construed as creating a negative inference against post-employment restrictions of more than two years.11
Finally, the Statute provides that noncompetes may be enforced against only certain categories of employees, which include: (a) sales personnel; (b) brokers; (c) management personnel; and (d) anyone performing the duties of a "key employee" or "professional."12 However, in light of the Statute's broad definitions of "key employee" and "professional," this ostensible limitation is not particularly significant.
The Act also endorses post-employment covenants that prohibit employees from soliciting (or attempting to solicit, directly or by assisting others) customers and prospects for the purpose of providing competitive products or services.13 Consistent with the preexisting law, the Statute limits the permissible scope of such restrictions to those customers and "actively sought prospective customers" with whom the employee had "material contact" during his/her employment.14 However, the Statute significantly departs from preexisting law on the question of what language is required for such a covenant to be enforceable.
Unlike the preexisting law, the Act does not require a nonsolicitation covenant to expressly state that it is limited to actual/prospective customers with whom the employee had material contact, nor does the Act require the covenant to list or describe the products and services that are considered to be competitive.15 Instead, the Statute provides that any written "prohibition against 'soliciting or attempting to solicit business from customers' or similar language" shall be "narrowly construed to apply only to: (1) such of the employer's customers, including actively sought prospective customers, with whom the employee had material contact; and (2) products and services that are competitive with those provided by the employer's business."16
The Act does not require a nonsolicitation covenant to contain a geographic limitation, but it does require that the restrictions be limited to a reasonable time period. The Statute's two-year "rule of thumb" for reasonableness applies to nonsolicitation covenants, as well as noncompetes.
The Statute alters the preexisting law regarding nondisclosure covenants in one significant respect. Under the pre-Statute case law, a nondisclosure covenant will be deemed overly broad and unenforceable if it does not contain an express time limit or if it contains a time limit that goes beyond what is actually needed to protect the employer's confidential information. Under the Act, however, an employee may be prohibited from using/disclosing an employer's confidential information for as long as the information remains confidential, and no express time limit is required.17
Obtaining the Benefits of the Statute
For employers wishing to reap the benefits of the Statute, the first step is to have a restrictive covenant agreement (RCA) that complies with the Act's requirements. Many Georgia employers have existing RCAs in place, and the covenants contained therein may very well pass muster under the Act. However, as mentioned above, the Statute applies only to agreements that are entered into on or after November 3, 2010. Consequently, to secure coverage under the Act, employers must replace any preexisting RCAs with newly executed agreements that conform with the Statute's requirements.
As with any contract, an RCA must be supported by "consideration." For a new hire, this requirement can be easily satisfied by the job offer itself or the simple act of hiring the employee. For incumbent employees, the consideration requirement can be satisfied by continued employment (i.e., refraining from firing the employee), a promotion, a signing bonus, or anything else that has value. However, if not handled properly, the rollout of new or replacement RCAs to incumbent employees may lead to workplace morale problems and even unwanted departures. Therefore, any such rollout should be preceded by careful planning and analysis.
Finally, although the Act's pro-enforcement standards are a welcome departure from the preexisting law, it remains important to carefully draft RCAs so that their restrictions do not exceed what is necessary to protect the employer's legitimate interests. While the Act allows courts to modify overly broad covenants, modification is not required. In light of the Georgia courts' longstanding hostility toward restrictive covenants, judges likely will be disinclined to modify an overly broad covenant if it appears that the over-breadth is the product of overreaching.
1 Watson v. Waffle House, Inc., 324 S.E.2d 175, 177 (Ga. 1985).
2 The Statute (O.C.G.A. §§ 13-8-50 et seq.) was enacted with the proviso that it would not become effective unless and until the Georgia Constitution is amended so as to allow for legislation easing the impediments to enforcing restrictive covenants.
3 The Statute addresses restrictive covenants found in various types of agreements, including (but not limited to) agreements between employers and employees, contracts relating to the sale of a business, franchise agreements, and agreements between manufacturers and distributors. This article covers only those provisions relating to employee-employer restrictive covenants.
4 O.C.G.A. § 13-8-54(a).
5 O.C.G.A. §§ 13-8-53(d) & 13-8-54(b).
6 O.C.G.A. § 13-8-53(a).
7 O.C.G.A. §§ 13-8-53(c)(2) & § 13-8-56(2).
8 O.C.G.A. § 13-8-53(c)(1).
10 O.C.G.A. § 13-8-57(b).
11 This two-year rule of thumb does not apply to noncompete covenants that are made in connection with the sale of a business. The Act adopts a five-year rule of thumb for noncompetes that are ancillary to the sale of a business.
12 O.C.G.A. § 13-8-53(a).
13 O.C.G.A. § 13-8-53(b).
17 O.C.G.A. § 13-8-53(e).
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