Georgia Referendum On Restrictive Covenants In Employment Agreements

By Mari L. Myer, The Myer Law Firm, Decatur, Georgia 1

Georgia has long had a reputation for being very friendly to employers except in one area:  it is difficult to enforce a post-employment restriction against an employee either competing with the employer or soliciting business from the employer’s customers. These restrictions are commonly referred to as “restrictive covenants”.

Georgia’s reputation for being a difficult place to enforce restrictive covenants stems from a provision in its constitution that prohibits restrictions that restrain trade.  If a restrictive covenant runs afoul of this constitutional provision, the restriction can’t be enforced by a Georgia court.  The result is that Georgia’s courts will only enforce restrictive covenants that are very narrowly drawn and that will not prevent the employee from earning a living in his/her chosen field.

When deciding whether to enforce a restrictive covenant, a court will look at whether the covenant is reasonable as to its duration, scope and geographic territory.  The restriction cannot be revised – “blue-penciled” – by the court, which means that the exact language of the restriction must pass muster under Georgia law or it will be stricken altogether.

A. The Existing Caselaw Governing Restrictive Covenants is Clear Enough to Practitioners Familiar With it.

Although the rules governing whether a restrictive covenant will be enforced by a Georgia court can be confusing to one not familiar with this area of the law, the rules can be easy to understand and apply once the practitioner has studied them closely.  The result is that, although an enforceable restrictive covenant can be difficult for an inexperienced practitioner to draft under Georgia law, once a covenant has been drafted it is often easy to anticipate whether a court will enforce it.  This affords a level of certainty for both employer and employee that often enables the parties to negotiate a resolution of their dispute without resort to protracted litigation.

One consequence of Georgia’s constitutional prohibition against restrictions that restrain trade is that companies can and do hire employees away from their competitors and take advantage of the employees’ skills and contacts within the industry in situations where an employee hasn’t signed an enforceable restrictive covenant.  Although some employers are understandably troubled by this, others would argue that this behavior is classic free market competition that should be allowed to continue.

B. The Statutory Revision to the Law of Restrictive Covenants Will Create – Not Eliminate – Problems.

A change to the way Georgia’s courts interpret restrictive covenants may be coming if the Georgia Legislature has its way.  The Legislature has accepted critics’ arguments that the current state of Georgia caselaw governing restrictive covenants is both confusing and bad for business.  In 2009, a legislative act was passed and signed by the Governor, subject to approval by a majority of voters in an upcoming November 2010 constitutional referendum.  If the Act is approved in the  referendum, it will become effective immediately thereafter, and it will substantially rewrite the law governing restrictive covenants.  In a nutshell, O.C.G.A. §§13-8-51 et seq. (the “Act”) will allow employers and employees, and certain other types of entities, to agree in writing that, following termination of the parties’ relationship (employment or some other type of business relationship), the employee2 will refrain from competing with the employer or soliciting business from the employer’s customers.  The Act provides a handful of guidelines regarding what may be considered a reasonable restriction, and it authorizes courts to rewrite – “blue pencil” – restrictions that a court concludes are not reasonable.

Unfortunately, as is explained herein, what is being touted as a “silver bullet” to cure the perceived evils of the current caselaw governing restrictive covenants may turn out to be neither necessary nor the promised “cure”.

1. Expensive and Time-Consuming Litigation Will Be Necessary to Interpret the Act and to Determine Which of the Existing Caselaw May Still Apply.

First, if the Act becomes law the well-developed body of Georgia caselaw interpreting restrictive covenants will only provide guidance where it either (a) is not specifically rejected by the Act, or (b) addresses matters that are outside the coverage of the Act.  As is generally the case when comprehensive legislation is adopted, there will no doubt be quite a bit of litigation to (a) interpret the Act, and (b) establish which of the old caselaw will still apply and in what circumstances.  Such cases will take several years to wind their way through the trial and appellate courts in Georgia, with an uncertain outcome.  Until these cases are resolved by Georgia’s appellate courts, there likely will be differences in how individual judges interpret and apply the Act.  Thus, at least initially, the Act will create – rather than clear up – confusion in this area of the law.

2. The Act Has Gaps and Ambiguities That Must be Resolved By Expensive and Time-Consuming Litigation.

Second, the Act contains both gaps and ambiguities that also will have to be resolved by the courts.  Again, this will spark litigation that will likely take several years to wind its way through the courts, also with uncertain outcomes.

a. There is a Coverage Gap.

The most glaring gap comes from the categories of employees covered by the Act.  The Act’s coverage is limited to salespeople, members of management, key employees and professionals, as each of these terms is defined in the Act.  A threshold issue prior to application of the Act to a restrictive covenant will be whether the employee against whom the employer seeks to enforce the covenant falls within one of these four categories.  If the employee doesn’t fall within one of these four categories, the employee will not be covered by the Act.  While these four categories appear to encompass the types of employees that an employer is most likely to want to bind to a restrictive covenant, in some instances there will be a perceived need to bind employees who don’t fall within any of these four categories and thus are not covered by the Act.

b. The Act Suggests that the Categories of Employees Who Do Not Specifically Fall Within its Coverage Cannot Be Bound by Restrictive Covenants.

If the employee is not in one of the four categories covered by the Act, the court must determine whether the Legislature intended to preclude the enforcement of restrictive covenants against such an employee.  The language of O.C.G.A. §13-8-54(b) suggests that only restrictive covenants that fall within the Act can be enforced.  If the court concludes that this was the legislative intent, then some categories of employees who could have been subject to restrictive covenants under the existing caselaw will not be subject to restrictive covenants that are signed after the Act goes into effect.

Since the Act facially states that it only applies to restrictive covenants signed after the Act’s effective date, courts must decide whether to enforce restrictive covenants signed by employees who fall outside the scope of the Act, where the restrictive covenants were signed prior to the Act’s effective date.

If courts conclude that, notwithstanding O.C.G.A. §13-8-54(b), restrictive covenants can still be enforced against categories of employees who fall outside the scope of the Act, the restrictive covenants applicable to these other categories of employees will be governed by the existing caselaw and not by the Act.

Of course, different trial courts will likely reach different conclusions on these threshold issues – again creating uncertainty that must be resolved through years of litigation in the trial and appellate courts.

3. Blue Penciling Will Allow Judges to Rewrite Covenants from the Bench, With a Resulting Loss of Both Predictability and Control.

a. Blue Penciling Will Create Uncertainty as to How and When a Court Will Rewrite a Covenant.

An additional area of concern regarding the Act is the effect of the inclusion of a provision allowing courts to blue pencil otherwise unenforceable restrictive covenants in a way that renders them enforceable.  At least initially, courts are likely to use different criteria to determine when to rewrite a poorly drafted covenant and when to simply refuse to enforce it – again creating issues to be resolved by the appellate courts.  This initial outcome can be predicted from an analysis of how Georgia’s trial courts have interpreted their existing blue penciling powers with respect to restrictive covenants ancillary to a sale of business:  sometimes courts have enforced the restrictions as written; sometimes courts have rewritten the restrictions and then enforced the rewritten restrictions; and sometimes courts have concluded that the restrictions don’t hew closely enough to the law to be “saved” – in which case the courts have thrown out the covenants altogether.  It is difficult to discern from the caselaw in which blue penciling has been considered in the sale of business context when and how a court will interpret such a covenant.  This has had the effect of creating considerable uncertainty regarding what such a covenant can safely require of the business seller.  Under the Act, this uncertainty will likely play out in the context of employee restrictive covenants as well. This uncertainty is just the opposite of what the Legislature has stated it intended to accomplish with the Act.

b. Blue Penciling Will Authorize Trial Court Judges to Rewrite Covenants, Possibly With Little Regard for the Parties’ Actual Intent.

Voters who object to judges legislating from the bench should be concerned that the blue penciling power granted to judges under the Act will in some instances have the effect of allowing trial court judges to rewrite contracts from the bench.  This will, of course, remove from parties the power to negotiate their own agreement where a judge finds fault with the terms of the restrictive covenant.  Although it is reasonable to expect a judge to try to rewrite a covenant in a way that reflects the parties’ actual intent, the Act places very few limits on the judge’s discretion in this respect.  An unhappy party will be left to seek yet another re-write by an appellate court.  Thus, by allowing a trial level judge to blue pencil, the Legislature has forced parties to give up control over their own “deal”.

Conclusion:  The Act is Likely to Create Confusion and Deliver Greater Control Over Contract Terms to Trial Court Judges.

In contrast to the problems with the Act that are described above, under the current caselaw, the rules are sufficiently clear as to what a restrictive covenant can and cannot require in order to be enforced by a Georgia court.  A careful practitioner can draft an enforceable restrictive covenant simply by following these rules.  Similarly, counsel can determine the enforceability of a restrictive covenant with a fair degree of certainty without having to litigate over it.

Although the Act allows the employer and an employee covered by the Act to agree on a duration, scope and territory of a restriction on either competition or solicitation of customers, and even offers some guidance as to durations that will generally be considered reasonable for various types of agreements, the ability to have a court blue pencil a poorly drafted restrictive covenant after the fact is an “out” for a lazy practitioner.  The poorly drafted restriction still could be stricken by a court altogether, or it could be enforced as written, or it could be rewritten by a court in such a way as to be unrecognizable to the parties.  And the parties will not know which of these events will occur until a trial court reviews the restrictive covenant. As a result, this flexibility in the Act – which is touted by its supporters as one of its chief benefits – will inevitably lead to litigation over whether the restrictive covenant (a) is sufficiently specific to be understood and obeyed by the employee, (b) requires modification by the court before it will be enforced, or (c) is so poorly drafted that a court will simply strike it rather than rewrite it.  Relying on the Act, a lazy practitioner may in some instances be able to draft a post-employment restriction that will escape being thrown out altogether by a court (as would likely happen under the current caselaw), but the parties will wind up litigating over the specifics of an enforceable restriction.  The result will be to increase litigation costs at the back end without providing any certainty on the front end as to the ultimate outcome.   Surely this is not in the best interests of most clients.

The analysis set forth in this article is provided for general understanding only and should not be considered legal advice.  Counsel should always be consulted for advice regarding a specific situation.

  1. Ms. Myer is the Principal of The Myer Law Firm, based in Decatur, Georgia.  A graduate of Boston University School of Law and Wellesley College (B.A. cum laude), she has over twenty years of experience litigating business and employment disputes, including matters involving restrictive covenants in employment agreements, trade secrets, intellectual property, employee separations, and business divorces.  She also negotiates and drafts employment agreements, separation agreements and related types of documents.  Her clients include small and medium sized businesses as well as individuals.  She is a long-time member of the Executive Committee of the Technology Law Section and chairs the Section’s Litigation Committee.
  2. This article uses the terms “employee” and “employer” loosely.  The Act sets rules governing a variety of relationships other than employment relationships, including by way of example those between independent contractors and principals and between distributors and manufacturers.

Leave a Comment