Georgia Legislature Tries to “Fix” Problem With Effective Date of Restrictive Covenants Law

Georgia faces a very confusing situation with respect to the effective date of its recent change in the law governing restrictive covenants in employment and other agreements.  Until recently, Georgia’s law governing noncompetes, covenants not to solicit customers and employees, and nondisclosure of confidential material was found in a body of Georgia caselaw that all flowed from a constitutional provision barring conduct restrictions that are in restraint of trade.  Restrictions that were deemed by courts to be in restraint of trade were simply not enforceable under Georgia law.  The Georgia Legislature tried to fix what they perceived to be a confusing body of caselaw by enacting a comprehensive restrictive covenants act (the “Act’)  that rewrote the law governing restrictive covenants in the context of not only employment but also many other types of business relationships, including franchises and distributorships.  Before the Act could go into effect, the Georgia Constitution had to be amended so that the Act wouldn’t be considered unconstitutional under the “restraint of trade” language in the Constitution.

Here is the problem:  The Act states that it becomes effective the day after the “enabling” constitutional amendment is passed.  The “enabling” constitutional amendment was passed in November 2010.  But, Georgia law specifies that constitutional amendments don’t become effective until January 1 in the year following passage.  So the “enabling” constitutional amendment didn’t go into effect until January 1, 2011.  This leaves open the question of whether the Act went into effect the day after the election in November 2010 (as stated in the Act) or on January 1, 2011 when the enabling constitutional amendment became effective.  If the Act went into effect in November 2010, it was unconstitutional when it went into effect.  The courts will have to decide whether this means that the Act was unconstitutional until January 1, 2011, or whether this means that the Act remains unconstitutional on the theory that the subsequent constitutional amendment couldn’t remedy the problem of the Act being unconstitutional.  To address this confusion, the Legislature is currently discussing re-passing the Act so that the Act will have been enacted after passage of the enabling constitutional amendment.  This leaves several questions unresolved:  What happens to restrictive covenant agreements that were signed between November 2010 and January 1, 2011 – or those that were signed between November 2010 and the date the new act is passed (if it is passed)?  And what happens if the Act is modified before it is re-enacted?  Anytime a law passes back through a legislative body, there is always an open question as to whether it will be modified en route (or whether it will be passed a second time.)  So no one knows what the “revised” restrictive covenants act may look like – if it is passed.  Stay tuned.

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