Key Changes to Georgia’s Law Governing Restrictive Covenants in Employment Agreements – Part One

As has been explained in prior postings on this website, Georgia’s law governing restrictive covenants in employment agreements (covenants not to compete, not to solicit customers, not to use or disclose confidential information and not to solicit company personnel) has undergone major changes in the past several months. Georgia has gone from having the “rules” set forth in a serious of court decisions – known as common law – to having the “rules” set forth in a new body of statutes.  But, as is almost always the case when new laws are enacted, it will be several years before we will really know how the courts will interpret the new statutes.  This three part article will address just some of the key changes in this area of the law that are likely to be “fleshed out” by the courts.

Part One discusses general changes applicable to each of these types of covenants.  After providing some additional general information about the changes in this area of the law, Part Two will discuss changes applicable to in term and post-employment covenants not to compete.   Part Three will discuss changes applicable to covenants not to solicit customers and employees, nondisclosure agreements, and covenants entered into as part of a sale of a business.

As will be clear from this analysis, there is potential for a substantial amount of litigation to establish how Georgia’s courts will interpret this new body of law.

Effective Date:  May 11, 2011

The date the new law went into effect is somewhat uncertain, but most likely it applies to employment agreements that were signed on or after May 11, 2011.

There is an argument that the restrictive covenants law that was passed by the Georgia Legislature in 2009 became effective either in November 2010 or on January 1, 2011.  There is also an argument that that law never became effective.  That 2009 law – which may or may not have ever become effective – was superseded by the law that was passed by the Georgia Legislature and signed into law by Georgia’s governor on May 11, 2011. It is widely believed that the 2011 law became effective upon being signed by the governor.

Any agreements that were signed prior to May 11, 2011 are not covered by the new law.  Depending on the date the agreement was signed (and the courts’ determination whether the 2009 law ever became effective), any agreement signed prior to May 11, 2011 will be governed by either Georgia’s common law or the law that was passed in 2009 and approved by voters passing a constitutional amendment in November 2010.  That issue will have to be resolved by the courts.

Bottom Line: The current law governing restrictive covenants seems to apply to all agreements containing restrictive covenants that were signed on or after May 11, 2011.  Agreements containing restrictive covenants that were signed before the constitutional amendment was passed in November 2010 will be governed by Georgia’s common law.  The applicable law for the time frame between the November 2010 vote and May 11, 2011 is a gray area for the courts to address.  Although this change in the law was marketed by its supporters as an effort to limit further litigation in this area of the law, just the opposite seems likely – at least in the short term.

The Scope of the Law is Very Broad

Although the discussion of this new law has focused on the employer/employee relationship, the law actually applies to a host of other relationships.  If you operate a distributorship, own a franchise, or work as an independent contractor, this new law could apply to you in certain circumstances.

Bottom Line: Regardless of whether you are an employee, employer, independent contractor, partner, distributor, distributee, franchisor, or franchisee, you should consult counsel before signing any agreement that contains any  restrictions on competition, solicitation of customers or personnel, or disclosure of confidential information.

If the Agreement Contains Overbroad Language, the Courts May Now Have the Power to Rewrite the Agreement and Enforce it as Rewritten.

Historically, Georgia courts have refused to rewrite an illegal restrictive covenant.  Thus, if a covenant was not enforceable as written, it would be thrown out altogether.  This policy served to force employers to draft reasonable restrictions so that they would not risk having a court find the covenant to be unenforceable.  The new law allows courts to modify unenforceable restrictive covenants to render them enforceable.  This gives employers incentive to overreach in drafting broad covenants, anticipating that a court will simply narrow – rather than throw out – any covenant that goes too far.

Under the new law, modification seems to mean removing unenforceable language and enforcing the rest.  The new law does not seem to authorize a court to simply rewrite a restrictive covenant, as some states allow.  And the new law seems to prohibit courts from modifying a restrictive covenant so as to render it more restrictive with regard to the employee than as originally drafted.

In light of Georgia’s long history of disallowing “blue penciling” or rewriting of unenforceable restrictive covenants, it remains to be seen how Georgia’s courts will approach this new ability to modify restrictive covenants.  Extensive litigation will likely be required before the new ground rules are established.

Shifting Burden of Proof

If an employer is able to prove that (1) the covenant at issue is necessary to protect legitimate business interests, and (2) the covenant otherwise complies with the new statute, the court is required to presume that the restriction is legal.  The burden will then shift to the employee to avoid enforcement of the restriction by showing that the covenant is not reasonable or does not comply with the requirements of the statute.  Extensive litigation will likely be required before it becomes clear how the courts will apply this new burden-shifting rule.

Relevance of Economic Hardship

Although this new law is widely regarded as being favorable to employers, it specifies that the possibility of economic hardship to the employee as a result of the enforcement of the restrictive covenant is relevant to a court’s assessment of the enforceability of the restriction.  In other words, if the employee will be unlikely to be able to earn a living if the restriction is enforced as written, a court can consider either modifying or throwing out the restriction.

Economic hardship to distributors, lessees, partners, franchisees, sellers, and employers that have contracted with other employers, cannot be considered by a court in deciding whether to enforce restrictive covenants against them.  Presumably, this distinction is based on an assumption by the Georgia Legislature that these entities are in a better bargaining position at the outset than employees may be.

Broader Range of Entities That Can Enforce Restrictions

The new law authorizes third party beneficiaries and assignees of restrictive covenants to enforce the covenants.  This seems to resolve the question of whether a company that is not a party to the restrictive covenant agreement can nevertheless enforce the restrictions in certain circumstances.

The fact that the employer is no longer in business is not a defense to enforcement of the restrictions where the business was shut down due to the employee’s violation of the restrictive covenants.  This protects a business that wishes to sue after being shut down by a rogue employee’s departure – and precludes the rogue employee from arguing that the business can’t sue because it is no longer in operation.

Stay tuned for Part Two, which will address changes in the law governing specific covenants.

Please note that this article is not intended to be comprehensive, but briefly summarizes recent changes in the Georgia law governing restrictive covenants. 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.

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