This is Part Three of an article discussing the recent changes to Georgia’s law governing restrictive covenants such as covenants not to compete, not to solicit customers, not to solicit personnel and not to disclose confidential information. Part One discussed 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 discussed changes applicable to in term and post-employment covenants not to compete. This 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 should become clear from a review of this article, many issues remain for resolution by Georgia’s courts over the next several years.
Post Term Covenants Not to Solicit Customers Are Authorized Within Certain Parameters.
Who is Covered?
Although the new law frequently uses the term “employee”, an “employee” is defined to include not just a W-2 employee but also an independent contractor, distributor, franchisee, licensee, and lessee. This broad definition should be kept in mind whenever one reviews the changes in this area of the law.
Under the new law, an “employee” can be bound by a covenant not to solicit customers in any or all of these situations: where the employee interacted with a customer or prospect for the benefit of the employer; where the employee supervised such interaction even if the employee was not directly involved in the interaction; where the employee learned confidential information about the customer; or where the employee earned money as a result of sales to a customer during the two years prior to the employee’s termination.
A covenant not to solicit customers can also be used to bar a former employee from using confidential customer information to solicit business in competition with the employer.
As is noted above, an employee who earns money as a result of sales to a customer can be barred from soliciting business from that customer. It seems likely that there will be litigation to establish the permissible parameters of this restriction. For example, the courts will need to determine how strong the connection must be between the employee’s earnings and sales to a specific customer. Since it could be argued that all salaries paid by a business that sells something are paid as a result of sales to customers, this language could potentially apply to all employees of any business that sells something. The courts will have to decide whether the restriction can be this broad. Similarly, litigation may be necessary to determine the outcome where an employee earns a general performance bonus that is not tied to specific sales and otherwise has no interaction with a specific customer prior to leaving the company.
What is the Allowable Scope?
In a dramatic shift from the existing common law, a covenant not to solicit customers that sets forth a good faith estimate of the employee’s expected duties, product responsibilities and services as of the commencement of employment will now be enforced even if it is later determined that the scope is overbroad. The court will be expected to construe such a covenant to only cover the employee’s actual activities and the actual products or services that are offered.
As an alternative to identifying a more specific scope, a covenant not to solicit customers can now simply state that it applies to activities, products and/or services of the type conducted, authorized, offered, or provided by the employee during the two years immediately prior to the termination of employment – another dramatic shift from the existing common law.
What is the Allowable Geographic Territory?
In another dramatic change from the existing common law, a covenant not to solicit customers that sets forth a good faith estimate of the employer’s anticipated geographic territory as of the commencement of employment will now be enforced even if it is later determined that the specified territory is overbroad. The court will be expected to construe such a covenant to only cover the employer’s actual geographic territory. Note that this analysis refers to the employer’s geographic territory. Previous caselaw required that restrictive covenants be tied to the employee’s activities and geographic territory. The new law seems to allow such restrictions to be tied to the employer’s activities and geographic territory – thereby allowing a greater post-employment restriction on an employee.
What is an Allowable Duration?
Under the new law, a post-employment non-solicitation of customers is presumptively reasonable if its duration is two (2) years or less from the date employment terminates. It is presumptively unreasonable if its duration is more than two (2) years from the date of termination.
Note that the approved duration described above applies just to an employment situation. A covenant not to solicit customers when applied to a distributor, dealer, franchisee, lessee, or licensee can be longer under the new law. Such a restriction is considered presumptively reasonable if its duration is three (3) years or less from the termination of the business relationship. It is presumptively unreasonable if its duration is more than three (3) years from the termination of the business relationship.
The Allowable Parameters of Covenants Not to Disclose Confidential Information Are Considerably Broadened.
Historically, information that does not qualify as a trade secret under Georgia law has been subject to confidentiality protection only for a limited and reasonable duration. (Trade secrets, in contrast, are protected forever so long as they remain a trade secret as defined under Georgia law.) The new law brings non-trade secret confidential information and materials in line with trade secret law, allowing an employer to protect such information and materials from disclosure so long as the information or materials remain confidential.
The Allowable Duration of a Restrictive Covenant That is Part of a Sale of Business is Considerably Longer Under the New Law.
A restriction ancillary to a sale of business is now considered presumptively reasonable if its duration is no longer than the longer of (1) five (5) years or less following the sale of the business, or (2) the period of time during which payments are being made in connection with the sale of the business. Any restriction that has a longer duration than the longer of these two categories is considered presumptively unreasonable.
Finally, please note that for all of these types of covenants, the law allows a court to enforce the covenant even if only a portion of its scope has been violated, or even if only a portion of the specified geographic area has been violated. This new rule will likely serve to limit the number of situations in which the courts will decline to enforce an overbroad restrictive covenant, with courts now being more likely to simply narrow the covenant and enforce it as narrowed. Under the prior law, an overbroad restrictive covenant likely would have simply been thrown out by a court.
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.