This is Part Two of a three part 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, this 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 should become clear from a review of this article, many issues remain for resolution by Georgia’s courts over the next several years.
Newly Signed Covenants That are Not in Compliance With the New Law Are Not Enforceable as Written.
Any restrictive covenant agreement that (1) was signed after the new law became effective, and (2) falls within the scope of the new law, must comply with the new law. Even if the agreement would have complied with prior common law, if it falls within the scope of the new law but does not comply with the new law, it cannot be enforced as written. It is possible, but not certain, that such an agreement could be modified by a court to bring it into compliance with the new law and then be enforced as modified. This is a matter to be resolved by the courts.
It is not clear how a court would evaluate a restrictive covenant agreement that falls outside the scope of the new law, if it was signed after the new law became effective. That issue remains for resolution by the courts.
Restrictive covenant agreements that were signed before the new law went into effect will continue to be governed by Georgia’s extensive body of restrictive covenant case law and not by the new law.
Who is an Employee under the New Law?
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, distributee, franchisee, licensee, and lessee. This broad definition should be kept in mind whenever one reviews the changes in this area of the law.
In Term Covenants Not to Compete Are Authorized.
There has been some recent litigation regarding the allowable terms of a covenant not to compete with an entity during an ongoing relationship. Examples of such an agreement (called an “in term covenant”) would be a covenant not to compete with one’s employer during the employment, or a covenant not to compete with a franchisor or distributor while working as its franchisee or distributee. The new law authorizes this type of in term covenant not to compete so long as the covenant is reasonable in duration, geographic area and scope.
The scope, duration or geographic area covered by the in term covenant not to compete need not be specified where the language of the restriction protects the purpose or subject matter of the relationship. It is likely that there will be litigation over whether specific types of restrictions can be deemed to protect the purpose or subject matter of the relationship.
The in term covenant also need not specify a scope, duration or geographic area where the language of the restriction serves to protect against development of a conflict of interest as a result of the employee’s, franchisee’s or distributee’s relationship with a third party. Since efforts to protect against a conflict of interest can take many forms, it is likely that there will be litigation over what type of language meets this requirement.
Any covenant that fails to contain language that either protects the purpose of the relationship or protects against development of a conflict of interest must specify a scope, duration and geographic area to be enforceable.
If the in term covenant not to compete specifies a duration, a duration that is equal to or less than the length of the parties’ relationship will be considered reasonable. Although this provision makes sense when the person being restricted is an employee with a specified term of employment, it is not clear how this change in the law will be interpreted when it is applied to a distributor, franchisee or other independent contractor where there is no term of employment (indeed no employment at all). This is an issue for the courts to resolve.
Post-Term Covenants Not to Compete Are Authorized Within Certain Parameters.
In recent years, it has been very difficult to draft a post-employment covenant not to compete that complies with Georgia’s common law. The new statutes authorize post-employment noncompetes and set guidelines for them.
Who is Covered?
A post-employment noncompete will now be allowed, but only as to employees whose duties fall within these categories: soliciting customers; engaging in sales or taking orders for contracts for products or services to be performed by others; managing the business or a department; working as a key employee; or working in a professional capacity.
The two “sales” categories seem to be fairly self-explanatory, in that if an employee is somehow involved in either selling to existing customers or bringing in new customers, the employee probably will fall within the scope of employees covered by this change in the law.
Although it is often easy to determine whether someone is involved in management, there may be some litigation to establish whether, for example, a manager should be defined the same under this law as a manager is defined under the Fair Labor Standards Act (which governs whether an employee may be exempt from earning overtime by virtue of being a manager as defined by that body of law.) While someone in the executive suite will clearly fall within this management category, courts will have to decide when someone who is further down the totem pole is considered to be managing the business or a department such that he or she falls within the scope of this new law.
The determination of who is a “key employee” also may spark some litigation, as the definition specifies rather vaguely that the employee should enjoy a high level of recognition among customers or be intimately involved in planning the direction of the business. It isn’t always clear who within an organization has these sorts of relationships or responsibilities, and there likely will be litigation over those who fall within the gray areas.
The definition of “professional” may also spark some litigation. That category is supposed to apply just to employees who are doing work that requires advanced training or a degree as a result of prolonged academic study. Does this mean that everyone who has a college degree is a “professional” under the statute? Does this mean that everyone who holds a PhD is a professional, regardless of whether the employee works in a capacity that uses the degree? What if an employee holds a professional degree but is not employed using that degree? Or what if an employee holds a certificate related to certain specialized training and uses the knowledge related to that certificate on a day to day basis, but lacks an actual college degree? These are just a handful of situations that are likely to spark litigation over the “professional” category.
What is the Allowable Scope?
Georgia’s common law has historically required that a post-employment noncompete be limited in scope to activities in which the employee actually engaged during the employment; a noncompete with an overbroad scope was unenforceable. Under the new law, noncompete language that specifies at the beginning of the employment a scope based on a good faith prediction of the employee’s future activities, product responsibilities, and services as of the date employment would be terminated can be enforced. Indeed, such a restriction can now be enforced even if it turns out later that the prediction is overbroad. Instead, a court will be expected to construe the covenant to only cover the employee’s actual activities and the actual products and services offered. Litigation over what is an allowable scope, and over what is considered a “good faith prediction”, seems likely.
What is the Allowable Geographic Territory?
Georgia’s courts have a long history of refusing to enforce post-employment noncompetes that specify overbroad geographic territories or that specify geographic territories in which the employee has never worked. Under the new law, noncompete language that is signed at the beginning of the employment and that specifies a geographic territory based on a good faith prediction of the geographic territory in which the employee will work during the period of employment can be enforced. Enforcement will be availalbe even if it turns out later that the employee never worked in some of the specified geographic territory. A court will be expected to simply narrow the covenant’s geographic territory to encompass just the areas where the employee actually worked and then enforce the noncompete as modified. Litigation over what is an allowable geographic territory, and over what is considered a “good faith prediction”, seems likely.
Employers also now have the option of specifying that the noncompete’s geographic territory is wherever the employee worked as of the date the employment terminated, so long as the employee can determine at termination the maximum reasonable scope of the restriction. In other words, whereas Georgia law has historically required that the employee be able to determine on the date he/she signs the noncompete what territory is covered thereby, now the employee may not know his or her restricted territory until the day the employment terminates.
Employers also now have the option of linking the geographic restriction to where the employer does business (rather than linking to just where the employee works), which was not allowed under prior case law.
In addition, employers have the option of prohibiting an employee from going to work for specifically named competitors for a limited period of time, instead of or in addition to specifying a particular geographic territory in which the employee is prohibited from competing.
What is the Allowable Duration?
Under the new law, a post-employment restriction 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 restriction against 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.
Finally, courts may enforce a noncompete 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. The courts are asked to only enforce the portion of the restriction that has been violated. Litigation to establish the boundaries of such restrictions seems likely.
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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