Update on the Confusing Changes to Georgia’s Restrictive Covenants Law (Covenants Not to Compete, Not to Solicit Customers, Not to Solicit Employees and Not to Disclose Confidential Information)

Georgia has had a great deal of activity in the past few years regarding its laws governing restrictive covenants in employment agreements.   The result has been a great deal of uncertainty, even though (ironically) the stated reason for much of the activity was to provide certainty.  Here is a summary of what has happened to date, followed by an analysis of what may happen over the next several months.

Georgia Restrictive Covenants Prior to November 2010 Were Governed by Court Decisions

Prior to November 2010, Georgia’s law governing restrictive covenants in employment agreements was spelled out in a series of court decisions, called case law.  These court decisions were guided by a provision of the Georgia Constitution that prohibits the enforcement of agreements that are deemed to be in restraint of trade.  This language in the Georgia Constitution requires that covenants not to compete, not to solicit customers, not to solicit employees and not to disclose confidential information must be very narrowly written in order to be enforceable in Georgia.

In 2010, the Georgia Legislature passed a statutory scheme that was designed to dramatically rewrite the law of restrictive covenants, in an effort to make broader restrictions easier to enforce.  The catch was that, in light of the constitutional prohibition against agreements in restraint of trade, the new statutory scheme could only go into effect if Georgia’s citizens approved a constitutional amendment authorizing it.  The constitutional amendment was adopted in November 2010.  This is where the story gets confusing.

Questions Exist Regarding the First Statutory Effort to Rewrite Restrictive Covenant Law

There are several potential problems with the enactment of the statutory scheme and the vote on the constitutional amendment.  So far, only some of these problems have been addressed.

The first problem is that the new statutes were passed before the constitutional amendment was approved.  The statutes stated on their face that they would become effective the day after the passage of the constitutional amendment authorizing the statutes.  The constitutional amendment was finally adopted over a year after the statutes were enacted, and the amendment was silent as to when it would become effective.  In Georgia, constitutional amendments that don’t specify a different effective date become effective on January 1 of the year after their enactment.  This means that, even though the statutes state on their face that they will be effective the day after the election (which occurred in November 2010), the authorizing constitutional amendment didn’t become effective until two months later, on January 1, 2011.

The discrepancy between the stated effective date of the statutes and the effective date of the constitutional amendment left the statutory scheme in limbo, with a question over whether or when the statutory scheme became effective.   If the statutes became effective the day after the election in November 2010, they were unconstitutional on the day they became effective, and it is not clear that the lack of constitutionality could have been “cured” retroactively by enactment of the constitutional amendment two months later on January 1, 2011.  If the statutes became effective on January 1, 2011, when the constitutional amendment became effective, the statutory scheme likely was constitutional when it became effective – but since this was not the effective date specified in the statutes, it is not clear how January 1 could be the effective date.  The appellate courts have not resolved this question.  This means that any efforts to enforce restrictive covenants signed between November 2010 and the Georgia Legislature’s effort to “fix” this problem in May 2011 will have uncertain outcomes.

Second Statutory Effort Was Intended to Resolve Potential Problems with First Statutory Effort

The Georgia Legislature tried to address the problems described above by enacting a slightly different version of the statutory scheme in May 2011.  The 2011 version of the statutory scheme became effective upon being signed into law by the Governor on May 11, 2011, several months after the authorizing constitutional amendment was passed.   If the amendment to the constitution passes muster, the May 2011 statutory scheme is likely to be deemed constitutional and will govern the interpretation of all restrictive covenant agreements signed on or after May 11, 2011.

Questions Remain Regarding the Effort to Adopt the Constitutional Amendment, Leaving Uncertainty in its Wake

The remaining issue – which is still unresolved – is whether the amendment to the Georgia Constitution was properly adopted.  The amendment appears to contain the necessary language to authorize the new statutory scheme.  But, there is a widespread belief among Georgia attorneys that the language placed on the ballot – on which many voters no doubt based their decision whether to support the amendment – did not adequately explain to voters that they were being asked to grant additional powers to the Georgia Legislature for the purpose of restraining a particular type of trade.  Several Georgia attorneys are exploring a possible challenge to the enactment of the constitutional amendment on the premise that voters were not adequately informed of the issue on which they were voting.  While there is some Georgia case law that suggests that ballot measures don’t have to be particularly clear when they address taking powers away from the Legislature, those cases may not apply where (as here) the ballot measure sought approval of an amendment that gave additional powers to the Legislature.

All of this confusion over the ballot measure means that it is only a matter of time until the Georgia Supreme Court will be asked to decide whether the ballot measure was “kosher”, such that the constitutional amendment was properly adopted, such that the statutory scheme signed into law in May 2011 is enforceable.

If the Supreme Court agrees that the ballot measure passes constitutional muster, then the constitutional amendment will remain in effect and the statutory scheme signed into law on May 11, 2011 will be enforceable.  In that case, the restrictive covenants in any employment agreement governed by Georgia law that was signed on or after May 11, 2011 will be governed by the new statutory scheme.

If the Supreme Court determines that the ballot measure does not pass constitutional muster, the constitutional amendment will be deemed not to have gone into effect and both of the statutory schemes enacted in reliance on being authorized by the constitutional amendment will be deemed unconstitutional.  In that situation, Georgia’s case law will continue to govern the interpretation of all restrictive covenants signed in Georgia, regardless of the date they were signed.

Even if the Supreme Court concludes that the ballot measure passes muster and the May 2011 statutory scheme is enforceable in Georgia, there will still be uncertainty regarding the enforcement of the initial statutory scheme that may (or may not) have been in effect for some dates between November 2010 and May 11, 2011.  Other litigation will have to address the enforceability of that scheme.

Unfortunately, the situation is likely to become even murkier before the issues outlined above are finally resolved.  Ironically, the statutory scheme was enacted with the promise that it would resolve confusion over the interpretation and enforcement of restrictive covenants in Georgia.

Stay tuned.

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.

Leave a Comment