Georgia s New Restrictive Covenant Act: What Employers Need to Know Presented by: Todd D. Wozniak Brett T. Lane
What are Restrictive Covenants? Contractual provisions that serve to prohibit or limit on an individual s (or sometimes an entity s) future business activities Non-competition, non-solicitation of customers, non-solicitation of employees, and non-disclosure provisions are the most common
Constant Tension An employer s legitimate interests v. an employee s right to earn a living, especially considering at-will principles Free trade and business competition v. protection of business information, training provided and customer relationships
The New Georgia Restrictive Covenant Statute Recently Georgia voters passed an amendment to the Georgia Constitution Amendment one: Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements? Codified at O.C.G.A. 13-8-51 et seq.
Purpose of the New Law The stated purpose of the Act is to bring Georgia in line with the overwhelming majority of other states and to establish a rule of reasonableness and legal analysis of these agreements. The goal is to decrease litigation, make enforcement more predictable, and provide employers with greater protection.
Significant Changes Brought About By The New Law
NON-COMPETE: GEOGRAPHIC SCOPE Old Common Law Must be determinable at the time the agreement was signed Can only cover geographic areas where the employee actually worked New Statutory Law May be determined by employee s covered territory at the time of termination Allows for a good-faith estimate of the geographic areas that may be applicable at termination O.C.G.A. 13-8-53(c)(1)-(2)
NON-COMPETE: SCOPE OF PROHIBITED ACTIVITIES Old Common Law Requires specificity in defining the activities an employee may not perform for a competitor Covenants prohibiting competing in any capacity are unenforceable New Statutory Law Allows a good-faith estimate of the activities, products, and services that may be applicable at termination Ultimately covers activities actually conducted and products/services actually offered. O.C.G.A. 13-8-53(c)(1)-(2)
NON-COMPETE: EMPLOYEES WHO CAN BE BOUND BY A NON-COMPETE Old Common Law No express limitation on the types of employees who may validly execute non-competes New Statutory Law Enforcement of noncompetes limited to employees who regularly solicit customers or engage in sales, are exempt executives or are considered a key employee or professional O.C.G.A. 13-8-53(a)
NON-COMPETE AND NON-SOLICITATION: TEMPORAL LIMITATIONS Old Common Law Temporal limitations evaluated on a case by case basis no presumption of reasonableness New Statutory Law Presumption of reasonableness dependent upon the type of covenant (e.g. 2 years following termination of employment, 3 years or less for sale of business) O.C.G.A. 13-8-56
NON-SOLICITATION: EXPANSIVE DEFINITION OF MATERIAL CONTACT Old Common Law Must have reasonable geographic limitation, or must be limited to customers with whom employee had actual contact on behalf of the company Must be limited to prohibiting solicitation for products and services competitive with the employer New Statutory Law Provides broad definition of material contact with customer required to trigger coverage O.C.G.A. 13-8-51(10) Does not require provision that defines the types of products or services considered competitive in order for non-solicit to be enforceable O.C.G.A. 13-8-53(b)
NON-SOLICITATION: CONNECTION WITH NON-COMPETITION PROVISIONS Old Common Law Rise and fall with noncompetition provisions -- if one is unenforceable, the other is automatically unenforceable New Statutory Law Judicial modification allows courts to modify individual provisions, likely allowing nonsolicitation covenants to be evaluated without regard to enforceability of non-compete
Under the New Statute Georgia Is No Longer All or Nothing Georgia Courts may now change an otherwise overbroad restrictive covenant by removing or severing unenforceable provisions. O.C.G.A. 13-8-51 (11)-(12); 13-8-53(d); 13-8-54(b) Modification is not mandatory Court can refuse to do so, or limit itself The only limitations are that the Court should try to achieve the original intent of the contracting parties and may not make any covenant more restrictive with regard to the employee than as originally drafted by the parties. O.C.G.A. 13-8-53(d); 13-8-54(b)
NON-DISCLOSURE: DURATION Old Common Law Reasonable time limit required as to nontrade secret confidential information New Statutory Law No time limit necessary Can protect information as long as it remains confidential or a trade secret O.C.G.A. 13-8-53(e)
NON-DISCLOSURE: DEFINING CONFIDENTIAL INFORMATION Old Common Law No set definition, leading to challenges to scope of contractual definitions New Statutory Law Defines confidential information to include information that relates to employer s business, is valuable, is not known to competitors and is disclosed to the employee because of the employment relationship O.C.G.A. 13-8-51(3)
Economic Hardship Provision In determining the reasonableness of a restrictive covenant between an employer and an employee... a court may consider the economic hardship imposed upon an employee by enforcement of the covenant. O.C.G.A. 13-8- 58(d)
JUDICIAL INTERPRETATIONS PointeNorth Insurance Group v. Zander (N.D. Ga. Sep. 30, 2011) Found that non-solicitation covenant was overbroad because it extended to all of the former employer s customers Court modified the covenant to apply only to customers with whom employee had contact while employed by the former employer Not an example of strict blue-penciling
OPEN QUESTIONS: IS THE NEW STATUTE CONSTITUTIONAL? November 2010 ballot language was vague, mentioned nothing about noncompetes or nonsolicits, and could be construed as manipulative The overwhelming majority of voters would not have known what they were voting for or against
OPEN QUESTIONS: WHAT LAW APPLIES COMMON LAW OR NEW STATUTE? Covenants entered into on or after May 11, 2011: New Statute Covenants entered on or before November 2, 2010: Common Law Between November 2, 2010 and May 11, 2011:???
OPEN QUESTIONS: HOW WILL COURTS APPROACH BLUE-PENCILING? The new statute arguably permits courts to strike overbroad provisions or to re-write them (so long as the covenant is not made more restrictive) Modification is, however, purely discretionary Ingrained judicial hostility towards the enforcement of noncompetes will not disappear overnight (especially if it appears the employer has overreached in drafting the covenant)
OPEN QUESTIONS: WHAT TYPES OF EMPLOYEES ARE SUBJECT TO NON-COMPETES? True non-competes are not enforceable against all types of employees under the new statute Key employee and professional definitions are especially subject to interpretation Expect this area to be litigated
OPEN QUESTIONS: WHAT IS THE FATE OF FORUM SELECTION AND CHOICE OF LAW CLAUSES? Georgia courts have long held that, in a restrictive covenant context, they will not apply the law of a foreign jurisdiction if that law would contravene Georgia s public policy Recently, the Georgia Court of Appeals went even further in Bunker Hill Int l Ltd. v. Nationsbuilder Ins. Services, Inc. (Ga. Ct. App. 2011) (decided under common law) and held that a party can invalidate a forum selection clause in an agreement containing restrictive covenants if it can show: (a) at least one of the covenants violates Georgia public policy and (b) that covenant is likely enforceable in the state provided for in the forum selection clause
OPEN QUESTIONS: WHAT IS THE FATE OF FORUM SELECTION AND CHOICE OF LAW CLAUSES? The new statute espouses a new public policy, which covenants drafted thereunder will be much less likely to violate So far, at least two federal courts in Georgia have refused to apply the new public policy to covenants entered into before May 11, 2011 Georgia state courts may disagree, however For covenants drafted on or after May 11, 2011, may be able to utilize forum selection clauses and choice of law clauses to avoid Georgia law (although employers may not want to avoid Georgia law under the new statute)
SHOULD I HAVE MY EMPLOYEES SIGN NEW RESTRICTIVE COVENANTS? Georgia law does not require additional consideration to support a new agreement signed by a current employee Is there a question of validity under common law? If so likely YES Is there a strong possibility that the employee cannot be subject to a non-compete under the new statute? If so NO (as to non-compete) May have the opportunity to streamline restrictive covenants and make them easier to administer
BROADER IMPLICATIONS FOR NATIONWIDE EMPLOYERS AND RECOMMENDED APPROACHES FOR DRAFTING
VARIOUS STATES: FOUR APPROACHES TO ENFORCEMENT 1] Presumptively Void (e.g., California, North Dakota) 2] All or Nothing (e.g., South Carolina, formerly Georgia) 3] Blue Pencil 4] Reasonable Alteration NOTE THAT, depending on the State, restrictive covenant law may be governed by: a statute of general application, a statute specific to a profession or circumstances, by common law, or a combination of the foregoing
RECOMMENDED APPROACH TO DRAFTING What legitimate business interests need to be protected? What states are in play for enforcement? What is the company trying to achieve with its restrictive covenants?
RECOMMENDED APPROACH TO DRAFTING Utilize a tiered approach Identify categories of employees and determine what type of restrictions are necessary Group A no competitive threat secretaries and administrative personnel (form non-disclosures and non-interference with employees) Group B worried about soliciting customers but not worried about competitive harm (form nonsolicitations, non-interference with employees and non-disclosures) Group C worried about competitive harm (tailored non-compete combined with non-solicit and nondisclosure)
PUTTING IT INTO PRACTICE ABC Company ( ABC ) manufactures microprocessors. ABC wants to hire a new VP of Sales and Business Development and include restrictive employment covenants in the employment agreement. The President of ABC has insisted that the agreement contain a noncompete. ABC s corporate headquarters is located in Atlanta, Georgia, but it has significant operations in South Carolina, Florida and California. The new VP will work out of ABC s Miami, Florida office, but will be primarily responsible for ABC s sales and business development efforts throughout the U.S. ABC s principal competitors are located in California, South Carolina and Georgia.
PUTTING IT INTO PRACTICE What will ABC need to protect upon the VP s departure? What will the litigation look like if the VP refuses to comply with the agreement? Where will the VP likely go if he leaves? Where will the litigation likely happen? What law will apply?
QUESTIONS