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Georgia Voters Approve New, Employer-Friendly Non-Compete Law

  • November 9, 2010

This Election Day, joining the majority of states, Georgia became a state where restrictive covenants should be regularly enforced.  Voters in Georgia approved a constitutional amendment permitting a new restrictive covenant law to take effect immediately.  The new law is a sweeping change for the state.  For the first time, Georgia has a law that identifies specific language necessary for enforceability, identifies the types of individuals and entities that can be parties to covenants, allows courts to “blue pencil” covenants, creates an undue hardship exception to the enforcement of covenants, and removes time restrictions on the protection of confidential information. 

For purposes of the new law, restrictive covenants include non-competition covenants, non-solicitation covenants and non-disclosure covenants.  The law had previously been passed by the state legislature and signed by the Governor.

Coverage

Only the following individuals or entities can be parties to restrictive covenants:

  • employers and employees; 
  • distributors and manufacturers; 
  • lessors and lessees; 
  • partnerships and partners; 
  • franchisors and franchisees; 
  • sellers and purchasers of a business or commercial enterprise; and
  • two or more employers. 

Employees that do not possess selective or specialized skills, learning, customer contacts or abilities by virtue of their employment with an employer may not be parties to restrictive covenants.

In addition, non-compete covenants (as distinguished from non-solicit and non-disclosure covenants) can only be used with respect to the following categories of employees: 

  • those who customarily and regularly solicit customers; 
  • those who make sales or take orders or contracts; 
  • those whose primary duty is managing the business (such as directing the work of employees, and having the authority to hire or fire or make recommendations of particular weight regarding those decisions); and
  • those who perform the duties of a key employee or professional employee. 

A key employee is someone who (i) by reason of an employer’s investment of time, training, money, trust, exposure to the public or exposure to customers and prospects during employment gained a high level of notoriety, fame and reputation or (ii) by virtue of his/her employment possesses selective or specialized skills, learning or ability. 

A professional employee is someone who has as a primary duty the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Presumptively Reasonable Time Periods

Post-employment restrictive covenants must be reasonable as to time.  Restrictions on employees for two years or less after employment are presumed reasonable; restrictions of more than two years are presumed unreasonable. 

Restrictive covenants involving current or former distributors, dealers, franchisees, or lessees of real or personal property are presumed reasonable if they are for three years or less. 

Finally, restrictive covenants involving owners or sellers of all or a material part of a business are presumed reasonable if they are for the longer of five years or the period of time payments are made to the owner or seller.  Any longer is presumed unreasonable.

Requirements for Non-Competition Covenants

At the end of employment, an employee may be prohibited from conducting any activity that is competitive with the activities he or she conducted for the employer.  This prohibition can be applied to the geographic area where the employee conducted such activities at the time of termination of employment or within a reasonable time prior to the termination of employment.  Such activity and area must be described in the covenant.

The covenant must be reasonable with respect to the scope of activities to be restricted.  Any good-faith estimate of the activities, products and services that may be applicable at the time of termination is sufficient, even if such estimate is capable of including or ultimately proves to include extraneous activities, products or services.  However, the covenant will be construed to cover only the activities actually conducted and the products and services actually offered within a reasonable time period prior to termination. 

Activities, products, or services are considered sufficiently described if a reference to them is provided and qualified by the phrase “of the type conducted, authorized, offered, or provided within two years prior to termination” or similar language containing the same or lesser time period. 

The covenant also must be reasonable as to territory.  The territory may include any area where the employee performed, supervised, or assisted in company operations.  The phrase “the territory where the employee is working at the time of termination” or similar language is considered sufficient if the person or entity bound by the restraint can reasonably determine the limits of the restraint at the time of termination.  If the area is described in more detail, a good-faith estimate of the area that may be applicable at the time of termination is sufficient, even if such estimate is capable of including or ultimately proves to include extraneous areas.

In the context of the sale of a business, the territory may be worldwide, if necessary, to protect the buyer or the good will of the business.

Requirements for Non-Solicitation-of-Customers Covenants

At the end of employment, an employee can be prohibited from soliciting or attempting to solicit business from an employer’s customers, including prospects, with whom the employee had material contact during employment.  No reference to geographic area or the types of products or services is necessary. 

“Material contact” is defined as customers and prospects with whom the employee dealt, whose dealings were coordinated or supervised by the employee, or about whom the employee obtained confidential information.  It also includes customers and prospects who received products and services from the employer and for which the employee received compensation during the two-year period prior to separation of employment.

A prohibition against “soliciting or attempting to solicit business from customers” or similar language is adequate, but will be narrowly construed to apply only to customers and prospects with whom the employee had contact, and to products and services that are competitive.

Requirements for Non-Solicitation of Employee Covenants

At the end of employment, a former employee can be prohibited from recruiting or hiring any employees of an employer or its affiliates.  No reference to geographic area is necessary.  Such a covenant can only apply to employees who are actively employed by or doing business with the employer or its affiliates at the time of the attempted recruiting or hiring.

Requirements for Non-Disclosure Covenants

At the end of employment, a former employee can be prohibited from using or disclosing an employer’s confidential information.  Confidential information is information related to the business of an employer, which has value and is not generally known to competitors of an employer.  The covenant need not contain a time limitation.  It can prevent disclosure for as long as the information remains confidential.

Blue Penciling

Courts may adjust (“blue-pencil”) non-compliant provisions of a restrictive covenant.  However, this is limited to striking or refusing to enforce a non-compliant term of a covenant.  Courts may not rewrite agreements. 

The law directs the courts to construe restrictive covenants to comport with the reasonable intent and expectations of the parties and in favor of providing reasonable protection to legitimate business interests.

Verification of Covenants

A current or former employee can demand in writing that an employer clarify its restrictive covenants.  The employer must respond to a request in writing within 30 days. It need not include confidential information or business strategies as part of the response.

Employers also may volunteer written clarification of covenants to current and former employees.  If the clarification lessens the restrictions, it will supersede the original terms of the covenant and will be binding regardless of whether additional consideration is provided.

Requirements for “In-Term” Covenants

An “in-term covenant” generally prohibits a current employee, partner, contractor, franchisee or shareholder from competing during the term of employment or a contract.  It need not be limited in scope of activity, duration or territory so long as it promotes or protects the purpose or subject matter of the agreement or otherwise deters a potential conflict of interest.

Enforcement and Injunctive Relief

Employers seeking enforcement must prove the existence of a legitimate business interest justifying the covenants.  Such interests are defined as follows:

  • trade secrets, 
  • confidential information, 
  • substantial relationships with existing or prospective customers, patients, vendors or clients, 
  • customer, patient or client goodwill, or 
  • extraordinary or specialized training.

In determining the reasonableness and enforceability of the covenants, a court may consider economic hardship imposed upon the former employee by their enforcement.  However, such consideration does not extend to distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of a business or commercial enterprises, or covenants between two or more employers.

Courts are instructed to enforce restrictive covenants by any appropriate and effective remedy available, including temporary and permanent injunctions.

Forfeiture Provisions

Instead of, or in addition to, prohibiting employees from competing after their employment ends, some employers require the forfeiture of post-termination compensation if employees compete.  Such disincentives are not affected.  Under the new law, contractual terms that provide for a loss or forfeiture of rights or benefits conditioned upon any specified act or event will not be considered a restraint of trade.  Therefore, they are not governed by the rules applicable to restrictive covenants.

Prospective Application

The law applies only to restrictive covenants signed on or after November 3, 2010.  Older restrictive covenants will be evaluated under the prior, more stringent Georgia common law standards.

Possible Future Challenges to the Law

Some opponents of the law have said they intend to challenge the legality of the law for various reasons.  At the time of this writing, however, no such legal action has been taken.

Jackson Lewis attorneys are available to answer your questions about protecting business information, including through the use of restrictive covenants, currently or under the new law.

©2010 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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