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The Second Time is the Charm: Georgia Governor Signs New Restrictive Covenant Law

  • May 12, 2011

Last November, voters in Georgia approved a constitutional amendment to allow a new restrictive covenant law to take effect.  There were several uncertainties regarding the enforcement and application of the new law.  When the Georgia legislature opened in January 2011, new restrictive covenant legislation was introduced to fix these problems.  That legislation was passed by the House and the Senate, and signed by Governor Nathan Deal on May 11, 2011.  It governs restrictive covenant agreements signed after that date.  An updated summary of the new law follows.

Coverage

Only these individuals and 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; or
  • two or more employers.

Employees are defined broadly by the law to include executive employees, research and development personnel, any other persons, including independent contractors, who are in possession of confidential information that is important to the business of the employer. It also includes any person or entity that possesses selective or specialized skills, learning or abilities, customer contacts, customer information, or confidential information because of his or her employment with the employer. 

In addition, non-compete covenants (as distinguished from non-solicitation 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 regularly 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 supervising two or more employees; 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 non-competition and non-solicitation agreements 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 period is presumed unreasonable.

Requirements for Non-Competition Covenants

At the end of employment, an employee may be prohibited from engaging in activities that are competitive with the activities he or she conducted for the employer, subject to several requirements.

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 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 maximum reasonable scope 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.

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 actively sought prospects, with whom the employee had material contact during employment for the purpose of offering products and services that are competitive with those provided by the employer.  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 material contact, and to products and services that are competitive.

Requirements for Non-Solicitation of Employee Covenants

There is no provision in the law specifically permitting restrictive covenants that prohibit the solicitation of employees (also known as “anti-raiding” provisions).   However, there also is no provision in the law that prohibits them.  Whether employee anti-raiding covenants will be enforceable may depend on current Georgia common law.

Requirements for Non-Disclosure Covenants

There is no provision in the law specifically permitting restrictive covenants that prohibit the disclosure of confidential information.  However, the law provides that such covenants need not contain a time limitation or geographic restriction, which suggests that such covenants are enforceable.  The enforceability of such covenants may be determined by current Georgia common law, except for the law’s provision that neither a time limitation nor a geographic restriction is required.

Blue Penciling

Courts may “modify” non-compliant provisions of a restrictive covenant, so long as the modification does not render the covenant more restrictive for the employee.  It is unclear what the term “modify” means.  It could be interpreted to mean only the ability to strike or refuse to enforce a non-compliant term of a covenant; or it could be interpreted to mean the ability to rewrite covenants.

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.
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.  The courts must presume the agreement reasonable if it is limited to the time period of the parties’ relationship.  The geographic scope can be defined as where the employer does business at any time during the relationship, provided that the total distance is reasonable and the agreement contains a list of particular competitors as prohibited employers for a limited period of time after the time period of the relationship.  The scope of competition can be measured by the employer’s business. 

Courts are instructed that they should not consider an in-term covenant unreasonable because it lacks a specific limitation upon scope of activity, duration, or geographic area as long as it protects the purpose of the agreement or relationship or 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

The law does not address the enforceability of forfeiture provisions that are tied to restrictive covenants.

Potential Legal Challenges

Some in the legal community have indicated they may challenge the constitutionality of the new law.  We will provide appropriate updates of any such developments.

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

©2011 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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