Thursday, May 21, 2009

Legislation Proposes Sweeping Changes to Georgia Law Regarding Restrictive Covenants

By Thomas J. Gallo

As many Georgia businessmen and businesswomen are aware, Georgia law regarding restrictive covenants, i.e. non-compete agreements and non-solicitation agreements, makes enforcement of covenants not to compete difficult. Even covenants drafted by experienced attorneys are often declared unenforceable by the Georgia courts and the standards for enforcement remain a somewhat shifting target. The enforcement issue creates problems for businesses and employees in assessing their legal rights and responsibilities.

The New Act

In early 2009, the Georgia General Assembly adopted an Act which is intended to clarify and codify Georgia law regarding restrictive covenants. In adopting the Act, the General Assembly found that reasonable restrictive covenants "serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing business within the state." The Act is intended to provide guidance to parties to restrictive covenants so that everyone may "know their rights and duties." The Act further instructs the Georgia courts to interpret restrictive covenants in accordance with the "reasonable intent and expectations of the parties," but goes further to require that such interpretation be "in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement."

The Act will become effective only upon the adoption of an amendment to the Georgia Constitution, which will be submitted to Georgia voters during the 2010 general election. The proposed constitutional amendment will likely be subject to considerable controversy prior to the election.

Although the Act, if it becomes effective, redefines Georgia restrictive covenant law in many different ways, there are several important, overarching changes of which everyone should be aware.

“Blue-Penciling”

Under current Georgia law, the courts are not permitted to modify or redraft ("blue-pencil") an unenforceable restrictive covenant unless it was executed in connection with the sale of a business. So, if any portion of a restrictive covenant was deemed to be unenforceable, the covenant would fail; there is no means to salvage the agreement and impose reasonable limits on a former employee's competition or solicitation of customers. The new Act would change Georgia law and authorizes a court to "modify a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties." This important change makes the enforcement of restrictive covenants far more likely in Georgia and changes the nature of any legal dispute from "whether" a covenant is enforceable or unenforceable to "under what terms and conditions" the covenant is enforceable. Many believe that this change is unfair to employees and others bound by restrictive covenants.

Scope of Prohibited Activities, Products, or Services

Under current Georgia law, courts have struck down restrictive covenants because they did not identify with sufficient particularity the types of competitive activities, products, or services the restricted party was prohibited from engaging in or selling. The Act seeks to avoid these attacks by providing that any description of competitive activities, products, or services shall be satisfactory if it "provides fair notice of the maximum reasonable scope of the restraint . . . even if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters." When a restrictive covenant is entered into prior to termination, the Act further provides that "any good faith estimate" of the competitive activities, products, or services that may be applicable at the time of termination is satisfactory even if it mistakenly includes extraneous matters. Such a covenant is to be enforced by the courts based on activities "actually conducted" and products and services "actually sold" within a reasonable time of termination.

Time Limitations

The Act instructs Georgia courts to presume certain time limitations in restrictive covenants to be "reasonable" and, therefore, enforceable unless proved otherwise. For example, a two year or less restrictive covenant against a former employee (not involving the sale of a business) beginning on the date of termination is presumed to be reasonable under the Act. A restriction for more than two years is presumed unreasonable. Restrictive covenants of three years or less involving distributors, dealers, franchisees, lessees, licensees (not involving the sale of a business) are presumed reasonable under the Act. Covenants longer than three years are presumed unreasonable. In cases involving the sale of a business, the courts shall presume a restraint the longer of: (i) five years or less, or (ii) the period of time during which payments are being made to the seller to be reasonable. Any longer restraint is presumed to be unreasonable under the Act.

Conclusion

There are a number of other important changes to Georgia's restrictive covenant law in the new Act. Whether those changes, as well as the changes discussed above, are important in any particular case depends on the facts and circumstances involved. Moreover, in the event the Georgia Constitution is amended in the 2010 General Election and the Act becomes effective, businesses throughout Georgia should have legal counsel familiar with this complicated area of law review and revise their restrictive covenants agreements and any employment agreements containing restrictive covenants.

Finally, in the meantime, existing Georgia law regarding restrictive covenants will continue to apply. It will remain important for Georgia businesses and employees to consult experienced counsel to help assess and protect their respective rights in the interim, as well.

For more information on Georgia’s current law regarding restrictive covenants, please see my articles on the firm’s website.

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