Schiff Hardin Labor and Employment Alert

Georgia Passes New Restrictive Covenant Act

Yesterday, a majority of voters approved an amendment to the Georgia Constitution that will ratify House Bill 173 (the "Georgia Restrictive Covenant Act") and vastly change the enforceability of restrictive covenants in Georgia. The changes take effect immediately and will apply to agreements entered into on or after November 3, 2010. Agreements entered into before November 3 will continue to be governed by pre-November 3 case law.

Background

Georgia has long been known for being less than friendly toward restrictive covenants. One reason Georgia courts have treated the covenants with rigorous scrutiny is that, until now, the Georgia Constitution prohibited the legislature from authorizing any contract that might have the effect of lessening competition. Courts have interpreted that provision to mean that restrictive covenants must be reasonably limited in the time, geographical area and scope of prohibited activities that they cover. But, many felt that in trying to define the contours of what amounts to a "reasonably" narrow covenant, Georgia courts created a maze of confusing and inconsistent case law. What is more, if a court deemed any part of the contract unreasonable — even if it found the remainder perfectly reasonable — the court would not modify or "blue pencil" the contract. As a result, employers often erred on the side of drafting extremely narrow restrictive covenants that, in practice, might offer them little to no protection.

The uncertainty provided by the case law and the all-or-nothing approach to the enforcement of restrictive covenants led to the General Assembly's proposal of the new act and constitutional amendment.

What Does The New Law Do?

The major components of the new law are as follows:

It allows courts to "blue pencil" restrictive covenants. In other words, when a court finds some parts of a restrictive covenant reasonable and others unreasonable, the court can now modify the covenant appropriately.
It limits the types of people and entities who can enter into non-compete and non-solicitation agreements.
It expressly permits non-compete agreements that are reasonable in time, geographic area, and scope of prohibited activities, but provides that non-compete agreements will be enforced only against "key" employees, "professional" employees, employees in certain management positions, and employees who regularly solicit customers or engage in making sales or obtaining orders or contracts.
It expressly permits non-solicitation agreements that prohibit an employee from soliciting or accepting or attempting to solicit or accept — for a stated amount of time following termination — any business from the employer's customers or prospective customers with whom the employee had material contact during his or her employment for the purpose of providing them with products or services that are competitive with those provided by the employer. Significantly, it also states that the employer need not limit the non-solicitation provision to a specific geographic area or the types of products and services covered. This marks a drastic change from earlier case law. Under the case law, employers were required to limit the scope of products and services covered and to either limit the geographical area covered or limit the covenant to those customers with whom the employee had material contact during his or her employment. Although the new law still requires employers to limit the covenant to those customers with whom the employee had material contact during his or her employment, it defines "material contact" much more broadly than the term has previously been defined in the case law.
It defines key terms such as "confidential information," "employee," "key employee," "material contact," "legitimate business interest," "modify," and "termination."
It establishes certain presumptively reasonable limits on the time and geographic area covered by restrictive covenants.
It states that time restraints are not required for confidentiality and trade secret covenants.

What Should Employers Do?

With the new law now in place, employers should consult with their attorneys to revise any employment agreements that will be used with new employees. Because current employees may begrudge the idea of entering into new agreements that comport with the new law, employers should also evaluate and discuss with their attorneys the practical feasibility of and/or a strategy for presenting new agreements to their current employees.

Schiff Hardin's Labor and Employment Practice Group has particular expertise in advising clients on and in crafting restrictive covenants. For more information on the details of this law, or, if you have any questions about your current employment agreements or the ways in which you might revise those agreements to strengthen your restrictive covenants, please contact any attorney in Schiff Hardin's Labor and Employment Group.

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