Yesterday, Georgia voters approved a measure that amends the state Constitution and thereby enacts significant new legislation impacting Georgia law on non-compete, non-solicitation and non-disclosure agreements. The new law goes into effect today and applies to agreements entered into from today’s date forward. The most noteworthy aspect of the new legislation gives judges the power to actually re-write or “blue pencil” overbroad covenants to conform the restrictions into the realm of reasonableness. Now that the legislation has become effective, employers in Georgia are questioning what steps should be taken. Should current employees sign new restrictive covenant agreements? How should future employment contracts be drafted in light of the new law? Will litigation increase or decrease as a result of the changes? Because we have yet to see how Georgia courts will interpret and apply the new law, the answers to these questions are not black and white. Despite this lack of clarity, certain aspects of the law can be analyzed and reacted to now.
No Change for Existing Agreements
The new law applies to three basic types of restrictive covenants: 1) non-competition; 2) non-solicitation (customers and employees); and 3) non-disclosure of confidential information. Traditionally, non-competition and non-solicitation provisions in employment agreements have been subject to strict scrutiny by Georgia courts. Such provisions, when poorly drafted, are typically the reason that an agreement is declared invalid. Although the new law allows for the enforcement of covenants that may have been stricken under the old regime, it will not save existing overbroad agreements, as its application is not retroactive. The standard contained in the new legislation will apply only to contracts that are entered into from November 3, 2010 forward. Any contract containing restrictive covenants executed prior to today will be scrutinized under the old law. Accordingly, any existing restrictive covenants that are not drafted with the particularity that is required under the prior line of Georgia cases may not be judicially enforceable. As has always been a wise practice in Georgia, employers should scrutinize their restrictive covenant agreements that are already in place to ensure their enforceability. Where problems are discovered, new agreements, drafted in light of the changed legal landscape, should be developed. In Georgia, continued “at-will” employment is sufficient consideration to support a restrictive covenant entered into during employment.
Drafting Agreements Under the New Law
While crafting an enforceable restrictive covenant in Georgia was once a delicate task, such nuance should no longer be necessary to obtain some level of enforcement. The rigid “all-or-nothing” approach that has been the hallmark of enforcement (and lack thereof) in Georgia has now been replaced by the more forgiving “blue pencil” standard, which allows a court to actually re-write an overbroad covenant to narrow its scope. Although an overbroad agreement will likely still be enforced to some degree, the level of enforcement will lie in the hands of a judge, who will have the ability to significantly reduce and otherwise modify the restriction. Even with the more flexible legal landscape, however, familiarity with the manner in which Georgia courts have previously construed these provisions and an informed knowledge of the new law are essential to drafting a contract that will be upheld, rather than altered, by a judge interpreting a disputed agreement.
Turning to each type of restrictive covenant regulated under the new law, employers and practitioners in Georgia should be aware of the following:
Non-competition clauses: Under prior law, a non-competition provision had to meet a reasonableness standard in time, scope, and territory in order to be upheld. The new law makes changes to these standards. Perhaps one of the most common fatal errors committed when drafting such clauses was the overbreadth, or lack of specificity, in defining a restricted territory. If a restricted territory was not narrowly tailored to the area where the employee worked, did not define a specific territory with particularity, or was defined in such a way that would allow it to change over time, it could be ruled unenforceable, which would also have the effect of disqualifying any non-solicitation clause in the same agreement. Under the new law, employers will now have much greater latitude in defining a restricted territory, including the ability to “estimate” the employee’s future territory. Under the legislation, the phrase “the territory where the employee is working at the time of termination” or similar language “shall be considered sufficient as a description of geographic areas,” so long as the employee “can reasonably determine the maximum reasonable scope of the restraint at the time of termination.” Importantly, the new statute restricts true post-termination non-competition provisions to four categories of employees: 1) sales employees; 2) key employees; 3) certain professionals; or 4) managers, as these terms are defined in more detail in the statute. A covenant restricting any employee who does not fall into one of the above categories from competing after termination will not be enforced. Finally, the new law addresses the reasonableness of the restricted time period, stating that any time period of two years or less will be presumed reasonable.
Non-solicitation clauses: The most significant aspect of the non-solicitation facet of the statute is the fact that employers may now prohibit employees from even passively accepting business from former customers with whom the employee had material contact. Such a provision would have rendered both the non-solicitation and non-competition clauses in an agreement void under prior law. As with non-competition clauses, non-solicitation clauses will be presumed reasonable if given a duration of two years or less.
Non-disclosure clauses: Under the new law, non-disclosure of confidential information provisions may now be unlimited in time, protecting information indefinitely so long as it remains confidential. Previously, non-disclosure provisions that were not limited in time, or given too long a time period, were struck down in their entirety. Further, any non-disclosure provision which could have been read to include information that was generally available to the public, even if also protecting true confidential information, could be struck down. This is no longer the case under the new law.
As of today, there are now two completely different sets of rules that govern the enforceability of restrictive covenants in Georgia. It may be several years before significant case law develops under the new law, as it will take time for agreements to be drafted, entered into, breached, and subsequently litigated. Despite the current lack of any judicial guidance, the statute itself is clear enough on its face that an experienced practitioner will be better able to craft employment agreements containing restrictive covenants that provide employers with necessary protections and remain enforceable under the new standards without judicial modification. Litigation under the new law will not resemble prior litigation, as the principle point of concern has moved from a purely legal standard to a primarily factual inquiry, and each case will depend on the individual facts of the particular situation. While it is unknown what effect the law will have on both employers’ and employees’ willingness to litigate over such agreements, and what that litigation will look like, all employers need to consider the new law prior to entering into any restrictive covenant agreements from today on.
To learn more about how this legislation may affect your company or if you have any questions regarding these issues, be sure to contact your employment counsel at Smith, Gambrell & Russell, LLP.