Passage of Constitutional Amendment Allows Enforcement of Employer-Friendly Restrictive Covenant Agreements
By Ben Mathis and Kelly Moul


Passage of Constitutional Amendment One in Tuesday's election will bring a dramatic change to Georgia law on non-competition and related agreements. Last year, Governor Sonny Perdue signed House Bill 173 (H.B. 173), designed to allow employers more freedom to implement restrictive covenants for their employees, including non-competition, customer non-solicitation, employee non-recruitment and non-disclosure provisions.  Before H.B. 173 could take effect, however, voters had to pass Amendment One, which changes the state Constitution to allow for this reform. With approval of Amendment One, H.B. 173 went into effect immediately.

Historically, Georgia law treated restrictive covenant agreements with hostility, declaring void those agreements which it deemed “unreasonable” or overly broad in their duration, geographic area, and/or scope of prohibited activities.  This was based upon the Georgia Constitution’s prohibition on contracts restraining trade.  Over time, a complex series of often contradictory rules took form, making it difficult to draft and enforce restrictive covenants in Georgia.

H.B. 173, now codified at O.C.G.A. § 13-8-50 et seq., provides employers with increased confidence that their restrictive covenants will be enforceable by laying out a structured explanation of the restrictive covenant provisions employers are allowed to impose.  The law also instructs courts on how to interpret and enforce restrictive covenants.  The key provisions of the new law are as follows:

  • “Blue Pencil” Judicial Modification: Instead of the previous “all or nothing” approach taken by Georgia law, courts now may modify agreements that are overly broad.  This means that agreements which are flawed by overly broad geographic, temporal, or other provisions may be modified by either removing the offending provision or modifying the scope to make it reasonable.  Previously, an agreement with virtually any imperfection was entirely void, so this is a dramatic shift in favor of employers who want to draft a more aggressive restrictive covenant.  O.C.G.A. §§ 13-8-51(11)-(12), 13-8-53(d), 13-8-54(b).
  • “Key Employees” Limitation: A critical part of this new law, not commonly known, is that the statute applies only to executive employees, employees in possession of important confidential information, or employees with specialized skills, knowledge, or customer contacts or information.  O.C.G.A. §§ 13-8-51(5), 13-8-52(a)(1).
  • Temporal Restrictions: Employment covenants of two years or less now are presumed reasonable, while covenants of more than two years are presumed unreasonable.  O.C.G.A. § 13-8-57.
  • Geographic Scope: A reasonable geographic scope may now be determined by a fairly broad, good faith estimate of the employee’s covered territory at the time of termination, instead of the employee’s territory at the time the agreement was signed.  O.C.G.A. § 13-8-53(c)(1),(2).
  • Protection of “Legitimate Business Interests”: The definition of a “legitimate business interest, which may be protected through restrictive covenants includes: trade secrets, valuable confidential information, substantial relationships with customers and vendors, customer good will and extraordinary or specialized training.  O.C.G.A. § 13-8-51(9).
  • Time Limits:  In addition, the law provides for elimination of time limits on the protection of some confidential information and trade secrets.

These dramatic changes only apply to agreements entered into on or after November 3, 2010.  Therefore, employers wishing to take advantages of the new, broader enforcement provisions and additional leeway provided by the new law must execute new agreements with current employees.

For more information on the new statute, please contact any attorney in FMG's Labor and Employment Law Section.  In addition, please join us at a breakfast seminar which will be held on December 2nd at the Georgian Club from 8:30 am-10:00 am.  Click here to RSVP for the seminar or email [email protected].

 



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