After more than two years of legal wrangling, it appears that the Georgia Restrictive Covenants Act finally is now in effect after Governor Nathan Deal signed House Bill 30 on May 11, 2011. Of course, while Governor Deal’s signature may have cleared up uncertainty over the application of the statute from May 11 forward, real questions still loom over the true effective date of the predecessor statute.
Just to recap the Act’s history, the Georgia legislature passed House Bill 173 back in April, 2009. That bill set out to make it much easier for a company in Georgia to enforce a post-employment restrictive covenant. In order to go into effect, however, Georgia voters had to pass a constitutional amendment that effectively approved passage of House Bill 173. And, in fact, last November 2, 2010, Georgia voters overwhelmingly approved (68% of the votes) the constitutional amendment.
Here is where it gets tricky. While House Bill 173 provided that it would become effective the day after the November 2, 2010 election and would apply to restrictive covenants entered into on or after that day, there has been a rising chorus of commentators that have questioned the true effective date of the statute. The reason is that House Bill 178, the legislation that proposed the constitutional amendment, did not make any mention of an effective date of House Bill 173. The Georgia Constitution, however, provides that, unless such legislation identifies the effective date of the amendment, it becomes effective on the first day of January following its ratification. In other words, some claimed that the actual effective date of House Bill 173 was January 2, 2011 while others have claimed that House Bill 173 does not apply to any agreements because it had an effective date that predated the constitutional amendment.
In light of the growing concern over this issue, the Georgia legislature recently passed House Bill 30, which essentially reintroduced the old statute, but with an effective date of January 2, 2011. On Wednesday, May 11, 2011, Governor Deal signed House Bill 30. Interestingly, recognizing future disagreements over the effective date of House Bill 173, House Bill 30 emphasizes that it should remove any uncertainty over the future application of the Georgia Restrictive Covenants Act, but should not be taken as evidence of a legislative determination that House Bill 173 was in fact invalid.”
With the passage of House Bill 30, some issues are cleared up while others remain. For instance, it is clear that all restrictive covenant agreements entered into before November 3, 2010 are governed by previous law while any such agreements executed after May 11, 2011 are controlled by the new Restrictive Covenants Act. The real question is which body of law controls agreements entered into after November 2, 2010 through May 11, 2011. Right now, no answer is apparent, although it is likely that this issue will be litigated in the courts in Georgia and that the Georgia Supreme Court ultimately will have to weigh in on this issue.
As a brief reminder, under the new Act, the following pro-employer changes have been made.
- 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.
- 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.
- Time Limits: In addition, the law provides for elimination of time limits on the protection of some confidential information and trade secrets.
The good news with all of this is that Georgia has enacted legislative changes that make it easier to enforce a post-employment restrictive covenant on a former employee. The bad news is that there is lingering uncertainty over the effectiveness of those changes to agreements executed by employees after November 2, 2010 and up through May 11, 2011. Until the courts give employers guidance on that issue, we recommend that employers have employees resign any restrictive covenant agreements signed during that time period.