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By: Mike Wolak
Restrictive covenants typically involve the “big three”: agreements not to compete, not to solicit the Company’s customers, and not to raid the Company’s staff upon separation from employment. As a result, the language of the “big three” must be given careful thought when drafting the employee’s agreement. Recent state and federal appellate opinions in Georgia and California make clear, however, that employee agreements and settlement agreements are being scrutinized more closely, such that even the more standard “loyalty” and “no-employment” provisions are being construed as restrictive covenants to determine whether they constitute unenforceable restraints of trade.
For instance, in Early v. MiMedx Group, Inc., 768 S.E.2d 823 (Ga. Ct. App. 2015), the Georgia Court of Appeals invalidated a loyalty provision of a consulting agreement requiring the employee to “devote her full working time (not less than forty (40) hours per week) to [the] performance of [her] duties.” Analyzing this provision as a restrictive covenant, the Court of Appeals held that the provision constituted an illegal restraint of trade, rather than a mere loyalty provision, because it prohibited the employee from performing any kind of work during the term of the agreement other than for MiMedx. Indeed, MiMedx admitted during oral argument that the provision prohibits Early from “babysitting on the weekends or working in a bookstore,” even though such work is not related in any way to the type of enterprise in which MiMedx is engaged. The Court of Appeals held that the loyalty provision contained “no limitation at all concerning either scope or territory,” which is required of restrictive covenants in Georgia. Unfortunately for MiMedx, the consulting agreement was entered into prior to enactment of Georgia’s Restrictive Covenant Act, which applies to all agreements entered into on or after May 11, 2011 and is more favorable to restrictive covenants than Georgia’s common law. Under the new law, this particular provision could likely be “blue-penciled” or judicially modified if it does not “promote or protect the purpose or subject matter of the agreement or relationship.”
Similarly, in Golden v. California Emergency Physicians Medical Group, 782 F.3d 1083 (9th Cir. 2015), the Ninth Circuit Court of Appeals held that the district court abused its discretion by categorically excluding a standard “no-employment” provision in a settlement agreement from the ambit of California’s non-competition/restraint on trade statute (Cal. Bus. & Prof. Code § 16600) on the sole ground that the provision did not constitute a covenant not to compete. The Ninth Circuit concluded that nothing in Section 16600 or any California decisions explicitly limit the statute’s reach to traditional non-compete clauses or render the statute inapplicable to other contractual restraints on professional practice. Accordingly, the Court remanded for a determination whether the “no-employment” provision – in which the former employee waived all rights to future employment with the Company “or at any facility that [the Company] may own or with which it may contract in the future” – constitutes a “restraint of a substantial character” under Section 16600.
The MiMedx and Golden decisions are a strong reminder that employers should, in addition to ensuring their standard “big three” restrictive covenants comply with applicable state law, also carefully examine their employment, consulting, and severance agreements to ensure that loyalty, best efforts, no-rehire, and other similar provisions comply with the applicable restrictive covenant law and are not considered an unenforceable restraint on trade. In doing so, employers should keep in mind that restrictive covenant laws vary widely by state, thus requiring drafting of applicable provisions on a state-by-state basis. Additionally, restrictive covenant law is evolving in many states, requiring agreements to be updated regularly to ensure compliance with existing law.