By Frederick C. Dawkins and David A. Cole
As most employers are aware, noncompete, nonsolicitation, and nondisclosure agreements (otherwise known as “restrictive covenants”) have been notoriously difficult to enforce in Georgia. This is because the Georgia Constitution specifically states that contracts that serve to “defeat or lessen competition” are “illegal and void.” As a result, Georgia courts currently hold that restrictive covenants will be upheld only if they are “reasonable” and necessary to protect the employer’s business.
Court decisions over the years have led to a patchwork of confusing, often inconsistent, rulings about what “reasonable” means and how far employers may go to protect their interests. The result is a body of law that offers employers very little predictability and flexibility for their restrictive covenants.
In response, the Georgia legislature passed a new law in 2009 that may change the landscape of restrictive covenant law in Georgia. Georgia House Bill 173 eliminates the often inconsistent geographic, temporal, and subject matter limitations currently imposed upon employers by Georgia courts, and replaces them with a set of rules that provides greater clarity on what is and is not enforceable. However, HB 173 will become effective only if voters approve an amendment to the Georgia Constitution in the November 2010 general election.
The following is a summary of the important changes that will be made by HB 173 if voters approve the amendment.
HB 173 will not allow noncompete agreements against every type of employee. Instead, noncompete agreements will be enforced only against employees who “customarily and regularly” solicit customers or make sales on behalf of the employer or who (1) have the primary duty of managing the company or one of its departments or subdivisions, (2) direct the work of two or more other employees, (3) have the authority to hire or fire employees, or (4) perform the duties of a key employee or professional.
The new law also clarifies how long an employer can prohibit an employee from competing with its business after termination. If the noncompete agreement is signed by a regular employee, courts are required to presume that a period of two years is reasonable. If the agreement is against a current or former distributor, dealer, franchisee, lessee of real or personal property, or licensee of a trademark, trade dress, or service mark, courts are required to allow a period of three years. Finally, if the agreement is signed by an individual in connection with the sale of a business, a period of five years will be allowed. Employers can still try to extend their noncompete agreements beyond these presumptively reasonable periods, but they will have the burden of proving the reasonableness of the additional time.
Unlike noncompete agreements, HB 173 would allow all employees to sign agreements that prohibit them from soliciting business from an employer’s customers after their termination. To be enforceable, nonsolicitation agreements still will need to include a time limit and be limited to customers with whom the employee had “material contact” during his employment. The difference is that HB 173 provides clear rules about what time limits are reasonable (2-3 years depending on the type of employee) and defines what “material contact” means. HB 173 also expressly states that nonsolicitation agreements do not have to be limited to any geographic area or to any types of products or services considered to be competitive in order to be enforceable.
Under current law, confidentiality agreements in Georgia must contain a reasonable time limit. HB 173 broadens the reach of confidentiality agreements by expressly stating that nothing in the statute shall be construed to limit the period of time for which a party may agree to maintain information as confidential or as a trade secret, just so long as the information retains its status as confidential or a trade secret. In addition, HB 173 clarifies that, in light of the mobility employees now have and the ease with which information can be shared, confidentiality agreements do not need to be limited to any particular geographic areas.
Judicial Modification of Unenforceable Provision
Perhaps the biggest (and most employer-friendly) change with HB 173 involves what is commonly referred to as the “blue pencil” rule. Unlike most other states, Georgia courts currently are forbidden from “blue-penciling” or, in other words, modifying overbroad or otherwise invalid restrictive covenants in order to make them enforceable. This means that, for instance, if the geographic scope is overbroad in a noncompete provision, then Georgia courts must invalidate the entire provision, even if the rest of the provision is reasonable. Under HB 173, however, courts will be authorized to modify a covenant that is otherwise void and unenforceable so that it becomes narrow enough to be enforceable and to protect the employer’s reasonable business interests.
For more information regarding this article, please contact Fred Dawkins
at 770.818.1409 or by email at [email protected]
or Dave Cole
at 770.818.1287 or [email protected]