LawFlash

Georgia Voters Approve Constitutional Amendment That Dramatically Enhances the Enforceability of Restrictive Covenants

November 22, 2010

On November 2, 2010, Georgia voters approved HB-173, a constitutional amendment designed to make Georgia more economically competitive by altering the state’s previously rigid law on restrictive covenants. The new law significantly enhances the enforceability of restrictive covenants, both by providing statutory guidance as to what is considered reasonable and by allowing courts to modify unreasonable contracts. The new law applies to contracts entered into on or after November 3, 2010. Contracts entered into prior to that date will continue to be adjudicated under the old law.

Blue-Penciling

Under the previous law, any technical defect could render the entire restrictive covenant unenforceable. The new law allows courts to modify, or “blue-pencil,” the covenant to render it enforceable so long as the modification is not more restrictive with regard to the employee than the original contract. Modification means that 1) the court may remove unreasonable parts of the covenant and that 2) the court may enforce provisions of the covenant to the extent that they are reasonable. No express references to duration, geographic area, or the types of products or services considered to be competitive shall be required in order for the restraint to be enforceable.

Time Limits

In a sharp departure from prior case law, the new law provides specific time limitations for post-employment restrictive covenants, which are deemed presumptively reasonable. Longer time limitations are presumptively unreasonable. These presumptions are rebuttable.

  • Restrictive covenants (not associated with the sale of the business) may be enforced against former employees for two years following termination of employment.

  • Restrictive covenants (not associated with the sale of the business) may be enforced against distributors, dealers, franchisees, lessees, or licensees for three years following termination of the business relationship.

  • Restrictive covenants maybe be enforced against the owner or seller of the business for either five years or the length of time during which payments are being made for the transaction, whichever is longer.

  • There is no limit on the period for which a party may agree to maintain confidential information, so long as the information remains confidential.

Covered Employees

The new law, like the old law, does not apply to employees who lack selective or specialized skills, learning, abilities, or customer contacts. Restrictive covenants may not be enforced against these types of workers. The new law may also be enforced against workers who have customer information or confidential information even if they lack these other qualities.

Specifically, covered employees include:

  • Executives
  • Research and development personnel
  • Employees or independent contractors in possession of confidential information that is important to the business of the employer
  • Employees or independent contractors in possession of customer contacts or customer information obtained through the employment
  • Employees or independent contractors who have specialized training obtained through the employment

Furthermore, post-employment provisions that restrict competition (as opposed to non-solicitation provisions and provisions prohibiting the disclosure of confidential information) are limited to “key employees;” “professionals;” employees who regularly solicit and engage customers; and employees who manage, direct, hire, fire and promote other employees.

Scope

Prior to the passage of the new law, a court could refuse to enforce a covenant that lacked specific limitation as to scope of activity or geographic area. The new law allows for any description that provides fair notice of the maximum reasonable scope of the restraint, even when the description could be stated more narrowly to exclude extraneous matters. For post-employment covenants, any good faith estimate that may be applicable at the time of termination satisfies the reasonableness requirement, but will ultimately be construed to cover only so much of the estimate as relates to activities actually conducted within two years prior to termination.

As outlined above, this new law greatly expands employers’ protection of business interests both by making the outcome of enforcement proceedings more predictable and by providing some leeway for drafting errors. Businesses with employees in Georgia should take the new rules into account in drafting contracts post-November 3. Moreover, employers might consider whether the benefits of the new protections warrant re-negotiating contracts with existing employees.

For more information on this alert, please contact any of the lawyers listed below:

Boston
John Adkins, john.adkins@bingham.com, 617.951.8551
Jenny Cooper, jenny.cooper@bingham.com, 617.951.8473
Joshua Dalton, josh.dalton@bingham.com, 617.951.8284
Louis Rodriques, Co-chair, Labor and Employment Group, louis.rodriques@bingham.com, 617.951.8340

Los Angeles/Orange County
Jacqueline Cookerly Aguilera, jackie.aguilera@bingham.com, 213.229.8439
Debra Fischer, debra.fischer@bingham.com, 213.680.6418

San Francisco
James Severson, james.severson@bingham.com, 415.393.2242

New York
Douglas Schwarz, douglas.schwarz@bingham.com, 212.705.7437

Tokyo
Mie Fujimoto, mie.fujimoto@bingham.com, 81.3.6721.3138

This article was originally published by Bingham McCutchen LLP.