Georgia: New Noncompete Law Should Assist Employers' Enforcement Efforts

Below is a slightly revised version of the FranCast article published by DLA Piper LLP (US) Atlanta partner Gerald Wells and associate Joe Englert on May 19, 2011 and edited by associate Jamie Konn for this blog.  The original article is available at http://www.dlapiper.com/georgia-new-noncompete-law-should-assist-franchisors-enforcement-efforts/.

Georgia: New Noncompete Law Should Assist Employers' Enforcement Efforts

Georgia Governor Nathan Deal has signed House Bill 30 into law, resolving some of the uncertainty surrounding recent legislative efforts to reform Georgia’s law on restrictive covenants. The new law, signed by the Governor on May 11, 2011, confirms the implementation of new rules regarding the enforcement of non-competition, non-solicitation and non-disclosure covenants that should benefit employers operating in Georgia. 

 

Law reenacts earlier legislation without its procedural flaws

House Bill 30 essentially reenacts earlier legislation, House Bill 173 (also known as the Georgia Restrictive Covenants Act), that was intended to go into effect the day after Georgia voters passed an amendment to the Georgia Constitution on November 2, 2010.  The validity of House Bill 173 was called into question due to procedural flaws related to the effective date.  Under the Georgia Constitution, a constitutional amendment becomes effective on January 1 of the following year, unless the amendment or resolution proposing the amendment states otherwise.  Since the amendment and the resolution for House Bill 173 were silent as to the effective date, it was unclear whether the law was effective on November 3, 2010 or on January 1, 2011.  Some speculated that these inconsistencies could invalidate the entire law.  More information on the uncertainty surrounding House Bill 173 is available here

Now the signing of House Bill 30 makes clear that, as of May 11, 2011, under Georgia law new rules are in place regarding the drafting and enforceability of restrictive covenants.

Lingering uncertainty

House Bill 30 specifically states that it was not intended to be “evidence of a legislative determination that House Bill 173 … was in fact invalid,” but rather to remove uncertainty as to the validity of the previous law.  Nonetheless, since the new law does not apply retroactively to agreements executed prior to the effective date, there is still some uncertainty as to the applicable law for agreements executed between November 3, 2010 and May 10, 2011. 

Presumably, all agreements executed after the effective date of the constitutional amendment, January 1, 2011, will be governed by the new rules, unless the previously enacted law is determined to be invalid.  But the application of the new rules to agreements executed between November 3, 2010 and December 31, 2010 is far less certain. 

Ultimately, these issues will likely be resolved through litigation.

Changes imposed by the new law

Among the new rules imposed by the new law, the following are the most relevant for employers: 

  • Georgia judges now have the discretion, but not the obligation, to “blue pencil” or edit overbroad restrictive covenants to make them enforceable
  • Non-competition restrictions are prohibited with respect to employees who are not sales and business development professionals, managers, department heads, key employees or professionals
  • A rebuttable presumption of reasonableness for time restrictions of two years or less following termination of employment
  • Territorial restraints describing where the person is working at the time of termination or similar language shall be considered a sufficient description of the geographic scope if the person bound by the restraint can reasonably determine the maximum reasonable scope of the restraint at the time of termination
  • Non-solicitation restrictions, which Georgia courts previously enforced only with respect to active solicitation, may now prohibit passive solicitation
  • Time restraints on maintaining information as confidential or as a trade secret are no longer required, as long as the information remains confidential or a trade secret

More information on the changes implemented under the new law is available here.

Practical steps

The signing of the new law provides an opportunity for employers to revisit the issue of restrictive covenants in Georgia and to consider revising agreements for prospective employees in Georgia to take advantage of the new rules. 

The addition of rebuttable presumptions concerning time and territory restrictions offers guidance as to where Georgia law draws the line of enforceability.  More importantly, the new power given to judges to blue pencil overbroad covenants, instead of striking them entirely, mitigates the risk of losing all of the protections in a restrictive covenant that contains one provision that crosses that line. 

That having been said, it is important to note that this ability to rewrite overbroad agreements is discretionary and some judges, accustomed to strictly scrutinizing restrictive covenants, may continue to strike covenants determined to be overbroad in their entirety.  Therefore, when entering into agreements involving employees in Georgia, it is advisable to proceed with caution and draft restrictive covenants that fall within the law’s guidelines of what is presumptively reasonable; and monitor how the courts in Georgia are applying the new law before attempting any aggressive position based on the court’s ability to blue pencil. 

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