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Voters To Decide: Significant Changes Ahead For Georgia Non-Compete Law?

July 05, 2010 BY Meredith Guerrero

            Georgia businesses are one step closer in their quest to change state law governing covenants against competition contained in employment agreements.  On the final day of Georgia’s legislative session, the Senate unanimously approved a proposal asking voters to amend the Georgia Constitution to allow the General Assembly to set standards governing covenants against competition.   

            As many employers already know, Georgia courts are notoriously hostile to restrictive covenants contained in employment agreements.  Indeed, Georgia is one of the most difficult states in which to enforce restrictive covenants agreements. 

            Georgia courts currently take an all-or-nothing approach to restrictive covenant agreements.  If a court determines that one restrictive covenant in an employment agreement is overbroad and unenforceable, the other restrictive covenants in the agreement are also rendered unenforceable (except for confidentiality covenants), even if they would be enforceable standing alone.  Unlike a number of other states, Georgia law also currently prohibits judges from modifying or “blue-penciling” an overly broad covenant to make it enforceable.   For example, if a non-compete clause restricts an employee from working in geographic areas in which the employee did not work for the former employer, the court cannot modify the covenant to include only those areas in which the employee worked.  The court must, instead, declare the entire covenant unenforceable.     

            With very little margin for error, the current state of Georgia law in this area makes it difficult for employers to draft enforceable covenants against competition.  However, if approved by voters in November, the amendment will immediately put into effect legislation signed by Governor Perdue on April 29, 2009.  This legislation, HB 173 (known as the “Georgia Restrictive Covenant Act”), broadens and more clearly defines the permissible scope of contractual restrictions on competitive activity.

            Although the Georgia Restrictive Covenant Act has been approved by the legislature and signed by the governor, it cannot go into effect until an amendment to the Georgia Constitution has been approved in a statewide referendum in the 2010 general election. This is because Article 3, section 6, paragraph 5 of the Constitution of Georgia currently states that the "General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, or encouraging a monopoly, which are hereby declared to be unlawful and void."

            For years, many Georgia companies have pushed for changes to the state’s employment laws in order to make them easier to understand and apply when crafting employment contracts that restrict employees who possess proprietary information from leaving to work for competitors or solicit their customers.  If voters pass the amendment in November, the changes contained in the Georgia Restrictive Covenant Act will immediately go into effect.  The new law allows judges to “blue-pencil” restrictive covenants that are too broad instead of declaring them completely unenforceable.  Both Florida and North Carolina already permit their courts to modify unenforceable restrictive covenants agreements to make them comply with state law.

            The new law also permits employers to include in non-solicitation clauses a prohibition on acceptance of business from clients, thereby overturning a line of Georgia cases that held that a restraint on "passive" solicitation is overbroad and void against public policy.  The Georgia Restrictive Covenant Act also establishes presumptively reasonable non-compete durations: two years for employees; three years for franchisees or distributors; and, in the case of business owners who sign a non-compete agreement as part of the sale of a business, the longer of 5 years or the time during which payments are made for the sale. 

            Importantly, the Georgia Restrictive Covenant Act also eliminates time limits on employers’ ability to protect confidential information.  Currently, Georgia is one of only two states that enforces time limits regarding a former employee’s disclosure of confidential information.

            The November ballot will pose the following question to voters: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?”  As evidenced by the language of the proposal, the General Assembly hopes the changes to Georgia’s law regarding covenants against competition will encourage business and economic development in Georgia. 

            If approved by voters in November, these changes will only apply to new agreements entered into after the effective date. Agreements existing before the effective date of the law would be scrutinized under the old law.  In light of the significant changes contained in the Georgia Restrictive Covenant Act, and the greater ease with which restrictive covenants may be enforced, employers should be prepared to revise their employment agreements in order to obtain the maximum benefit from the changes.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley