Georgia Legislature Proposes Dramatic Changes To Restrictive Covenant Laws
*Co-authored with Alexis M. Downs.
If eventually passed, proposed Georgia House Bill 173 will dramatically alter Georgia restrictive covenant law as we now know it. In short, this proposed legislation purports to significantly ease the employer’s burden when it comes to the enforcement of non-competition, non-solicitation and non-recruitment covenants in Georgia, where such restrictive covenants have been notoriously difficult to draft and enforce. HB 173 will become law only after ratification of a proposed amendment to the Georgia Constitution scheduled to be on the ballot during the November 2010 general election.
As a matter of public policy, the Georgia courts currently refuse to enforce restrictive covenants which do not include strict limitations as to duration, territory, and scope. Whether or not a limitation will be considered reasonable is currently governed by Georgia common law which has evolved over several years on a case by case basis. This has resulted in a piecemeal set of amorphous and relatively stringent rules which make the enforceability of restrictive covenants extremely difficult and quite unpredictable. Furthermore, under the current Georgia law, the courts are forbidden from “blue-penciling” or, in other words, modifying invalid provisions within employee non-compete and non-solicitation agreements. Finally, Georgia courts will automatically invalidate non-solicitation covenants if the employer’s non-compete covenant is in any way invalid, and vice versa.
Taking what could be referred to as an “about-face” from current law, HB 173 states its purpose is to “serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing businesses within the state.” In support of this stated purpose, the proposed legislation significantly softens the oftentimes challenging geographic, temporal, and subject matter limitations currently required by Georgia courts. To this end, the Bill defines several frequently misapplied terms, and offers presumptively valid and relatively liberal time frames for certain types of restrictions. For example, a two year duration is presumed reasonable as to a restraint of a former employee’s ability to compete with an employer within a specific geographic area. A restraint of up to three years is considered reasonable for non-solicitation and non-recruitment agreements. The proposed legislation is also more lenient in regard to scope, eliminating the historical requirement that employers specifically link the scope of prohibited post-employment competition with what are oftentimes unpredictable future duties and responsibilities of the signatory employee. As such, contrary to the current law, the proposed legislation dictates that, “any good faith estimate of the activities, products and services” will suffice so as to define the scope of the proscribed post-employment competition. Also, contrary to a recent Georgia Supreme Court ruling, the proposed legislation dictates that in-term covenants (those which apply during the employment relationship as opposed to after) are not required to include specific limitations as to scope of activity, duration, or geographic territory. Finally, perhaps the most significant proposed change is that the courts will be directed to blue-pencil provisions found to be unenforceable. Thus, if a portion of a restrictive covenant is invalid, the courts will be able to narrow the restriction in question and, as a result, enforce any remaining partial provisions or covenants.
HB 173 was signed by Governor Purdue on April 29, 2009, and will become effective one day following ratification of a proposed amendment to the Georgia Constitution which would give the legislature the power to enact such laws. The need for a constitutional amendment stems from a 1991 decision of the Georgia Supreme Court in which a similar non-competition law was held unconstitutional under Article III of the Constitution of Georgia which reads: "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 …". If the amendment is not ratified in the November 2010 general election, HB 173 will be automatically repealed.
