Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

Co-authored by Kenneth G. Menendez.

Back in May, on the last day of the 2010 session of the Georgia General Assembly, lawmakers passed a bill totally revamping Georgia’s restrictive covenant law (House Bill 173). Unlike most laws, however, this Act was not effective either upon passage by the General Assembly or upon signature by the Governor. Rather, this Act became effective on the day following the 2010 general election, if ratified in the form of an amendment to the Georgia Constitution providing for the enforcement of restrictive covenants in commercial contracts that limit competition.

On November 2, 2010, by a margin of more than two-to-one, Georgia voters ratified this Constitutional amendment and, as a result, effectuated the total restructuring of Georgia’s restrictive covenant law. Thus, upon certification of the election results, Georgia will have a new restrictive covenant law, which will apply on a going-forward basis to all contracts entered into on and after such effective date.

Highlighting the new Georgia law is the authorization for the courts to “blue-pencil” or modify restrictive covenants, in cases where the contractual covenants are partially unenforceable or overly broad, so as to grant only the relief reasonably necessary to protect the interests of the parties and achieve the original intent of those parties to the extent possible. Historically, in the context of restrictive covenants contained in employment agreements, Georgia courts have refused to blue-pencil overly broad covenants or covenants otherwise determined to be unenforceable. Thus, prior to the new law, if any portion of a restrictive covenant (or accompanying covenants not to solicit clients or pirate employees) was found to be unenforceable, all of the covenants contained in the applicable agreement were determined to be unenforceable as well.

The new Georgia law goes further, in terms of identifying those contracts which, in the future, may include restrictive covenants; included are contracts between employers and employees, distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of businesses, and two employers. The law also identities categories of employees who may be subject to restrictive covenants, and those categories of employees who may not. Finally, the new law puts the burden of proof on the party challenging the restrictive covenant, once the party seeking to enforce the restrictive covenant establishes by prima-facie evidence that the restrictive covenant is in compliance with the provisions of the new law.

Georgia’s new restrictive covenant law should provide some much-needed clarity and guidance, in terms of allowing lawyers to craft restrictive covenants which will stand up under scrutiny from the courts, rather than relying upon a case-by-case analysis of the covenants (along with the factual situations involved) to determine the legality of those covenants. Additionally, courts will now be empowered to blue-pencil overly broad or unenforceable restrictive covenants, and it will be interesting to see how the courts accept and handle this authorization.
 

In a decision, dated January 26, 2009, in the matter Epiq Systems, Inc. v. Hartie, Index No. 111950/08, the Supreme Court of the State of New York, New York County, by Judicial Hearing Officer (and retired Justice) Ira Gammerman, denied a preliminary injunction in aid of arbitration sought by plaintiffs Epiq Systems, Inc. and related companies (collectively, “Epiq”). Epiq claimed that it faced inevitable disclosure of its trade secrets by three individual defendants formerly employed at Epiq and their new employer Kurtzman Carson Consultants LLC (“KCC”) with respect to three computer programs, including one web-based system, developed and used by Epiq to solicit ballots and tabulate ballot results in Chapter 11 bankruptcy proceedings, and in analogous foreign proceedings, involving widely-held public securities.

Epiq sought to enforce restrictive covenants in its employment agreements, which barred the individual defendants from disclosing Epiq’s confidential, proprietary or trade secret information, competing against Epiq or soliciting Epiq’s customers for one year after termination, and soliciting Epiq’s employees during employment and for one year after termination. After a two-day hearing in September 2008, the Court entered a temporary restraining order specifically limiting, although not prohibiting, the individuals’ employment with KCC.

Although the Court held that any arbitration award to which Epiq might ultimately be entitled apparently would be rendered ineffectual absent preliminary relief, it declined to issue a preliminary injunction against defendants, finding that Epiq had not satisfied any of the elements of the traditional tripartite test for injunctive relief: likelihood of success on the merits, showing of irreparable harm, and balance of equities favoring the movant.

Key findings for the Court were that the individual defendants did not know any part of the source code or the underlying algorithms of Epiq’s programs, even though they had worked at length with Epiq’s programmers, and so they could not disclose such information to KCC. In addition, KCC already had its own software program that allowed KCC to perform bankruptcy-related solicitation and tabulating projects in-house. Moreover, the Court held that even if the defendants would seek to improve KCC’s software, their knowledge brought to bear on such a project would not constitute a trade secret under the definition of trade secret under section 757, comment b, of the Restatement of Torts, which applies under New York law. In finding a lack of irreparable harm, the Court also noted that it had been presented with no real evidence that defendants had committed or were about to commit commercial piracy.

Epiq filed a notice of appeal on February 11, 2009.