A Primer for Georgia Employers on What Litigation Under the New Restrictive Covenants Act May Look Like

Posted by Neal F. Weinrich on

As we have reported in prior issues of this newsletter, Georgia’s non-compete law has recently undergone significant changes. The new Restrictive Covenants Act, O.C.G.A. § 13-8-50 et seq. (the “Act”) was supposed to take effect last November following the approval of a ballot referendum which amended Georgia’s Constitution to allow the legislature to legislate concerning restrictive covenants. Due to a potential problem with the effective date and the constitutionality of the legislation, House Bill 30 was introduced and passed in the most recent session of the Georgia General Assembly. Governor Deal signed House Bill 30 on May 11, 2011, and the law has thus now taken effect. House Bill 30 in essence re-enacted the Act and likely cured the procedural problems with the original Act.

The Act overturns more than one hundred years of Georgia case law which was extremely hostile to the enforcement of non-competes and other restrictive covenants in employment agreements. The new law thus drastically changes the dynamic between employers and employees in Georgia in this area.

While we know the Act makes it substantially more likely that employers in Georgia will be able to enforce restrictive covenants against their former employees, we cannot predict what to expect when litigating cases under the new law. Previously, many lawsuits involving restrictive covenants were resolved quickly when a Judge made a determination very early in a case that the covenants were unenforceable on their face under Georgia’s extremely strict case law. Disputes under the new law will look different, as the Act favors enforcement and also authorizes judges to modify covenants to make them reasonable and enforceable. This article is intended to provide a brief primer on a few of the issues Georgia employers can expect to litigate when seeking to enforce restrictive covenants against their former employees:

1. Is the Act applicable to the particular employee?

In the months leading up to the ballot referendum on the constitutional amendment which enabled the Act to go into effect, opponents of the Act questioned the merits of a law which makes it harder for Georgians to find employment during such challenging economic times. In response, proponents of the Act argued that the law would only apply to a small percentage of Georgia employees.

Whether the proponents of the Act are correct and what percentage of employees are subject to the Act remains to be seen. The Act expressly applies to “employees”, as that term is defined by the Act. See O.C.G.A. § 13-8-51(5). Executive employees, which include board members, officers, key employees as that term is defined by the Act, and managers, are considered “employees” under the Act. See O.C.G.A. § 13-8-51(5)(A) and (7). The Act also applies to research and development personnel or other persons, including independent contractors, who are in possession of confidential information important to the employer’s business. See O.C.G.A. § 13-8-51(5)(B). The Act also applies to persons, including independent contractors, who are in possession of selective or specialized skills, learning, abilities, customer contacts, customer information or confidential information which were obtained by reason of having worked for an employer. See O.C.G.A. § 13-8-51(5)(C). Employees who lack selective or specialized skills, learning, abilities, customer contacts, customer information or confidential information are expressly excluded from the definition of “employees” covered by the Act.

Given these definitions as well as the structure of the statute, in many cases, employees will likely dispute that they are “employees” under the Act. Whether an employee comes within one of these definitions is likely to be often litigated. In lawsuits where employers are seeking to enforce restrictive covenants governed by the Act, employers must therefore be prepared to demonstrate and prove that the former employee falls within one of the definitions of an “employee”, and to ward off the former employee’s efforts to prove otherwise.

2. Are the particular restrictive covenants at issue reasonable?

One of the most notable changes under the Act is that Georgia courts are now permitted to modify unreasonable restraints. Under Georgia’s preexisting case law, if a restriction in a covenant in the employment context was found to be overbroad, the court could not modify the covenant to make the restriction reasonable. Rather, the covenant was deemed unenforceable in its entirety. Thus, if the geographic territory in which an employee was restricted from working included areas where the employee did not work for or represent the employer, the covenant could not be modified by a court to restrict the employee from working in only those areas where the employee worked. Instead, the entire covenant would be declared unenforceable. Furthermore, if one covenant against competition in an employment agreement was found to be overbroad and unenforceable, the other covenants against competition in the agreement were rendered unenforceable.

The Act changes this rule and authorizes courts to modify restrictive covenants by enforcing them to the extent they are reasonable. See O.C.G.A. §§ 13-8-53(d); 13-8-51(11) and (12). Thus, the reasonableness of the restrictive covenants sought to be enforced will likely be heavily litigated. Employees will argue that the territory or scope of a non-compete is broader than necessary for the employer to protect its business interests, and will urge the courts to strike or modify portions of a covenant rather than enforcing it as written. Employers will come forward with proof that the restraints in their covenants are reasonable, such as by showing that an employee worked for the employer throughout the restricted territory of a non-compete. Judges will then have to decide whether and how to pare down restrictive covenants to make them reasonable.

3. Will enforcement of the restrictive covenants impose a financial hardship on the employee?

The Act permits judges to consider the economic hardship that enforcement of a restrictive covenant will impose on an employee when determining its reasonableness. See O.C.G.A. § 13-8-58(d). Employees will undoubtedly assert this defense with frequency and argue that their covenants should not be enforced because of the hardship that enforcement would impose. Employers thus may often be forced to “disprove” that enforcement of the covenants will impose an economic hardship on the former employee.

One way an employer may do so is by arguing and proving that a person with the employee’s particular skills, training and qualifications could obtain gainful employment without violating the restrictive covenants. Another way is to demonstrate that the employee has the financial wherewithal, means and assets, such that enforcement of the covenants would not impose an unreasonable economic hardship. Thus, when an employee asserts this hardship defense, it may lead to discovery very early in a case about an employee’s employability as well as his finances, assets, and spending habits.

These are just a few of the many issues raised by the Act, many of which are new to cases involving restrictive covenants in Georgia. Given that these issues require judges to make factual determinations and rule using their discretion, injecting these issues into disputes involving restrictive covenants will likely make the outcomes of these cases far less predictable than they were before. Furthermore, because these issues require factual discovery and development, the cost of litigating cases involving restrictive covenants will likely increase.

In time, employers and attorneys will know from experience what litigation under the Act is like. In the interim, we hope this article provides a glimpse into what employers can expect when they seek to enforce restrictive covenants against their former employees which are governed by the new law.