The Georgia Court of Appeals recently issued a decision that has significant implications for drafting and enforcement of restrictive covenants, including non-competes, customer non-solicits and employee non-solicits and non-recruitment provisions.
Restrictive Covenant Litigation
In Belt Power v. Reed, 2020 WL 1150059 (Ga. App. 2020), the court
addressed three key issues that are important to restrictive covenant
litigation: (1) whether Georgia’s Restrictive Covenant Act (the “RCA”) applies
to no-hire and employee non-solicitation covenants; (2) whether blue-penciling
under the Act is permissive, not mandatory; and (3) whether a choice-of-law
provision choosing the law of another state will still be disregarded if
applying the provision would result in enforcement of covenants that are
considered to be against Georgia public policy.
The trial court had struck the no-hire and employee non-recruitment covenants at issue, finding that the RCA does not apply to them and that they were unenforceable under the common law. Not surprisingly, the court reversed the trial court’s decision that the RCA does not apply to employee no-hire and employee non-solicitation covenants. The court recognized that the RCA defines the term “restrictive covenant” in part as “an agreement between two or more parties that exists to protect the first party’s or parties’ interest in property, confidential information, customer good will, business relationships, employees, …” (emphasis supplied). Therefore, reading that section of the statute in conjunction with O.C.G.A. section 13-8-54(b), the court held that the “clear and plain language of these two provisions compels a conclusion that any agreement that meets the Act’s definition of restrictive covenant, and is not otherwise excepted from the Act’s provisions, is subject to the terms of the Act and must comply with the terms of the Act.”
In addition to finding that the employee no-hire/non-solicitation covenant was unreasonable under the common law, the trial court had made the alternative finding that even if the RCA applied, the provisions were facially unreasonable and overly broad under the RCA. The trial court also declined to blue-pencil the covenant to render it enforceable. On appeal, the company argued that the trial court abused its discretion in declining to modify the covenants. The Court of Appeals again looked to O.C.G.A. section 13-8-54(b) and noted that the statute provides a trial court “may modify” a restraint that does not comply with the RCA. The Court of Appeals confirmed that the term “may” here means that modification is not mandatory. To the contrary, the Court concluded, “it is within a trial court’s discretion whether or not to apply the Act’s blue pencil provisions.” The Court went on to hold that the trial court had properly considered the company’s legitimate business interests and concluded they did not warrant a modification of the covenants to make them enforceable, so it had not abused its discretion in declining to modify the covenants.
In coming to this conclusion, the Court of Appeals potentially side-stepped the issue of whether under the RCA the blue-pencil can only strike words that render a covenant overbroad or whether the court can judicially modify the covenant to rewrite the agreement for the parties and enforce what the court finds to be reasonable. Aside from the statute itself and some federal district court decisions, there is still no guidance from Georgia appellate courts on this issue.
Finally, the Court of Appeals held that the RCA does not change its prior conclusion that unreasonable restrictive covenants are against Georgia public policy. Accordingly, the Court held the trial court did not err in refusing to apply the choice of law provision. This decision is curious as the agreement was governed by Delaware law and the Court did not provide any explanation for how application of Delaware law would result in enforcement of covenants that are against Georgia public policy. Importantly, Judge Rickman concurred in judgment only as to the last division of the opinion, so the precedential value of this part of the decision is questionable.
Drafters should carefully consider Belt Power when including no-hire/non-recruitment covenants in agreements that will apply to employees located in Georgia.
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
