Georgia Court of Appeals Cites New Restrictive Covenants Law

Posted by Neal F. Weinrich on

Cox v. Altus Healthcare and Hospice, Inc., –S.E.2d–, 2011 WL 198388 (Ga. App. Jan. 24, 2011), is the first appellate decision in Georgia to cite Georgia’s new restrictive covenants law, which recently went into effect.   The decision confirms that the Court of Appeals will apply pre-existing case law to decide the enforceability of restrictive covenants entered into prior to ratification of the amendment to the Georgia Constitution which implemented the new law:  “Now effective as a result of the ratification of an amendment to the Constitution of Georgia in the general election of November 2, 2010, O.C.G.A. § 13-8-2.1(a) authorizes covenants ‘that restrain in a reasonable manner.’  (cit. omitted).  However, Ga. L. 2009, p. 231, § 4 provides that the new version of the statute ‘shall not apply in actions determining the enforceability of restrictive covenants entered into before’ the ratification.  We therefore apply the law of restrictive covenants as it existed before that event.”  Id. at *3.

Cox also illustrates an employer’s potential exposure for wrongful restraint if it seeks and obtains an injunction against a former employee based on restrictive covenants later determined to be unlawful.  In Cox, the employer obtained an interlocutory injunction based on its former employee’s restrictive covenants.  The employee appealed the injunction, contending that the restrictive covenants were overbroad and violated Georgia law.  The employee also obtained leave to amend his answer to add a counterclaim for wrongful restraint.

Before the employer’s appeal brief was due, it amended its complaint to dismiss its claim for injunctive relief.  The trial court then dissolved the injunction.  Because the injunction had been dissolved, the employer argued that the former employee’s appeal was moot.  The employee argued that the appeal was not moot because his pending counterclaim for wrongful restraint depended on whether the trial court’s issuance of the injunction was erroneous.

The Court of Appeals held that the appeal was not moot and that the trial court erred in restraining the employee because the restrictive covenants were unenforceable.  As the covenants were illegal, the Court of Appeals held that the employee had been wrongfully restrained as a matter of law.  The Court of Appeals remanded the case for a determination of actual damages suffered by the employee while he was wrongfully enjoined.

Cox thus counsels employers of the risks associated with seeking to enjoin a former employee based on restrictive covenants which may be found to be overbroad and illegal by a reviewing court.