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BFV Perspectives, Noncompete & Trade Secrets, | May 15, 2013

Georgia Supreme Court Mentions Effective Date of New Restrictive Covenants Act

Much has been written about the issues surrounding when Georgia’s new restrictive covenants law took effect. House Bill 173 was intended to take effect on November 3, 2010, the day following ratification of an amendment to Georgia’s Constitution which allowed Georgia’s General Assembly to legislate more freely in the area of restrictive covenants.  However, because the amendment did not actually take effect until January 1, 2011, questions arose about the validity of House Bill 173.  Based on these concerns, the General Assembly passed House Bill 30.  House Bill 30 substantially reenacted House Bill 173 and took effect on May 11, 2011.  By its terms House Bill 30 only applies to restrictive covenants entered into on or after its effective date. 

While House Bill 30 thus clearly governs covenants entered into after May 11, 2011, the question of what law governs restrictive covenants entered into between November 3, 2010 and May 11, 2011 is unclear.  An unpublished opinion from the Eleventh Circuit found that House Bill 173 was void ab initio and that Georgia’s historical common law governs restrictive covenants entered into prior to May 11, 2011.  See Becham v. Synthes USA, 2012 WL 1994604 (11th Cir. June 4, 2012).  While potentially persuasive, Becham is not binding on Georgia trial courts.  To date, no Georgia appellate court has ruled on what law governs the enforceability of restrictive covenants entered into between November 4, 2010 and May 11, 2011.

In Holton v. Physician Oncology Services, LP, –  S.E.2d –, 2013 WL 1859294 (Ga. May 6, 2013), the Georgia Supreme Court considered a challenge to the validity of an injunction based on a non-disclosure covenant in an employment agreement entered into in August 2009.  The Supreme Court gratuitously commented in a footnote that if the covenant was overbroad, it could not be blue-penciled under Georgia’s new law: “The 2011 act revising the law related to restrictive covenants in contracts does not apply to contracts entered into before May 11, 2011.  See Ga. L.2011, p. 399, § 5. Therefore, the act’s provision on judicial modification of restrictive covenants does not apply here. See O.C.G.A. § 13–8–54(b).”

On its face this comment might suggest that the Supreme Court agrees with the Eleventh Circuit’s holding in Becham that Georgia law did not change until May 11, 2011.  A closer examination of the Supreme Court’s wording, however, suggests that Georgia’s highest court did not answer the question of when Georgia restrictive covenants law officially changed.  More specifically, the Supreme Court’s footnote in Holton refers to the “2011 act.”  House Bill 30 is the “2011 act”, and there is no dispute that House Bill 30 applies to covenants entered into on or after May 11, 2011.  In contrast, House Bill 173 is a “2009 act.”  The Supreme Court’s choice of words (i.e., its use of the phrase “2011 act”) thus leaves open the possibility that House Bill 173 could apply to restrictive covenants entered into between November 3, 2011 and May 10, 2011 (or between January 1, 2011 and May 10, 2011).

Furthermore, the employment agreement at issue in Holton was signed in August 2009.  Thus, even if the Supreme Court was opining in Holton on whether Georgia’s restrictive covenants law changed on November 3, 2010, January 1, 2011 or May 11, 2011 (which it appears it was not anyway), its ruling would still be dicta.

Notwithstanding the fact that Holton thus probably does not provide practitioners with much additional guidance on what law applies to restrictive covenants entered into between November 3, 2010 and May 11, 2011, it is still noteworthy that Georgia’s highest court commented on the new law.  Of course, it is possible that trial courts will interpret the Supreme Court’s footnote in Holton as indicating that it agrees with or would agree with the analysis in Becham.  Time will tell how the Georgia Supreme Court’s footnote is interpreted and what in fact was meant.

BFV Perspectives, Noncompete & Trade Secrets, | May 15, 2013
Neal F. Weinrich
Neal F. Weinrich

Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.