Georgia’s New Non-Compete Statute: Is This Legislation Good for Business in Georgia?

Posted by Benjamin I. Fink on

As we reported in our Fall 2009 edition of this newsletter, significant changes may be coming to the law concerning non-competes and other restrictive covenants in the employment context in Georgia.  The Restrictive Covenants Act (the “Act”) was passed by the Georgia General Assembly during the 2009 legislative session.  However, before the new legislation becomes effective, an amendment to the Georgia Constitution must be approved in a state wide referendum in the upcoming general election. With the referendum approaching, we think it is important to explore whether this legislation is good for business in Georgia, and whether its stated goals can be accomplished.

The stated purpose of the Act is to “bring Georgia in line with the overwhelming majority of other states and to establish a rule of reasonableness and legal analysis of these agreements.”  According to the sponsors of the bill, the purpose of the legislation is also to make the outcomes of enforcement of non-compete agreements more predictable, to decrease litigation in this arena, to provide employers with greater protection, and to make Georgia more like other states.  The purpose of this article is to examine whether these stated goals are in the best interest of business in Georgia and whether the legislation can accomplish them.

While a comprehensive discussion of the present state of the law in Georgia concerning non-competes in the employment context is beyond the scope of this article, some background will be helpful to frame the discussion. While the law in Georgia is restrictive, it is reasonably predictable for attorneys knowledgeable in the area.  In a nutshell, the Georgia courts use a three-prong test “as a helpful tool” to determine the reasonableness (and, thus, the enforceability) of covenants ancillary to employment contracts.”  The covenants must be reasonably limited in terms of 1) the length of time in which they bind the employee; 2) the scope of the conduct that is prohibited; and 3) the geographical territory inside which the employee is bound.

Importantly, Georgia does not allow “blue penciling”, or judicial modification, of restrictive covenants in the employment context.  That is, if a restrictive covenant is not reasonably limited in time, scope, or geographical territory, a court may not strike portions of it or re-write the restriction to make it reasonable.

For the experienced attorney, following the rules which have developed from the “three-pronged test” is not particularly difficult.  While the rules that have developed certainly limit the type and scope of restrictions that employers can be obtain from employees in Georgia, the rules are relatively easy to follow, if one knows them.

Under the new legislation, courts will be permitted to both “blue pencil” restrictive covenants in employment agreements by “crossing out” overly broad terms and to judicially modify overly broad restrictive covenants to grant relief which the court determines is reasonably necessary to protect the employer’s interest and to achieve the intent of the contracting parties.  This means a court will be permitted to completely re-write a non-compete agreement, if necessary, to make it reasonable.

Will the New Legislation Make Georgia More Economically Competitive?

The referendum that will be on the November ballot will ask voters:  “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?”[1]  However, it is not altogether clear that the Act will make Georgia more economically competitive.

According to one study, strict enforcement of non-compete covenants is advantageous for companies in emerging industries.  But, as an industry develops and competition increases, it becomes less advantageous for companies to locate in jurisdictions with laws strongly favoring the enforceability of non-competes.  In fact, according to this study, Massachusetts’ liberal enforcement of non-competes in the employment context is one reason why Massachusetts has lagged behind California’s Silicon Valley in attracting and growing technology companies.[2]

It goes without saying that in California, a state where non-competes are strictly prohibited in the employment context, high-tech businesses have thrived.  One would think Georgia would like to have a booming technology industry on par with the one in Silicon Valley.  Even the Georgia Chamber of Commerce, a vigorous proponent of the new legislation, would probably agree that Georgia would like to attract and incubate the next Microsoft, Google or Apple.  If this study is correct, the new legislation may very well set Georgia back in its efforts to attract high-paying, information-technology jobs, rather than move the state forward.

Will Outcomes Become More Predictable?
Under the current law in Georgia, the validity of restrictive covenants in the employment context is reasonably predictable.  Georgia courts will generally enforce a non-compete if:  (1) it covers only the territory in which the employee has worked for, or represented, the employer during his or her employment; (2) the scope of the prohibition is rationally related to the activities performed by the employee during his or her employment; and (3) the duration of the restraint is not unreasonable.  Moreover, Georgia courts will generally enforce a customer non-solicitation provision if it is limited to the customers with whom the employee had contact during employment, even in the absence of a territorial restriction.  The Georgia courts will also generally enforce non-disclosure or confidentiality provisions as long as they have some time limitation that bears some relation to the length of time during which the information can truly be considered confidential.

For attorneys experienced in this arena, the outcomes of non-compete disputes are reasonably predictable, as covenants are typically either enforceable or unenforceable on their face when the rules described above are applied.  In fact, under current Georgia law, whether the restraint imposed by a restrictive covenant is reasonable is a question of law for determination by the court. What this means in practice is that the vast majority of non-compete disputes are decided by the judge based on motions, rather than by juries.  Outcomes in litigation are significantly more predictable when judges are making decisions on legal issues rather than juries rendering verdicts based on the facts, the law and many other factors, including emotions (and which attorney they like better).

There is no doubt that in a non-compete dispute in a state that allows blue penciling or judicial modification of restrictive covenants, it can be expected that the employer will usually obtain some protection from the court, rather than coming away empty-handed, as is often the case in Georgia because of poorly drafted restrictive covenants.  However, the outcome of a case in a state which allows blue penciling or judicial modification is usually dependent on the particular judge’s outlook on restrictive covenants in the employment context as well as the particular facts of the case (which must be presented in an evidentiary hearing or trial, rather than in a summary fashion such as a motion). Unlike in Georgia, where, under the current law, the enforceability of a covenant can be predicted with a reasonable degree of certainty at the outset of any dispute, in states in which the courts can blue pencil or modify a covenant, the range of possible outcomes of the dispute is very unpredictable, even for the most experienced practitioner.  Under the Act, if approved, this lack of predictability will be exacerbated by the fact that judicial modification of otherwise unenforceable provisions is permissive.  In other words, each judge will have to make his or her own decision whether to blue pencil or modify each agreement he or she considers.

In sum, while the new legislation will certainly make it more predictable in that employers will obtain some protection from the Georgia courts when they find the need to enforce restrictive covenants against former employees, the scope of that protection, and how any individual judge will rule, will become far more difficult to predict.  This loss of predictability for the employer (and also the employee) is a downside to the Act.

Will the Act Decrease Litigation? The new legislation is likely to decrease litigation by deterring most employees from challenging restrictive covenants that were entered into in conjunction with their employment.  Employees will be less likely to challenge even overly broad restrictive covenants if they cannot reasonably predict how a judge will rule with respect to the covenants and, if doing so, will require time-consuming and expensive discovery as well as a trial.

Nevertheless, rather than decrease the time and cost of litigation which does take place, the legislation will likely result in significantly more protracted litigation when a lawsuit is filed.  Currently, the majority of lawsuits in Georgia in this arena are short-lived because the court will usually be afforded the opportunity to rule as to the enforceability of the covenant early on in the litigation.  Most often, this ruling is made based on the wording of the covenant without the need for expensive discovery and evidentiary hearings or trials.  In addition, when a covenant is found to be unenforceable, the case is usually resolved by the parties quickly. When a covenant is found to be enforceable, the case also tends to be resolved promptly because the employee (and often his or her new employer) will not want to risk the possibility of a judgment for damages.

Thus, when significant discovery and a full evidentiary hearing are necessary to litigate the reasonableness of the territory and/or the scope of the activities that are restricted, the time and expense necessary to determine whether a covenant is enforceable will expand greatly. Evidentiary hearings or trials will also be necessary to determine if an employee has the “specialized knowledge and training” which is necessary under the Act for a non-compete to be enforced against him or her.  The same will be true for the “economic hardship” exemption that is part of the Act.

In sum, any decrease in the number of lawsuits concerning restrictive covenants caused by the new legislation may be offset by the expanded nature and expense of those lawsuits which are filed.

Is the Uniformity Sought by the New Legislation Illusory? The goal of uniformity, another policy goal of the new legislation, may be an illusory one.  Whether courts may blue pencil or judicially modify restrictive covenants in the employment context varies widely throughout the United States.

As stated above, California outright prohibits non-compete agreements in the employment context.  Whether employment or continued employment is sufficient consideration for restrictive covenants also varies widely.  Unlike in some other states, in Georgia, employment or continued employment is sufficient consideration for restrictive covenants in the employment context.  In fact, in this regard, Georgia is one of the more employer-friendly states in the country.  For example, in courts in California, Montana, North Carolina and South Carolina, among others, mere employment or continued employment is not sufficient consideration for restrictive covenants in the employment context. Something else of value must be provided to the employee.[3]  In Texas, a non-compete is enforceable only if it is ancillary to an “otherwise enforceable agreement.”  This means that a restrictive covenant cannot be simply ancillary to employment or continued employment, but must attach to another agreement that is otherwise enforceable between the employer and the employee (for example, an agreement concerning the employer providing specific training or specific confidential information or trade secrets to the employee).  Therefore, it is not entirely clear that the legislation will make Georgia’s non-compete law more like other states’ laws. Indeed, given the wide variation in restrictive covenant laws in the United States, uniformity is probably an illusory goal.

Importantly, the Georgia Legislature seems to be heading in the opposite direction from other states that are looking at this issue.  For example, Oregon recently passed legislation limiting the use of restrictive covenant agreements in the employment context.  Moreover, in Massachusetts, legislation was recently introduced that would prescribe more specific requirements in order for restrictive covenants in the employment context to be enforced in that state.

What Impact Will the Act Have on Employees?

It is particularly curious that our legislature would pass a law of this nature given the current state of the economy.  Recent unemployment statistics place Georgia’s unemployment rate at ten percent, with over 450,000 Georgians out of work.[4]  For those who are subject to restrictive covenants, the job market will be especially bleak.  Overly broad restrictive covenants can have a chilling effect on former employees who may not know that the agreements they signed are unenforceable.

This will also certainly make it more difficult for companies to recruit employees for their businesses in Georgia.  More often than not, when an employee is challenging a non-compete he or she signed with a former employer, it is at the request or with the encouragement of a new employer who wants the employee to be able to compete freely against his or her former employer.  Many employers in Georgia find Georgia law to be helpful to them in this regard.  The passage of the Act will change this dynamic significantly.

Conclusion

It is difficult to dispute that Georgia law needs to provide greater protections for employers.  For example, the territorial restrictions that are now permitted must be expanded to address the realities of the modern business world.  Companies with national or international operations, have an interest in enforcing nationwide (or greater) non-competes against employees such as executives or salespersons who have responsibility for the operations or customer relationships on a nationwide basis. To date, however, Georgia courts have been unwilling to enforce a nationwide non-compete.  Moreover, the prohibition against restrictions that prohibit the acceptance of unsolicited business makes it extraordinarily difficult for companies to rely solely on a non-solicitation provision rather than using a non-compete.  In other words, if employers were permitted to prohibit employees not only from soliciting business from customers with whom they had contact, but also from doing business with those customers even when the business is unsolicited, employers would be more likely to rely on non-solicitation provisions and the need for non-competes would be reduced.

In sum, there is no question that the law in Georgia needs to be modernized to allow employers greater protections, when appropriate. However, the new legislation seems to go well beyond what is necessary to accomplish this goal.  The new legislation also runs contrary to a trend taking hold in other states with which Georgia would like to compete.  In Massachusetts, the legislature is very carefully studying the issue before acting.  While the Georgia legislature purports to have done so, it does not appear to these observers that the Georgia legislature has even scratched the surface of the various perspectives that should be considered, or that it spent the time and energy necessary to truly determine what is best for business in Georgia.

[1] H.R. Res. 178, 151st Leg. (Ga. 2010).  One commentator has referred to this wording as “patently deceptive and unconscionable.” While these may be strong words, it is hard to believe that from the standpoint of those who will be impacted by this legislation this wording is the most accurate description of the nature of the legislation to be considered by the voters.

[2] See April Franco and Matthew Mitchell, Covenants Not to Compete, Labor Mobility, and Industry Dynamics 44-46 (Mar. 21, 2005) (unpublished manuscript, on file with authors) (available at www.lse.ac.uk/collections/RICAFE/pdf/Franco_April.pdf); see also Study: Non-Compete Clauses Hurt Route 128 Growth, THE BOSTON GLOBE, August 20, 2008; Posting of Michael Rosen, Recent Events Provide More Fodder for Debate About Noncompetes in Massachusetts, to http://www.massachusettsnoncompetelaw.com/2008/09/articles/noncompete-debate/recent-events-provide-more-fodder-for-debate-about-noncompetes-in-massachusetts/ (Sept. 2, 2008).

[3] In fourteen states, continued employment does not constitute sufficient consideration for restrictive covenants in the employment context. In twenty-two states, including Georgia, Massachusetts, Nebraska, New Jersey and Ohio, continued employment is sufficient consideration. In thirteen states and the District of Columbia, the issue is undecided.

[4] Georgia Labor Force Estimates (Georgia Department of Labor), June 2010.

Benjamin I. Fink is a shareholder in the Atlanta law firm Berman Fink Van Horn P.C. where he focuses his practice on non-compete and other competition-related disputes.

Neal Weinrich is an associate with the firm. Neal’s litigation practice frequently involves disputes concerning noncompetition, non-solicitation, and non-disclosure agreements, as well as other competition-related issues.

Anne Andrews also contributed to this article.

This article is intended for general informational purposes only. The article is not intended to constitute, and does not constitute, legal advice.