Practical problems with Georgia’s new Restrictive Covenants Act

Posted by Benjamin I. Fink on

Given that legislation has been introduced in the Georgia General Assembly to correct a potential problem with the effective date of the new Restrictive Covenant Act, we are counseling clients to wait to see what happens with the pending bill before implementing new restrictive covenant agreements. However, some clients have asked us to forge ahead with drafting new agreements. In doing so, we have identified a couple of areas in which we believe the statute is ambiguous and needs to be improved. They are as follows:

(1) O.C.G.A. section 13-8-56 may be confusing to judges who are called upon to interpret it. The first part of that section of the statute states that it applies to restrictive covenants that limit or restrict competition “during the course of an employment or business relationship….” However, part (2)(B) of that section of the statute seems to reference inclusion of a list of particular competitors as prohibited employers for a limited period of time “after the term of employment or a commercial or business relationship.” Then, part 4 of that section refers to any restriction “that operates during the term of an employment relationship …”

It is my understanding from speaking with Kevin Levitas (one of the sponsors of the legislation) that the phrase “during the course of an employment or business relationship” is intended to be broader than the phrase “during the term of an employment relationship, agency relationship, etc.”, and that the first part including sections 1 and 2 are intended to apply to both in-term and post-term covenants. Unfortunately, I am not certain that judges reading the statute will necessarily come to the same conclusion.  They may conclude that O.C.G.A. section 13-8-56 in its entirety applies only to in-term covenants.

Of course, one could argue that such an interpretation would render part (2)(B) superfluous, so it must be that parts (1) and (2) are intended to apply to both post-term and in-term covenants. However, that could be a difficult argument to make to a judge. In any event, the wording of the statute, as it exists currently, will lead to significant disagreement on this issue and therefore, litigation over its meaning. If it is intended to apply to both in-term and post-term covenants, it should be modified accordingly.

(2) There also appears to be a gap in coverage in the statute for covenants that are applicable to the sale of an ownership interest in a company by a minority owner. For example, one of our corporate partners is handling a transaction in which there are some minority owners who own less than 25% of the company. These owners are not employees of the selling company and will not be employees of the purchasing or surviving entity. As such, it does not appear that they come within the definition of “seller” as that term is defined in O.C.G.A. section 13-8-51(17). Thus, if we include restrictive covenants in the documents these minority sellers sign relating to their sale of their minority interests in the company, it does not appear that those covenants are governed by the new law. Accordingly, we will be left to the prior common law to determine the enforceability of the covenants, if there is ever a dispute over them. The statute needs to address the situation in which a minority owner in a business sells his or her interest in the business, but is not an employee of the selling company and will not be an employee of the acquiring company. I do not see where the statute addresses this scenario.