NON-COMPETE AGREEMENTS IN GEORGIA GOVERNED BY NEW LAW

Charles D. Lawson

On May 11, 2011, Georgia Governor Nathan Deal signed HB 30 into law, clearing the air regarding the constitutionality of a new Georgia law governing restrictive covenants. The law was originally passed in the 2009 legislative session and a constitutional amendment approving its statutory language was ratified by voters in November, 2010. However, because of issues regarding the effective date of the new law, questions arose regarding the constitutionality of the restrictive covenant law itself. To remove all such questions, the Georgia General Assembly passed HB 30--substantially reenacting the substantive provisions of the original law--and sent it to the Governor for signature.

The full text of HB 30 may be reviewed here, http://1.usa.gov/lD3KSZ, with highlights set forth below.


APPLICABILITY

Restrictive covenants are expressly permitted in contracts between the following:

(1) Employers and employees;

(2) Distributors and manufacturers;

(3) Lessors and lessees;

(4) Partnerships and partners;

(5) Franchisors and franchisees;

(6) Sellers and purchasers of a business or commercial enterprise; and

(7) Two or more employers.

LEGITIMATE BUSINESS INTEREST REQUIREMENT

Before any restrictive covenant will be enforced, the party seeking enforcement must prove the existence of one or more legitimate business interests justifying such enforcement, including without limitation one or more of the following:

(1) Trade secrets (as defined by Georgia law);

(2) Confidential information that does not qualify as a trade secret;

(3) "Substantial relationships" with specific prospective or existing customers;

(4) Customer good will associated with an ongoing business, a specific geographic location, or a specific marketing or trade area; and

(5) Extraordinary or specialized training.

LIMITATIONS ON RESTRICTIVE COVENANTS

AFTER A TERM OF EMPLOYMENT

Contracts restricting competition after the term of employment will not permitted against employees who do not, in the course of their employment:

(1) Customarily and regularly solicit customers or prospective customers for the employer;

(2) Customarily and regularly engage in making sales or obtaining orders for products or services

(3) Perform the following duties:

(a) Have a primary duty of managing the enterprise in which the employee is employed or a customarily recognized department or subdivision thereof;

(b) Customarily and regularly direct the work of two or more employees; and

(c) Have the authority to hire and fire other employees or have particular weight given to recommendations as to hiring, firing or change in employment status of other employees; or

(4) Perform the duties of a key employee or of a professional.

A "key employee" is an employee who has gained a high level of fame or reputation as the employer's representative, or has gained a high level of influence or credibility with the employer's customers, vendors, or other business relationships, or is intimately involved in the planning and direction of the business of the employer or a defined unit thereof.

A "professional" is an employee who has as a primary duty the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or talent in a recognized field of artistic or creative endeavor.

RESTRICTIONS ON COMPETITION THAT ARE PRESUMED REASONABLE

During the term of employment.

Time: Restrictions during the term of employment that are measured by the duration of the parties' commercial or business relationship are presumed reasonable.

Geographic scope: Restrictions in a geographic area in which the employer does business at any time during the parties' relationship, even if not known at the time of entry into the restrictive covenant, are presumed reasonable so long as the total distance encompassed by the restriction is also reasonable and/or the agreement contains a list of particular competitors as prohibited employers for a limited period of time after the term of employment.

After the term of employment.

Former employee not associated with the sale or ownership of all or a material part of the assets of a commercial enterprise, or the equity interest or profit participation of any commercial enterprise: A restriction of two years or less in duration will be presumed reasonable, with any restriction greater than two years presumed unreasonable.

Current or former distributor, dealer, franchisee, lessee of real or personal property, or licensee of a trademark, trade dress or service mark not associated with the sale or ownership of all or a material part of the assets of a commercial enterprise, or the equity interest or profit participation of any commercial enterprise: A restriction of three years or less in duration will be presumed reasonable, with any restriction greater than three years presumed unreasonable.

Owner or seller of all or a material part of the assets of a commercial enterprise, or the equity interest or profit participation of any commercial enterprise: A restriction of the longer of five years or less in duration, or the period of time during which payments are being made to the seller as a result of the sale, will be presumed reasonable, with any longer period of time deemed unreasonable.

NON-SOLICITATION AGREEMENT REQUIREMENTS

Restrictions on the ability of former employees to solicit, directly or by assisting others, any business from a former employer's customers for competitive products or services are permitted, but will only be enforced with respect to such customers with whom the former employee had "material contact during his or her employment." "Material contact" is defined as contact between an employee and each customer or potential customer of the employer: (1) with whom the employee dealt on behalf of the employer, (2) whose dealings with the employer were coordinated or supervised by the employee, (3) about whom the employee obtained confidential information as a result of the employee's association with the employer; or (4) who received products or services from the employer for which the employee received commissions or other earnings during the two years prior to the date of the employee's termination.

No reference to a specific geographical area or type of service is required, but any such restriction will be "narrowly construed" to apply only to such customers of the former employer, including actively sought prospective customers, with whom the employee had material contact, and regarding products or services that are competitive with those provided by the former employer.

"BLUE PENCIL" OF RESTRICTIONS PERMITTED

Courts are expressly permitted to "modify a covenant that is otherwise void and unenforceable, but they may not make any modification that would render the covenant "more restrictive with regard to the employee" than as originally drafted by the parties.

NO TIME OR GEOGRAPHICAL LIMITS ON CONFIDENTIAL INFORMATION AND TRADE SECRETS

The new law makes clear that there is no limit on the period of time or geographical area within which a party may require another to maintain information as confidential or as a trade secret, so long as said information actually remains confidential or a trade secret, as applicable.

REMEDIES

Courts will enforce restrictive covenants complying with Georgia's new law by any appropriate and effective remedy available at law or equity, including without limitation temporary and permanent injunctions.

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If you have any questions regarding Georgia's new law governing non-compete agreements, please contact the Author or any member of our Labor and Employment Group.

About the author: Mr. Lawson received his B.S. from the University of Tennessee at Chattanooga, magna cum laude, in 1994, and his J.D. from Vanderbilt University in 1997 where he was elected to the Order of the Coif. He is a member of GKH's Labor and Employment group and specializes in all phases of the employer-employee relationship, including wage and hour, FMLA, ADA, unemployment compensation, and discrimination/harassment law. He provides regular employer counseling on issues ranging from workplace policy development and labor law compliance to non-competition and confidentiality issues. He also defends employment claims filed with administrative bodies such as the EEOC and the Tennessee Human Rights Commission, as well as claims filed in state and federal court. Mr. Lawson's work with employers is designed to educate them about particular areas of the law governing the employment relationship, with a focus on minimizing exposure to employment-related claims and providing cost-effective litigation strategies should litigation arise.