Noncompete Clauses in Georgia: an Economic Analysis

• Publication year: 2010

Georgia State University Law Review

Volume 21 j g

Issue 4 Summer 2005

6-1-2005

Noncompete Clauses in Georgia: An Economic Analysis

Jeffrey T. Rickman

Follow this and additional works at: http://digitalarchive.gsu.edu/gsulr Part of the Law Commons

Recommended Citation

Rickman, Jeffrey T. (2004) "Noncompete Clauses in Georgia: An Economic Analysis," Georgia State University Law Review: Vol. 21: Iss. 4, Article 8.

Available at: http://digitalarchive.gsu.edu/gsulr/vol21/iss4/8

This Article is brought to you for free and open access by the College of Law Publications at Digital Archive @ GSU. It has been accepted for inclusion in Georgia State University Law Review by an authorized administrator of Digital Archive @ GSU. For more information, please contact digitalarchive@gsu.edu.

NONCOMPETE CLAUSES IN GEORGIA: AN ECONOMIC ANALYSIS

Introduction

Georgia courts use a high level of scrutiny for covenants not to compete.¹ The general consensus among most attorneys, commentators, and judges is that Georgia courts very seldom enforce noncompete clauses in employment contracts. These restrictive covenants appear to enjoy an unusually "high precedential mortality rate,"³ and often courts fail to specify why they refuse to honor them.⁴ The combination of a harsh predisposition toward the covenants and a lack of clear explanation of the courts' reasoning often makes litigation the only method of evaluating the validity of a noncompete clause.⁵ As Justice Jordan stated in his dissent in Fuller v. Kolb,⁶ "Ten Philadelphia lawyers could not draft an employer-employee restrictive covenant agreement that would pass muster under the recent rulings of this court."⁷

However, this severe treatment of noncompete clauses is not without foundation.⁸ Georgia courts cite the dual policy concerns of preserving free trade and protecting employees' livelihood as justification for their skepticism.⁹ The Georgia Supreme Court first

1. See Steven E. Harbour, Restrictions on Post-Employment Competition by an Executive Under Georgia Law, 54 mercer L. rev. 1133 (2003).

2. See Fuller v. Kolb, 234 S.E.2d 517, 518 (Ga. 1977) (Jordan, J., dissenting). See generally Harbour, supra note 1; Gary P. Kohn, A Fresh Look: Lowering the Mortality Rate of Covenants Not to Compete Ancillary to Employment Contracts and to Sale of Business Contracts in Georgia, 31 EMORY L.J. 635 (1982).

3. Barnes Group, Inc. v. Harper, 653 F.2d 175,178 (5th Cir. 1981).

4. Kohn, supra note 2, at 705.

5. See Barnes Group, Inc. v. Harper, 653 F.2d 175, 178 (5th Cir. 1981). See generally Harbour, supra note 1.

6. 234S.E.2d517(Ga. 1977).

7. Id. at 518 (Jordan, J. dissenting); see also Barnes Group, Inc., 653 F.2d at 178 ("A 'trend* in the area of restrictive covenants is somewhat difficult to divine in Georgia in light of a high precedential mortality rate."); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Stidham, 658 F.2d 1098, 1101 n.7 (5th Cir. 1981) (stating that "[l]ike the King of Siam" the court experienced "puzzlement" over Georgia's "reasonableness" analysis of noncompete clauses).

8. See generally Rakestraw v. Lanier, 30 S.E. 735 (Ga. 1898).

9. Id. at 738.

1107

1108 GEORGIA STATE UNIVERSITY LAW REVIEW [Vol. 21:1107

set forth this policy concern in Rakes trow v. Lanier.¹⁰ There, the court stated that restrictive employment contracts that "tend to injure the parties[,] .. . diminish their means of procuring livelihoods and a competency for their families[,] . . . discourage industry and enterprise, . . . prevent competition, . . . enhance prices, and expose the public to all the evils of monopoly" are void and unenforceable.¹¹ The Georgia Constitution adds additional support to the court's concern over restrictive contracts by stating that a general,

19

contractual restraint of trade is void as against public policy.

In efforts to guard against these restraints, Georgia courts have adopted a test to determine the enforceability of restrictive covenants.¹³ Courts enforce a restrictive clause "if the restraint imposed is not unreasonable, is founded on valuable consideration,.. . is reasonably necessary to protect the interest of the party in whose favor it is imposed, and does not unduly prejudice the interests of the public."¹⁴ To determine the reasonableness of a restrictive clause, Georgia courts have attempted to balance the employer's interests with those of the employee.¹⁵ In so doing, Georgia courts evaluate the entire contract according to a tripartite analysis of the geographic restrictions, the scope of the activity prohibited, and the restriction's duration.¹⁶

Yet, in contrast to Georgia's somewhat skeptical view of restrictive covenants, some recent scholarship paints a different picture of noncompete clauses.¹⁷ Rather than viewing these clauses as monopolistic restrictions on trade or heavy economic burdens for employees, many scholars point to the benefits of covenants not to

10. 30 S.E. 735 (Ga. 1898).

11. Id.

12. Ga. Const., art. ni, § 6, para. V(c).

13. See Rakestraw, 30 S.E. at 738.

14. W.R. Grace & Co., v. Mouyal, 422 S.E.2d 529, 531 (Ga. 1992); Rakestraw, 30 S.E. at 738.

15. See Orkin Exterminating Co. v. Dewberry, 51 S.E.2d 669, 675 (Ga. 1949); cf. Harlan M. Blake, Employee Agreements Not to Compete, 73 harv. l. rev. 625, 648-49 (1960); Carroll R. Wetzel, Employment Contracts and Noncompetition Agreements, 1969 U. ILL. L.F. 61, 64 (1969).

16. Sysco Food Servs. of Atlanta, Inc. v. Chupp, 484 S.E.2d 323, 325 (Ga. Ct. App. 1997); W.R. Grace eft Co., All S.E.2d at 531.

17. See York Moody Faulkner, A Market Analysis of Anticompetition Agreements in Labor Contracts, 1991 BYU l. Rev. 1657 (1991); Paul h. Rubin & Peter Shedd, Human Capital and Covenants Not to Compete 10 J. legal Stud. 93 (1981).

2005] GEORGIA'S APPROACH TO NONCOMPETE CLAUSES 1109

compete. Paul H. Rubin, Peter Shedd, and York Moody Faulkner have stated that noncompete clauses may actually help raise employee wages and provide an incentive for businesses to invest in intellectual capital.¹⁹ Additionally, noncompete clauses may often be the only means by which a business can recoup its heavy investment in human capital (such as employee training). Thus, as these scholars demonstrate, noncompete clauses may actually be helpful to a certain extent.²¹

This Note will argue that Georgia courts are mistaken in the policy reasoning they use to strike down noncompete clauses in employment contracts and will suggest changes for evaluating these clauses. First, this Note will examine Georgia's approach to employment noncompete clauses by looking at the historical foundation of these restrictions. It will then summarize and examine Georgia's present stance on the covenants.²⁴ Next, the Note will present arguments from scholars and other jurisdictions that illustrate how Georgia's approach to noncompete clauses may frustrate the very economic policies it seeks to protect (i.e., workers' wages and free competition). It will attempt to show that making noncompete clauses difficult for employers to enforce may make it more difficult for businesses to protect their investments in human, informational, and intellectual capital.²⁶ This Note will conclude by suggesting changes that Georgia courts should adopt as they attempt to balance the economic interests of the employer with the livelihood of the employee.

18. See id. See Faulkner, supra note 17; Rubin & Shedd, supra note 17.

19. See Faulkner, supra note 17, at 1661-66; Rubin & Shedd, supra note 17, at 97.

20. Blake, supra note IS, at 652.

21. See generally Faulkner, supra note 17; Rubin & Shedd, supra note 17.

22. See infra Parts I-III.

23. See infra Part I.A.

24. See infra Part I.C.

25. See infra Part HA.

26. See infra Part HA.

27. See infra Part III. Although this Note will address different types of noncompete clauses—those for a sale of a business, partnership agreements, and employment contracts—it will focus only on restrictive covenants found in employment contracts.

1110 GEORGIA STATE UNIVERSITY LAW REVIEW [Vol. 21:1107

I. Georgia's Approach To Noncompete Clauses

Although the seminal case concerning restrictive employment covenants occurred in 1898, little has changed in this specific area of Georgia law.²⁸ This section will examine the historic rise of Georgia law regarding restrictive covenants, paying close attention to the policies courts have sought to enforce, and will then describe the tripartite test that courts use to determine a clause's reasonableness. This section will conclude by examining the various levels of scrutiny Georgia courts apply to different restrictive contracts.

A. Historic Background

Historically, English and American courts have approached covenants not to compete with a great degree of skepticism.³¹ This stance stems largely from the seemingly harsh restrictions on employees and free trade. However, as the economic climate changed in the United States and England, courts in both countries changed their approaches to covenants not to compete.³³ English courts, led by Lord Macclesfield's opinion in Mitchel v. Reynolds?* attempted to apply a rule that balanced the interests of the employee with those of the employer.³⁵ This desired balancing of policy concerns materialized as the "rule of reason."³⁶ Courts then abandoned the more antiquated "general-partial" distinction, which attempted to differentiate general restraints of trade that spanned the entire kingdom from those restricted to a particular area or person.

Georgia courts have followed a similar path of development in their approaches to restrictive covenants. Georgia, both in its courts

28. See Rakestraw v. Lanier, 30 S.E. 735 (Ga. 1898).

29. See infra Parts I.A-C.

30. See infra Part I.D.

31. Kohn, supra note 2, at 643.

32. Blake, supra note 15, at 642-43; Kohn, supra note 2, at 643.

33. Blake, supra note 15, at 637-46.

34. 1 P.Wms. 181, 24 Eng. Rep. 347 (Q.B. 1711).

35. See id; Blake, supra note 15, at 630-31.

36. Blake, supra note 15, at 630-31.

37. Id

38. See...