Restrictions on Post-employment Competition by an Executive Under Georgia Law - Steven E. Harbour

• Publication year: 2003

Restrictions on Post-Employment Competition by an Executive Under Georgia Lawby Steven E. Harbour^*

Today many corporations are attempting to restrict post-employment competition by executive employees. The corporation may be motivated by a sincere attempt to protect its investment in customer relationships or its intellectual property. The corporation also may be seeking to protect itself from competition or simply trying to make it more difficult for the assets to "walk out the door." Whatever the motivation, with increasing frequency, corporations are requiring their executives to execute one or more agreements containing restrictions on post-employment opportunities.¹ Executives, in turn, are seeking legal advice on the enforceability of such restrictions.

This Article analyzes the current state of Georgia law concerning the enforceability ofcontractual restrictions on post-employment competition in the case of an executive.² Such restrictions generally contain language prohibiting the executive from competing or being employed by a competitor in a defined geographic area. The agreement may also contain a separate provision restricting the executive from soliciting the customers of the executive's former employer. Usually, these restrictions are anywhere from six months to three years in duration.³

This Article is divided into two parts. The first part discusses the current state of Georgia law concerning noncompete provisions. The Georgia courts have identified certain interests of the employer and employee as worthy of protection. To balance those interests, the courts have developed a set of rules. A violation of any of those rules, normally, though not always, will render the noncompete provision unenforceable. The second part of the Article discusses some of the added complexity that an executive faces when attempting to predict how a Georgia court will apply those rules.

I. The Law in Georgia of Noncompete Provisions in Employment Agreements in Georgia, covenants restricting post-employment competition in employment agreements are subject to a reasonableness test.⁴ As the Georgia Supreme Court stated in W.R. Grace & Co. v. Mouyal,⁵

[A] restrictive covenant contained in an employment contract is considered to be in partial restraint of trade and will be upheld "if the restraint imposed is not unreasonable, is founded on a valuable consideration, and is reasonably necessary to protect the interest ofthe party in whose favor it is imposed, and does not unduly prejudice the interests of the public."⁶

Whether a restriction is "not unreasonable" and whether it is "reasonably necessary" depends on the interest the court is seeking to protect. The Georgia courts have identified certain interests of the employer, the party in whose favor the restraint is imposed, that are entitled to protection. The courts then attempt to balance those interests against the interest of the employee, who is subject to the restraint.⁷

A. Balancing the Interest of the Employer and the Employee

The interest most often cited by Georgia courts as warranting protection is the employer's customer relationships. The courts have repeatedly stated that restraints are necessary to protect an employer from having its customers pirated away by unfaithful employees.⁸ The courts assume that the customer relationship was originally with the employer or that the employer has provided the resources and training that allowed the employee to develop the customer relationships. one of the early cases focusing on customer relationships dealt with restraints imposed by a pest control company that hired World War II veterans, trained them for the business, and provided them with a sales territory.⁹ As will be seen, this acceptance of the employer's interest in protecting customers from being expropriated drives most of the law of noncompete provisions in Georgia.

Courts have also stated that noncompete provisions protect the employer from an unfaithful employee's use of confidential informa-tion.¹⁰ The Georgia Supreme Court, however, has indicated that confidential knowledge obtained by the employee while working for his employer is a legitimate interest, but it should be protected by a confidentiality agreement—not a noncompete restriction.¹¹ Nonetheless, the Georgia courts, on occasion, still rely on protecting the employer's information as a justification for enforcing a noncompete provision.¹² The interest that the court seeks to protect may determine its attitude toward restrictive covenants in employment agreements. If a court focuses solely on protecting the employer from former employees expropriating customers, that court is less likely to enforce noncompete provisions outside of the traditional sales context. Moreover, the court will be skeptical of protections that are not limited to customers with whom the employee dealt. If a court believes that a noncompete provision protects the employer from the use of confidential information by former employees, then that court should be more likely to enforce such provisions against all employees, whatever their function, and over broader areas.

The Georgia courts also seek to protect the interests of the employee. In the eyes of the court, employees have little bargaining power, and when an employee agrees to an employment contract that contains a restrictive covenant, he receives little in return but a job.¹³ As a result, the Georgia courts have expressed a need to protect employees from overreaching by their employers.¹⁴ This somewhat paternalistic attitude is based on a belief about the employer-employee relationship that may not be accurate in all cases. As will be discussed in Part II, some employees, and particularly executives, may have had considerable bargaining power when negotiating an employment agreement.

An additional driver that determines a court's attitude towards noncompete provisions in employment agreements is whether the court believes that such agreements are necessary to further economic development. The economic effect of post-employment restrictive covenants has been subject to a growing debate. Originally, commentators argued that enforcing noncompete agreements allowed corporations to protect their intellectual capital and other proprietary information and, thereby, encouraged economic growth. Such encouragement was deemed particularly important in a modern business economy.¹⁵

The rationale that enforcing restrictive covenants favors economic development has come under attack recently. Commentators have argued that California's domination of the high-tech industry was due in part to California's hostility to post-employment restrictions.¹⁶ A provision of the California Civil Code has been interpreted to prohibit nearly all agreements that restrict post-employment.¹⁷ Commentators have contended that prohibiting the enforcement of noncompete provisions allows employees to freely move among substantial corporations, medium-sized entrepreneurial firms, and high-tech start ups.¹⁸ This movement helped generate the cross-fertilization ofideas that was necessary to fuel the technology boom. Georgia is a net importer of executive technology talent.¹⁹ One can assume that two major objectives of the law that regulates economic activity are to foster economic development and to attract highly-skilled individuals to the state. Therefore, seeking to determine whether a court will enforce a post-employment restriction is predicting, to some degree, whether the Georgia courts believe that the goal of economic development is more likely to be furthered by enforcing restrictive covenants or by being hostile to them.

The Georgia Supreme Court and the Georgia Court of Appeals have balanced the interest of the employer against the desire to protect the employee in a constantly evolving body of case law.²⁰ As the United States Court of Appeals for the Fifth Circuit stated in 1981, "A 'trend' in the area of restrictive covenants is somewhat difficult to divine in

Georgia in light of a high precedential mortality rate."²¹ Since that comment, the Georgia courts have continued to overrule or question fairly recent decisions. For example, recently the Georgia Court of Appeals disavowed two cases that were less than three years old when it held that if one restraint is not reasonable, then all noncompete restraints in the same agreement are not enforceable.²² This lack of consistency makes predicting a decision in a particular case hazardous when it involves the enforcement of a noncompete provision.

While this Article focuses on restrictions in employment agreements, it is important to understand that noncompete provisions also commonly appear in agreements relating to the sale of a business. In such cases, the seller promises not to compete with the buyer of the business after the sale. Traditionally, the Georgia courts have willingly enforced broad restraints if they were ancillary to the sale of a business.²³ With restrictions ancillary to the sale of a business, the courts will allow the restriction to be effective for a significantly longer duration than if the restriction is in an employment agreement.²⁴ More importantly, the court, in effect, will modify or "blue pencil" a noncompete agreement ancillary to the sale of a business so that it is reasonable and enforce-able.²⁵ As will be seen below, Georgia courts will not "blue pencil" restraints in employment agreements.

In addition to business sales and employment contexts, noncompete provisions are often incorporated in partnership agreements. In Georgia, the courts have held relatively recently that restrictive covenants in partnership agreements will be reviewed more favorably than the "strict scrutiny" given to employment agreements but not as generously as in business sale situations.²⁶ Thus, in Georgia, noncompete restraints are subject to three different levels of scrutiny: restrictive covenants in employment agreements are...