Georgia Gets Competitive
| Publication year | 2009 |
| Pages | 0012 |
A Look at the Law
by Erika Birg, Michael Elkon and Erin McPhail Wetty
Imagine yourself sitting in your office one afternoon and a new, prospective client named Spectre Consulting calls. Spectre is relocating its headquarters to Georgia from Las Vegas, which means relocating the entire executive team, as well as all of the company's researchers and sales representatives. Because Spectre zealously guards its confidential information and its business relationships, it asks you to prepare employment agreements for its employees moving to Georgia. Spectre wants the agreements to be enforceable in Georgia and to include non-compete, non-solicitation and nondisclosure covenants.
The task seems simple enough at first. Although you have heard that Georgia is hostile to these sorts of restrictive covenants, certainly employment agreements of this nature cannot be that difficult. To survey the field, you first look for a statute on point. You find O.C.G.A. § 13-8-2.1 covering restrictive covenants, but you determine quickly that the Supreme Court of Georgia struck the statute down shortly after it was passed.[1]
So, you then decide to review applicable case law by using computer research. The results you find are daunting. Your search for the term "non-compet!" yields 250 results; "non-solicit! /p customer" yields 36; and”' confidential information' /p disclos!" yields 86. Your search further reveals that Georgia does not reform or blue-pencil agreements, so any flaw in a provision will render that provision unenforceable. To draft proper covenants for this demanding client, you will need to wade through a thicket of cases to glean the applicable rules. You realize that Georgia's current legal regime governing restrictive covenants can best be described as death by a thousand paper cuts.
The Georgia Legislature Acts
Your dilemma illustrates a primary rationale for the Georgia Legislature's passing of HB 173 to govern enforcement and interpretation of restrictive covenants in the commercial arena.[2]Currently, there are no clear rules governing restrictive covenants; this leaves employees, employers and most practitioners in the dark as to what is permissible. The new statute sets forth ground rules for restrictive covenants. It addresses the classes of employees who can sign restrictive covenants, the types of agreements that are covered and, most significantly, the standards for evaluating such covenants. It empowers courts to modify covenants, so that employers can enforce provisions that protect their legitimate interests, but no more.
Gov. Sonny Perdue signed HB 173 after the House and Senate had passed it by large margins. By its own terms, however, the law will not go into effect until Georgia's voters ratify a proposed constitutional amendment in November 2010. The Legislature conditioned HB 173's effectiveness upon the constitutional amendment because of the Supreme Court of Georgia's previous rejection of O.C.G.A. § 13-8-2.1. Shortly after that statute became law, the Supreme Court ruled that the Legislature had exceeded its constitutional authority by "authoriz[ing] contracts and agreements which may have the effect of or which are intended to have the effect of defeating or lessening competition or encouraging monopoly."[3]
Because HB 173 contains language authorizing modification or partial enforcement of restrictive covenants, rather than subject HB 173 to constitutional uncertainty, the Legislature chose to condition its effectiveness upon clarifying the Legislature's authority in this arena. Accordingly, the Legislature will consider a resolution in the 2010 session that would put a constitutional amendment on the November 2010 ballot. The resolution and amendment, which are still under consideration, would, in effect, authorize the Legislature to enact legislation in this arena and authorize courts to enforce a covered agreement only to the extent that it is reasonable. If the amendment passes the Legislature and is ratified by the voters, then HB 173 will become effective.
The statute does not apply retroactively, so the existing law on restrictive covenants will remain relevant for agreements entered into prior to that date. Because HB 173 is intended to and does change the law to overcome certain judicially developed anomalies, however, many employers may wish to plan prospectively for the new law.
How Does HB 173 Change the Law?
Below are seven particular instances in which the current common law creates difficulties for unwary businesses and how the new statute will lead to a different result.
Problem 1: Should We Treat All Employees the Same?
Georgia courts apply strict scrutiny to restrictive covenants in employment agreements, which means that the court will not uphold the covenant unless it is unassailable in every way.[4] It also means that a trial court may not consider the level of an employee within an organization in deciding whether a particular covenant is reasonable—all employees must be treated alike. For example, if a CEO leaves her company and heads straight to a competitor, armed with all of the confidential and proprietary business information that makes the company tick, then Georgia courts will apply the same analysis and scrutiny to her noncompetition agreement as they would to a non-competition agreement for a sales associate straight out of college with no experience in the field.[5]
Such an approach often yields inequitable outcomes, as was aptly illustrated in a recent case from the Court of Appeals, BellSouth Corp. v. Forsee.[6] The former employee was BellSouth's vice chairman of operations; he served as the chairman of the board of directors for Cingular Wireless; and there was no doubt that given his role, he was "intimately familiar with highly confidential and trade secret information" belonging to the company.[7] In connection with his employment, the executive signed a non-competition agreement forbidding him from providing services in competition with BellSouth or its affiliated entities to any "entity which provides products or services identical or similar to those provided by BellSouth" within the territory where the employee had provided services for an 18-month period after termination.[8] After announcing his resignation from BellSouth, the executive accepted a position as chairman of the board of directors and chief executive officer of Sprint Corporation, a primary competitor of BellSouth.[9]
The Court of Appeals held that BellSouth could not prevent the executive from working for Sprint because the non-compete provision was unenforceable. In particular, the Court held that, as the agreement was drafted, the geographic reach of the non-compete provision could not be known until the last date of the executive's employment.[10] As a result, the agreement violated Georgia law. The Court's decision seems inequitable because the Court applied rules designed to protect employees who have significantly less bargaining power than the employer. That same policy rationale does not translate well to a case in which a top executive negotiates a lucrative employment contract to lead a major corporation.
To avoid situations similar to those that occurred with BellSouth's senior executive, the new legislation allows employers to identify specific competitors as prohibited employers during the period of the non-compete.[11] Under the statute, BellSouth could have listed Sprint as a prohibited employer, and a court should have enforced this reasonable restriction. This provision also gives employers added flexibility for employees who move offices but are consistently competing against a few, known companies.
More significant, the statute allows courts to adjust overly broad covenants to make them reasonable and enforceable.[12] Thus, the courts will be able to account for the factual differences in each situation. For example, judges can take into account whether they are dealing with a senior executive or a mid-level programmer when determining what restriction is appropriate in a particular situation. Georgia can dispense with its one-size-fits-all approach to noncompete analysis.
Problem 2: Must an Employer be a Fortune Teller?
As noted above, under Georgia law, the exact geographic scope of a non-compete provision has to be determinable at the time that the agreement is signed.[13] An employer cannot use a provision along the lines of "employee Smith will not compete within a ten-mile radius of any office at which he is based during his employment," because Smith and the employer do not know the office(s) at which Smith ultimately will work during the course of his employment. Georgia law also requires that an employer define with precision the scope of activity covered by a non-compete. An employer cannot prevent an employee from working for a competitor "in any capacity."[14]Instead, the employer has to define what tasks the employee is going to perform and then prohibit the employee from performing those same tasks for a new employer after employment.
The rub is that the employer not only has to have a precise job description prepared, but that description has to be 100 percent accurate. Quite simply, there are no silver medals for coming close; witness Beacon Security Technology, Inc. v. Beasley.[15] In Beacon, the employee entered into a non-compete provision that forbade him from selling, leasing or servicing the following types of security systems in a seven-county area for a two-year period after termination: "burglar & fire alarms, Closed Circuit TV, Intercoms, Telephone & TV Hook ups, Central Vacs and Medical Alert, or other security systems . . . ."[16] When the employee resigned and immediately started competing in the restricted area, his former employer sued.[17] The Court of Appeals held that the...
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