Potential Sea Change in Georgia's Competitive Landscape

The competitive landscape in Georgia, and decades of judge-made law about non-compete, non-solicit and non-disclosure agreements, may drastically change next year. I just reread the text of Georgia House Bill 73, which you can find at http://www.legis.ga.gov/legis/2009_10/versions/hb173_HB_173_AP_7.htm. Both the Georgia House and Senate have passed it, and the Governor has signed it. If the voters in Georgia approve a state constitutional referendum in 2010, HB 173 becomes effective and applies to contracts entered into after that date.

For companies looking at their existing non-competes, or considering entering into new ones after that time, we’re talking about a sea change. The General Assembly writes that it believes restrictive covenants in agreements “serve the legitimate purpose of protecting legitimate business interests” and “creating an environment that is favorable” to attracting and keeping Georgia businesses. “Favorable” is perhaps an understatement. Compared to the current state of the law, this bill could not be any more protective of business interests.

Right now, Georgia and California are two of the most pro-employee states in the sense that courts are hesitant to enforce all but the most limited non-competes and non-solicits.

The principle is written into our state constitution: any restraint on trade – and these kinds of contracts are considered restraints – are against our public policy. Taking this pro-competition public policy as a point of departure, Georgia’s courts crafted a vast and sometimes challenging to reconcile body of cases about what is and is not enforceable. Frequently, what companies thought were carefully drafted agreements come before trial courts on motions to enjoin employees and are then struck down as unenforceable.

HB 173 is a broadside on all of that law. My read is that it is designed to make sure that a company that wants to restrict an employee (or a seller of business, or franchisee, or independent contractor, for that matter) from competing for a period of time, can do so without concern that a court will invalidate it. The statue, in fact, reads a lot like an instruction manual for the courts, which is a bit unusual: it creates time periods and kinds of restrictions that should be “presumed” reasonable, it specifies burdens of proof and the definitions of key terms from case law, and it instructs courts to do whatever they need to do to make even a poorly drafted contract enforceable.

Some of the remarkable changes we would see if HB 173 becomes effective, and withstands challenge in the courts:

--Allowing and requiring the courts to “blue pencil,” or rewrite restrictive covenants to make them enforceable, and considering each restrictive covenant on its own terms (not letting non-solicit and non-competes “rise and fall” with one another)
--Instead of case-by-case determination, presumptions that two-, three- and up to five-year restrictions are reasonable for different classes of contract parties (e.g., employees, franchisees or distributors, or the seller of business assets)
--Eliminating the requirements of narrowly drawn scope and description of prohibited activities and geographic area, and of predictability of the covered geographic area

Careful planning is going to be the order of the day. We have a major statute crashing head on into a detailed, if not completely static, set of cases and legal principles. With some major “if’s,” though – whether the referendum passes and what it looks like, and then what our appellate courts say about how this new statute squares with existing law and the state’s constitution – HB 173 presents Georgia businesses with some major competitive opportunities. We’ll keep track of the bill, and provide more detailed analysis of its individual provisions, as its effective date becomes imminent.

-Andrew Flake
andrew.flake@agg.com

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