Georgia’s New Law On Noncompete and Nonsolicit Agreements

In the past, Georgia employers have had difficulty enforcing all but the most carefully drafted and limited noncompete agreements with their employees. This year, for the first time, companies can take advantage of a dramatic change in the law that expands the protection available not only through noncompete, but also nonsolicit and nondisclosure agreements with employees.

The Impetus for Change

In the past, the Georgia courts, guided by decisional law rather than statute, have defined what constitutes a constitutionally enforceable “restraint on trade,” and thus, what restrictions can and cannot be placed on competitive action by former employees. Because the courts have been bound by existing legal precedent, this case law has been very slow to change, and in the view of many, adjust to modern business realities. The rules and guiding principles were perceived by many to be outdated and to hinder the attraction of new business to Georgia.

Highlights Of The New Law

First, the new law, which is codified at O.C.G.A. § 13-8-50 et seq., is intended to apply to agreements entered into on or after January 1, 2011. Existing agreements will be governed by the same case law as before, even if a company seeks to enforce one of them now or in the future.

Second, in a sea change for Georgia, the new law allows courts to “blue pencil,” or modify, a restrictive covenant that they deem to be overbroad or unreasonable. Although courts in the vast majority of states other than Georgia had long had this power, this aspect of the new law represents a major change in direction for the state. Prior to its enactment, if any portion of a noncompete or nonsolicit provision was found to be unreasonable, the entire covenant would be deemed unenforceable. Now, a court may choose to enforce a provision only to the extent that it is necessary and reasonable to protect the employer’s legitimate business interests.

Third, the new law provides some long-sought-after guidance as to the scope of restrictive covenants that will be deemed enforceable. With respect to true noncompete agreements, the amendment changes the current law concerning the permissible geographic scope of an enforceable agreement. Rather than being tied to the geographic area in which an employee physically worked, a noncompete provision can now extend to the area in which the employer does business (so long as such area is reasonable). In the alternative, a noncompete provision can list specific competitors of an employer for which an employee may not go work. Such changes are significant in today’s business environment, in which an employee may physically sit in one place while conducting business on the other side of the state or the country.

The new law further clarifies that, in addition to or in lieu of a noncompete agreement, an employer may utilize and enforce a customer nonsolicit provision, pursuant to which a former employee is prohibited from soliciting business on behalf of a competitor from customers, or prospective customers, of his former employer with whom the employee had material contact. Such provisions do not require a geographic limitation and are particularly useful in the sales context.

Fourth, the law gives guidance as to the time limitations that will be deemed reasonable, and therefore enforceable, for restrictive covenants. In the employment context, the new law provides a rebuttable presumption that a two-year limitation following the termination of employment will be reasonable with respect to noncompete and nonsolicit agreements. In a significant change from current law, the law further provides that nondisclosure provisions seeking to prevent the disclosure of an employer’s confidential business information or trade secrets need not have a time limitation, but may continue in effect for so long as the information in question remains confidential.

Fifth, the new law does not apply to all employees, but rather only those who have access to the kinds of sensitive business information that warrant protection. Indeed, the definition of “employee” extends only to executives, research and development personnel or other persons in possession of the employer’s confidential information, and employees in possession of selective or specialized skills, learning, or abilities or customer contacts or information. Thus, “rank and file” employees who do not have access to their employer’s proprietary information in some fashion should not be subject to restrictive covenants governed by the new law.

Impact on Your Company

The passage of the new law will allow employers far more latitude than in the past to craft reasonable restrictive covenants for their employees that protect the employer’s legitimate business interests. Because the new law applies only to those agreements executed on or after January 1, 2011, though, companies desiring to take advantage of the new law should consider having their Georgia employees execute new agreements. For companies that do not currently have restrictive covenant agreements in place with their employees, now is a good time to implement such a practice to ensure that the employers’ sensitive business information is not improperly used or disclosed in the event of the departure of a key employee. Given the complexities of the new law, it would be also advisable to have these new agreements reviewed by counsel to ensure that they will have the greatest potential for being fully enforced by the courts.

Correcting a Timing Discrepancy

You may read that legislators have begun the process of reenacting the law again this legislative session. The reason is a timing discrepancy, which arises from the two-part enactment process of the new law – through a bill, which was enacted first, and an amendment to the Georgia constitution, which was approved and voted upon second. When Georgia voters approved the constitutional amendment on November 2, 2010, it triggered the effective date of the bill. To look at the bill itself, it would appear that it was effective immediately. But a constitutional amendment is not effective until January 1 of the following year, leaving a “gap period” from November 3 until December 31 in which the status of the new law could be questioned.

For questions, please contact Andrew B. Flake. Mr. Flake is a partner in the Litigation Group at Arnall Golden Gregory LLP (andrew.flake@agg.com). Our firm serves the business needs of growing public and private companies, helping clients turn legal challenges into business opportunities. We don't just tell you if something is possible, we show you how to make it happen. Please visit our website for more information, www.agg.com.