Georgia Senate Sends Restrictive Covenant Law to the Ballot

Readers of the blog know we’ve been following the proposed change in Georgia’s restrictive covenant laws. At the close of this year’s General Assembly, the Senate took the penultimate step toward approval when it voted to send the issue to the ballot. In November, you will see on your ballot a constitutional referendum, which if approved, will enable and trigger the new law.

You will recall that right now, Georgia is one of the most difficult states in which to restrict competitive activity by former employees. 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. Frequently, what companies thought were carefully drafted agreements come before trial courts on motions to enjoin employees and are then struck down as unenforceable.

Faced with this challenge, the General Assembly proposes to exempt agreements that are consistent with the new law (House Bill 173) from the kinds of contracts that are illegal and void against public policy. Freely negotiated employment agreements designed to protect trade secrets, confidential information and customer relationships would no longer be categorized with “contracts tending to corrupt the legislation or the judiciary” or, perhaps more common “wagering contracts.”

If approved by the voters, the new law will replaces the rigid “geographic scope” test, thereby modernizing restrictive covenant enforcement. Instead of trying to define an employee’s territory based on where the employee physically has done business for the employer, the new law permits a court to accommodate not just geography, but the area where activities are actually conducted. House Bill 173 alternatively allows employers to simply list prohibited competitors instead of a prohibited geographic territory. Thus, employers and employees have more flexibility in negotiating what kinds of post-employment conduct is prohibited, and the employer does not have to worry about constantly having to update the agreement as the business relationship between the parties changes over time. At the same time, the employee is afforded more certainty in the protections negotiated in the event that the agreement has to be enforced.

The proposed definition of “employee” in the new law would extend only to executives, persons with true access to confidential information (such as research and development personnel) and persons with specifically sensitive customer information that is generated from the employee’s tenure with the employer – not every employee. In other words, House Bill 173 is targeted precisely to protect the entrusting of competitively sensitive information by the employer to the employee in exchange for the compensation and benefits attendant to the job.

Moreover, even defined “employees” subject to the new presumptions in favor of restrictive covenant agreements drafted in accordance with House Bill 173 have the legal ability to challenge particular agreements as being overbroad in fact. Unlike the current state of the law where agreements are “good” or “bad” as written and cannot be modified to balance competing interests, the new law gives the courts the ultimate ability to “blue pencil” or “modify” arguably overbroad agreements. Thus, the courts still serve as a check against an employer who has reached too far in fact, but the courts now have to account for the concerns of business as well in evaluating the scope of the restriction sought to be imposed by the employer. At present, lacking the ability to “blue pencil,” courts can only invalidate a restrictive covenant that may reach just beyond what is reasonable.

Businesses drafting restrictive covenants, and the professionals assisting them, will find additional certainty in the bill. For all kinds of prospective restrictive covenants, the Georgia Assembly included presumptions as to the duration of covenants. For covenants provided in the employment context, House Bill 173 states that a period of up to two years is presumptively reasonable. For covenants executed in other situations, the length of the permissible restriction may increase, e.g., for up to three years in a franchise or licensing context and up to five years when covenants are provided in connection with the sale of a business.

If approved by in November, the new law will apply prospectively, that is, to agreements entered after the effective date of HB 173. You can find the text of Georgia House Bill 173 at http://www.legis.ga.gov/legis/2009_10/versions/hb173_HB_173_AP_7.htm and some further discussion of its implications at http://www.agg.com/media/interior/publications/AGG_White_Paper-Georgia_House_Bill_173.pdf.

Andrew 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.

Corporate Advertising: Conducting Your Own Due Diligence Is A Must

Without fail, one of the first responses from companies accused by competitors of false advertising is that “we didn’t know,” and it may well be that the advertising information came from a reputable source. But is the “innocent mistake” defense viable in false advertising litigation? Although it seems only fair that a company taking reasonable steps to verify information in its advertisements would be in the clear, federal advertising law holds companies strictly liable for false advertising. In other words, there is no good faith or innocent mistake defense to underlying liability.

We recently found a “juicy” illustration of the point. Pom Wonderful, the leading marketer of pomegranate juice, had noticed one of its smaller competitors using Pom’s own studies to market competing juice. With this competitor on the radar, Pom also noticed that the company, California-based Purely Juice, was marketing “100% pomegranate juice,” with “no added sugar.” Pom’s testing proved that claim incorrect, and after negotiation failed, Pom sued in federal court.

Purely Juice, it turns out, had been using a broker to find juice suppliers. The broker vouched for its suppliers, but, despite those assurances, the juice Purely Juice received was adulterated, so that the “100% pomegranate” and “no sugar” claims were false. Purely Juice claimed it had no idea of the adulteration, and that it took the word of its broker about the reliability of the juice supply.

Was that approach successful? Just last week, a court of appeals affirmed a trial award against Purely Juice of approximately $1.2 million in damages, disgorgement of more than $300,000 in its profits, and attorney’s fees of more than $620,000. One of the legal principles that resulted in the award is that a company is liable for false advertising regardless of its knowledge. Not only that, an officer or director is personally liable for false advertising in which she participates or that she directs, so the president of Purely Juice, also a defendant, shared in the liability.

It did not help Purely Juice that the trial court also found it “knew or should have known” about the shaky credentials and processes of its suppliers and therefore, of the adulteration. In that market, the limited supply of pomegranate juice means that many suppliers mix in other juice, and add sugar. Had the company conducted and abided by its own testing, and done better due diligence, one wonders if it could have avoided the litigation entirely.

For our own marketing teams, the lesson is clear. The advertising “buck” stops at the company’s door, and assurances from third parties about the quality or characteristics of supplied products, even from trusted suppliers or business partners, will not insulate the company from liability for false advertising. Thorough internal due diligence is a must.


--Andrew Flake

Andrew B. 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.

Theft at Goldman Sachs: Even the Biggest Vulnerable to Trade Secret Loss

We just learned that Goldman Sachs, the venerable investment bank and one of the major movers in the U.S. financial markets, suffered a major security breach, one that teaches just how vulnerable companies are to rapid theft and potential devaluation of their trade secret information.

We know of the breach because the United States just lodged criminal charges against a former Goldman employee, a highly paid ($400K per year) programmer and vice-president for equity strategy tasked with developing one of the firm's most sophisticated trading programs. The facts are startling: the programmer, before he left to work for a Chicago firm, transferred computer code directly from Goldman's server to a London-registered computer server in Germany. Goldman makes it money, in part, using programs like this one to execute trades. This program delivered millions of dollars of value every year to the bank. So sophisticated was the program that the United States alleges in the criminal filings that it could be used to "manipulate markets."

The stolen program thus fits consummately the definition of a trade secret. With its theft disclosed, what are Goldman’s next steps?

An unnamed source reports that the investment bank say it has "secured its systems," http://tinyurl.com/m2gctg, but has the damage been done? We do not know where the actual code is now, or whether Goldman and/or the United States have foreclosed any possible future transfer. In the hands of another bank, with the right implementation, the program could be used to devastating effect. We wonder, too, whether Aleynikov (and his new firm if it employed him for any length of time) will be the subject of a civil lawsuit by Goldman to enjoin any work on similar trading models.

Another major question is how Goldman allowed Aleynikov to purloin a "crown jewel" application in the first place. The detection and response systems may have worked well, as one commentator observes in a New York Times piece, http://tinyurl.com/klnn28, but shouldn't an institution as large as Goldman have had controls to flag the export and data transfer of such commercially sensitive code?

For businesses trying to protect their own confidential business information, the story is a caution and reminder that trade secrets are only as valuable as the reasonable precautions taken to prevent their disclosure. For online data, that means, for example, restricted access, password protection, and it may mean, in addition to regular monitoring, firewall and other protocols to limit data transfer.

-Andrew Flake

Andrew B. 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.

Tax Preparation Firm That Dumped Sensitive Customer Records Faces Liability

If your company handles sensitive customer information, as most companies these days do, a recent lawsuit, Pinero v. Jackson Hewitt Tax Service, Inc., pending in a federal court in Louisiana bears consideration. The Pinero case reminds businesses that their privacy policies and protocols need to be up to date and adhered to by employees. Negligently exposing private customer information to the public may lead to liability and a public relations nightmare for your company.

The Lawsuit

The plaintiff in the lawsuit was a customer of one of the defendants, a popular tax preparation franchisee. In 2005, before engaging the defendant franchisee to provide tax preparation services, the plaintiff was shown the franchisee’s privacy policy, and was assured that her personal information would be safeguarded.

In 2008, however, someone found the plaintiff’s tax records, along with those of more than a hundred other individuals, in a dumpster behind the franchisee’s retail store. The records had not been shredded. A news station broke the story and returned the tax records to the plaintiff. The franchisee claimed that the tax records were stolen.

The plaintiff, likely angry that her confidential information had been disposed of so irresponsibly, brought suit against the franchisee and franchisor, setting forth a variety of claims, including fraud, breach of contract, and violation of state statutes. In a series of rulings, the court dismissed some of the plaintiff’s claims, but did allow the plaintiff to proceed with claims of fraud, violation of Louisiana’s Unfair Trade Practices Act, and an invasion of privacy claim against the defendants.

What This Means For You

The Pinero lawsuit is a reminder that companies must handle sensitive customer information with great care. Not only can improper exposure of private customer information lead to liability, it can also create a public relations nightmare for your company.

Privacy policies should be drafted carefully to define what constitutes private information and should set forth the company’s obligations and the customer’s rights. These policies should also be updated periodically to stay current with changes in law, technology, or to keep up with your company’s products and services.

Adequate security technology should be employed to safeguard the storage and transfer of electronic records of customer information. Employees should also be trained and routinely refreshed as to what constitutes “private” information, how that information should be handled and disposed, and their responsibility in ensuring that the information remains private.

Of course, despite the strictest measures, private customer information may be compromised inadvertently or through criminal acts such as hacking. In that situation, swift action must be taken to resolve the problem. In certain cases, it may be make sense to proactively inform the customer about the breach and the steps you are taking to remedy the situation.

-- Anuj Desai, Esq.

Not If, but How

Arnall Golden Gregory, LLP has significant experience in the area of privacy law, ranging from drafting privacy policies, counseling clients about privacy security technology solutions, as well as resolving related disputes. We serve 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, http://www.agg.com/.