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.

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.