Legal Briefs

Georgia’s New Restrictive Covenant Act

Published Monday, November 8, 2010

Georgia voters approved a constitutional amendment to what is known as Georgia’s Restrictive Covenant Act in 2010. Mark Alexander, a partner and trial attorney with the Stewart Melvin & Frost law firm in Gainesville, Ga., offers advice on what both employers and employees should consider when they set up or review a restrictive covenant in their company.

Question: What is a restrictive covenant?

 

Mark: Contracts that restrict or regulate competitive activities between different parties such as an employer and an employee. Under law, an employer can require a new employee to sign an agreement that prevents that employee from competing against the company for a certain time period after they leave the company.

 

Most commonly known example of a restrictive covenant is a non-compete or non-solicitation agreement between an employer and an employee. But also applies between distributor and manufacturer; between franchisor and franchisee; between partnerships and partners; etc.

 

For example, non-compete or non-solicitation restrictions may apply to a geographical territory where the employee is barred from doing business if he or she leaves the company.

 

Another example, non-compete restrictions also may apply to a list of the company’s customers that the employee is barred from soliciting for business if he or she ever leaves the company. Previously, the Georgia Constitution prohibited restraint on trade. Consequently, Courts found restrictive covenants to be a partial restraint on trade and would enforce them only when narrowly tailored to protect legitimate business interests.

 

Question: What does the Restrictive Covenant Act Amendment mean?

 

Mark: This amendment leads to a dramatic change in employment agreements in the state of Georgia. The New law is tilted more toward employers. It vastly broadens what is permissible under non-compete agreements.

 

Question: Can you give us an example of how the new law works?

Mark: The biggest change in the law permits the court system to edit or rewrite an employer’s restrictive covenant if it is challenged by an employee. This rewriting of a contract is known as “blue penciling.”

 

For example, if the original non-compete agreement was too broad because it restricted the employee from working anywhere in the United States, the court could rewrite the covenant to narrow the sales territory ban only to Georgia – so as to make it enforceable.

 

Under the previous law, even a minor flaw in the non-compete contract could throw out the entire agreement. Under the new amendment, however, the court could rewrite the flawed portion of the contract to make it stand up under law.

Question: So, is this Restrictive Covenant Act a good thing or a bad thing?

Mark: It depends on whether you are the employer or the employee. If you are an employer, the act definitely provides you with more protection against an employee who leaves your company and tries to take your customers with them. The drafters of this new law believe that this amendment will make Georgia a more “business-friendly” state.

 

If you are an employee, this new law would definitely put you in a less negotiable position. In this down economy, job applicants are more likely to sign any employment agreement just to get hired. But they should always review their employment contract carefully.

Question: Are there any other downsides to this new amendment?

Mark: Supporters claim the new act will result in fewer restrictive covenant lawsuits. However, I think it could have the opposite effect. It could in fact lead to expanded litigation, in my opinion. I believe that employers, under the new act, will be more emboldened to file suit against a key employee whom they believe to be violating their restrictive covenant agreement. It may have a chilling effect on employees engaging in legitimate competitive activities.

 

Question: Does the new Restrictive Covenant amendment, affect existing non-compete contracts?

Mark: No. The new law would apply only to those agreements after the law’s effective date. Existing agreements would still be interpreted and enforced under current case law.

 

Question: What advice do you have for employers or employees who are considering a non-compete or other restrictive covenant in their company?

Mark: Whether you are an employer or an employee, it is advisable to get an experienced attorney involved. I’ve seen too many cases where business tried to take a short cut and put a standard template contract into place. These restrictive covenants need to be tailored to the business.