Georgia's New Non-Compete Law Hits a Legal Roadblock

Back in 1990, the Georgia state legislature tried to repair the state's reputation for having a business-chilling stance on non-compete and non-solicitation agreements. That year the Georgia General Assembly passed a law designed to make it more feasible for companies to protect their trade secrets and business from employees who depart to join a competitor or to start their own competing business.

But that law did not remain on the books for long. In 1991 the Georgia Supreme Court struck down the statute. The court found that the state constitution bars any legislation that enhances the enforceability of post-employment restrictive covenants.

That meant that the courts again began throwing out many of the non-compete agreements that came before them for review. Under case law in the state, such covenants are governed by highly technical rules that often rendered the agreements unenforceable. And, unlike many state court systems that allow judges to "blue pencil" agreements they find to be overbroad, in Georgia the courts simply threw out any covenants that didn't conform strictly to the rules. The courts also adopted an "all or nothing" rule, under which an overbroad non-compete also invalidated any non-solicitation clause in the same contract.

It took 18 years for the legislature to try again to fix the problems, but in 2009, the General Assembly finally passed another bill to ease the way for businesses to adopt enforceable restrictive covenants. To guard against a repeat of 1991, the legislature passed a second bill calling for a voter referendum on an amendment to the Georgia Constitution regarding "the enforcement of covenants in commercial contracts that limit competition." The referendum was meant to preclude a court challenge to the new law.

Business interests promoted the ballot proposition on the grounds that the existing non-compete environment was making it difficult for the state to attract new employers, particularly in the technology sector where trade secret issues are particularly troublesome. But the referendum didn't get a lot of fanfare, according to Joe Shelton, a partner at Fisher & Phillips in Atlanta.

"I saw one commercial about the need to protect business by voting 'yes,'" he says. "I didn't see any ads against it. The biggest challenge was, would the voting public understand the question being posed?"

Apparently they did, because on Nov. 2 they overwhelmingly ratified the constitutional amendment. The new non-compete law carried an effective date of the day following ratification, so presumably it would have gone into effect protecting any non-compete agreements signed starting Nov. 3.

But yet another complication soon emerged. The legislation that enabled the ballot question did not have an effective date specified, meaning it would go into effect on Jan. 1. Initial guidance from several law firms called for clients to wait until after Jan. 1 to introduce new non-compete and non-solicitation agreements.

Then the plot thickened even more. Some lawyers who analyzed the effective date issue pointed to a section of the Georgia Constitution that states that the constitutionality of a new law "is to be determined by the constitution in effect on the date the law became effective" and "if it is unconstitutional then, it is forever void." That led to the conclusion that the new non-compete law was "forever void" because the constitutional amendment that made it possible was not in effect on the date the law became effective.

"The only clear solution to this problem is for the General Assembly to reenact a substantively identical version of the Statute, but with a Jan. 1, 2011, effective date," Littler Mendelson advised its clients.

The legislature is scheduled to convene on Jan. 11 and most likely will be asked to pass yet another version of the legislation with the new effective date.

"I believe the legislature will take care of this and that the ultimate effective date will end up being 1/1/11," says Shelton. "But we should get more clarity when the legislator sponsors begin to speak out more publicly. My sense is that they are still looking at this from all angles."

In the meantime, Shelton is advising clients to hold off at least until January with any new non-compete agreements.

If and when it does become effective, Georgia's new non-compete law will remove several hurdles for drafters of non-competes, confidentiality agreements and non-solicitation agreements. According to Shelton, those hurdles include a requirement for time restrictions on confidentiality agreements, as opposed to provisions in other states allowing an agreement to require that confidential information not be divulged as long as it remains confidential.

Another issue is territorial restrictions in non-competes, which limit the area in which a person is restricted from competing. Under Georgia's rules, the territory has to be specified when the contract is drafted. "The territory a person is assigned on Day 1 [of employment] is not necessarily his territory on Day 1,000," Shelton says. "But in Georgia you could not say the person is restricted from competing in the counties where he worked for the last 12 months; you had to decide on Day 1 what the territory would be."

Most importantly, the new law would give judges the ability to amend agreements, rather than just tossing out those that have a deficiency. "Georgia judges will have the ability to take an agreement that is not perfectly written and modify it to make it reasonable," he says.

Even assuming all the legal complications to implementing the new law are overcome and a more business-friendly system takes effect, Shelton warns employers not to overreach when drafting non-competes.

"Employers still need to be cautious," he says. "Employees still will take [the agreements] to judges who are used to saying, 'That's unreasonable and I won't enforce it.' Judges are not going to want to do all the work."

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Mary Swanton

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