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Wednesday, August 31, 2011

On May 11, 2011, Georgia Governor Nathan Deal signed House Bill 30 into law, beginning a new era for non-compete, non-disclosure, and non-solicitation agreements under Georgia.  Georgia historically has been an inhospitable forum for employers seeking to enforce restrictive covenants against former employees.  Georgia’s new Restrictive Covenant Act (the “Act”) clarifies and strengthens the ability of employers to restrict conduct during and after employment.

Importantly, the Act applies only to Georgia restrictive covenant agreements entered into on or after May 11, 2011.  Employers with operations in Georgia should revisit their restrictive covenant agreements and consider revising their agreements to take advantage of protections of the new law.  Historically, Georgia law has not required new or additional consideration to support a new restrictive covenant agreement signed by a current employee, so employers are in a good position to strengthen their competitive protections, at this time, should they choose to do so.

Perhaps the most significant change of the Act, courts are now expressly authorized to modify or “blue pencil” an overbroad restrictive covenants entered into on or after May 11, 2011.  Accordingly, courts have the discretion, but are not obligated, to strike out or remove language that renders the restrictive covenant unenforceable.  Given the prospective nature of the Act, Georgia common law will still govern agreements entered into prior to the effective date of the Act, which means if any restrictive covenant in such agreements is overbroad it will not be enforced.

Employers should consider taking advantage of the following new rules provided under the Act by entering into new restrictive covenant agreements:

  • Non-disclosure provisions relating to confidential information are not required to specify a time limit on a requirement to maintain information as confidential so long as the information otherwise remains confidential.  Accordingly, employers should consider removing such time limitations from their existing non-disclosure agreements.
  • Non-solicitation covenants are not required to expressly refer  to geographic areas or types of products or services considered competitive.  Courts will instead look to whether the employee had “material contact” (which is defined very broadly under the Act) with the customers or prospective customers during his or her employment for the purpose of providing products or services that are competitive to the employer’s business.  Based on these changes, employers have an opportunity to streamline the language they currently use for such covenants.
  • The Act includes statutory rebuttable presumptions of reasonableness for post-termination time restrictions, which should be incorporated into new agreements, including:
    • Two (2) years or less for post-employment covenants;
    • Three (3) years or less for distributor, dealer, franchisee, lessee of real or personal property, or licensee of a trademark, trade dress, or service mark covenants; and
    • Five (5) years or the period of time during which payments are being made to the seller for the sale of business covenants.
  • Finally, under the Act, if the employer can show that the restrictive covenants comply with the new statutes, the party challenging the restrictive covenants bears the burden of establishing that the restrictive covenants are unreasonable.

Because existing restrictive covenants continue to be governed by the strict scrutiny under Georgia common law rather than the more favorable treatment under the Act, we are encouraging our clients to review their existing agreements with restrictive covenants and consider replacing them to take advantage of the new Act.  While no one approach is necessarily appropriate for all employers, we would be happy to discuss the opportunities presented for your company.

If you have any questions regarding the new Act, or if you would like assistance in reviewing your existing restrictive covenant agreements or drafting new agreements for compliance with the new Act, please contact your Bryan Cave attorney.

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