May 25, 2010

Changes to Georgia's Restrictive Employment Covenant Laws May Be on the Horizon

Holland & Knight Alert
Joshua I. Bosin

During its 2010 Session, the Georgia General Assembly passed House Resolution 178, which proposes to amend Georgia’s Constitution by giving the judiciary authority to “blue-pencil” non-competition agreements containing unenforceable restrictions. The proposed constitutional amendment, if ratified by a majority of voters during Georgia’s November 2010 general election, will supersede a long line of Georgia authority that holds if one element of a non-competition agreement is unenforceable, then the entire agreement is unenforceable as a matter of law. And a ratified amendment could affect how other states view the enforceability of non-competition agreements.

As the law currently stands, Georgia courts are among the strictest in the country in assessing the enforceability of non-competition agreements in employment contracts. If a restriction in a non-competition agreement is unenforceable, judges do not have the power to enforce the remaining restrictions by rewriting the agreement to exclude or modify the unenforceable restriction.

In 1990, the General Assembly attempted to give that power to judges by statutory enactment. But because the Georgia Constitution prevents the General Assembly from passing any laws that have “the effect of defeating or lessening competition,” in 1991 the Georgia Supreme Court held the 1990 enactment unconstitutional. House Resolution 178 seeks to amend the constitutional “defeating or lessening competition” language by giving judges the express power to rewrite or delete unenforceable restrictions in employment covenants.

Potential Impacts

In addition to the “blue-pencil” change, if the constitutional amendment is ratified this fall, a number of other provisions contained in House Bill 173, which was passed during the General Assembly’s 2009 Session, also will become law. One important provision would make presumptively enforceable any non-competition agreement in an employment contract with a duration of two years or less. Another provision would provide statutory definitions to many terms commonly used in non-competition agreements. Further, the changes would allow employers more flexibility in restricting former employees from soliciting and accepting business from their former employers’ current and prospective customers.

How this constitutional amendment would affect the judiciary’s treatment of non-competition agreements in employment contracts is unknown. Typically, the judiciary applies strict scrutiny to non-competition provisions in employment-related agreements and lesser degrees of scrutiny to non-competition clauses in partnership and sale of business agreements. Judges have strictly scrutinized non-competition provisions in employment agreements because of an inability to “blue-pencil” the provisions. But if the constitutional amendment passes and judges are authorized to “blue-pencil” non-competition clauses contained in employment agreements, the judiciary might begin review these provisions less strictly, too. Although this would seemingly make non-competition restrictions easier to enforce, judges would be empowered to rewrite competitive restrictions as they deem necessary to protect employees, not necessarily employers.

Considerations for Employers

It is thus necessary for Georgia employers to continue to carefully draft non-competition provisions with the advice of counsel. By crafting detailed valid competitive restrictions, employers will be less likely to see their non-competition provisions altered by courts. Acute consideration of business objectives will enable employers to protect themselves from having their employment agreements judicially altered, while at the same time taking advantage of the strengthened provisions contained in House Bill 173.

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