Restrictive Covenants in Georgia: A New Beginning (Again)

19 May 2011 Labor & Employment Law Perspectives Blog

On May 11, 2011, Georgia Governor Nathan Deal signed into law a statute that provides the capstone to a significant revision in the state’s acceptance of restrictive covenants, which should make it easier to enforce noncompetition, nonsolicitation, confidentiality and other such contractual provisions.

In the past, a particular obstacle, which restrictive covenants have faced in Georgia courts, is that, in regard to employment agreements, covenants having any unenforceable provisions will not be “blue-penciled.” That is, courts would not enforce even those provisions that did pass muster; instead, the entire covenant would be void. (Under the prevailing law, restrictive covenants in the context of the sale of a business are subject to less scrutiny that such covenants that are conditions of employment.)

By enacting the new statute, codified at O.C.G.A. section 13-8-50 et seq., Georgia joins the ranks of other jurisdictions that permit courts to enforce the properly drawn aspects of restrictive covenants, even if other provisions are defective.

This is not to say that partial enforcement (blue penciling) of restrictive covenants is now mandatory, but only that Georgia courts “may” do so. With the existing body of Georgia case law being roundly skeptical of overreaching employment agreements, it remains to be seen whether Georgia courts will follow the path that the new legislation has opened.

Another important aspect of the new statute is the guidance that it provides for courts (and contracting parties) concerning the interpretation of restrictive covenants. The legislature’s guidance includes specific contractual language that the legislature regards as sufficiently well-defined. The statute also explains the allocation of burdens of proof for establishing the reasonableness of restrictive covenants and identifies various conditions that regarded as presumptively reasonable.

We referred, above, to the signature by Governor Deal as the “capstone” to the change in Georgia’s law because it completes a cycle of efforts that began with the passage of nearly identical legislation in 2009. At that time, however, it was appreciated that an amendment to the Georgia Constitution (which then prohibited agreements “defeating or lessening competition”) was needed for such a law to take effect. (Indeed, a statute permitting blue-penciling restrictive covenants was put in place in 1990, but was held to violate the Georgia Constitution by the Supreme Court of Georgia, the following year.) Thus, the 2009 statute said that it would become effective on the day after ratification of an enabling amendment. Such an amendment (permitting agreements that place “reasonable” restrictions upon competition) was approved by voters in November 2010. But because amendments to Georgia’s Constitution do not take effect until January 1 of the year following such a vote, the 2009 statute became effective before the enabling Constitutional amendment and thus might be invalid. In order to overcome any such dispute, the Georgia legislature passed yet another new bill, earlier this year, which is the one that Governor Deal has signed.

The new law applies to all restrictive covenants entered into on or after its May 11, 2011 effective date. The treatment of covenants entered after the November 2010 election, but prior to May 11, 2011 vote on the Constitutional amendment, will remain unclear until Georgia courts address the issue.

With the new law in place, employers – and others whose interests might be served by restrictive covenants – should take advantage of the opportunity that now exists to replace existing agreements with revise versions reflecting the legislature’s guidance. Parties to any restrictive covenants entered into during the period of uncertainty as to status of the prevailing law (that is, from November 3, 2010 until May 10, 2011) should be especially mindful of the opportunity to renew those agreements, so as to provide clarity to what might otherwise be a murky situation.

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