Co-authored by Kenneth G. Menendez.
Back in May, on the last day of the 2010 session of the Georgia General Assembly, lawmakers passed a bill totally revamping Georgia’s restrictive covenant law (House Bill 173). Unlike most laws, however, this Act was not effective either upon passage by the General Assembly or upon signature by the Governor. Rather, this Act became effective on the day following the 2010 general election, if ratified in the form of an amendment to the Georgia Constitution providing for the enforcement of restrictive covenants in commercial contracts that limit competition.
On November 2, 2010, by a margin of more than two-to-one, Georgia voters ratified this Constitutional amendment and, as a result, effectuated the total restructuring of Georgia’s restrictive covenant law. Thus, upon certification of the election results, Georgia will have a new restrictive covenant law, which will apply on a going-forward basis to all contracts entered into on and after such effective date.
Highlighting the new Georgia law is the authorization for the courts to “blue-pencil” or modify restrictive covenants, in cases where the contractual covenants are partially unenforceable or overly broad, so as to grant only the relief reasonably necessary to protect the interests of the parties and achieve the original intent of those parties to the extent possible. Historically, in the context of restrictive covenants contained in employment agreements, Georgia courts have refused to blue-pencil overly broad covenants or covenants otherwise determined to be unenforceable. Thus, prior to the new law, if any portion of a restrictive covenant (or accompanying covenants not to solicit clients or pirate employees) was found to be unenforceable, all of the covenants contained in the applicable agreement were determined to be unenforceable as well.
The new Georgia law goes further, in terms of identifying those contracts which, in the future, may include restrictive covenants; included are contracts between employers and employees, distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of businesses, and two employers. The law also identities categories of employees who may be subject to restrictive covenants, and those categories of employees who may not. Finally, the new law puts the burden of proof on the party challenging the restrictive covenant, once the party seeking to enforce the restrictive covenant establishes by prima-facie evidence that the restrictive covenant is in compliance with the provisions of the new law.
Georgia’s new restrictive covenant law should provide some much-needed clarity and guidance, in terms of allowing lawyers to craft restrictive covenants which will stand up under scrutiny from the courts, rather than relying upon a case-by-case analysis of the covenants (along with the factual situations involved) to determine the legality of those covenants. Additionally, courts will now be empowered to blue-pencil overly broad or unenforceable restrictive covenants, and it will be interesting to see how the courts accept and handle this authorization.