In 2011, Georgia enacted a new statute to govern restrictive covenants in employment and commercial contracts. The statute regulates restrictions to competition, solicitation of customers and disclosure of confidential information. All agreements entered into after May 11, 2011, will be covered by the statute. In order to be valid, the restrictions imposed must protect a legitimate business interest and create an environment conducive to keeping existing businesses in Georgia and attracting new businesses.
Legitimate business interest exists when the entity possesses one or more of the following:
- trade secrets
- valuable confidential information
- substantial relationships with specific prospective or existing customers, patients, vendors, or clients
- customer, patient, or client goodwill associated with a business or its intellectual property
- a specific interest over a geographic location or a specific marketing or trade area knowledge
- extraordinary or specialized training to employees or business associates.
The party seeking to enforce a restrictive covenant must prove the existence of one or more of these legitimate business interests justifying the restrictive covenant.
The restrictions imposed by the statute are only applicable to contracts between employers and employees, distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of a business or commercial enterprise, and two or more employers.
Restrictions During the Term of the Employment or Business Relationship
Contracts restricting competition during the term of the employment will be enforced provided the restrictions are reasonable in time, geographic area, and scope of prohibited activities.
The statute presumes reasonable a restriction not to compete that extends through the term of the relationship. A geographic territory which includes the areas in which the employer does business at any time during the parties’ relationship is reasonable, if the distance encompassed by the provisions are also reasonable or the agreement lists particular competitors as prohibited employers, or both. The scope of competition restricted is reasonable if measured by the business of the employer. However, any restriction that operates during the term of an employment or business relationship will be reasonable even if it lacks any specific limitation upon scope of activity, duration, or geographic area if protects the purpose of the agreement or relationship or deters any potential conflict of interest.
Restrictions After the Termination of the Employment or Business Relationship
Restrictions on competition after the term of employment are only allowed for employees: (1) primarily soliciting customers, (2) primarily engaged in making sales, (3) primarily managing the business or a department, directing the work of two or more employees or having the authority to, or recommend, the hiring, firing, advancement, promotion, or any other change of status of other employees or (4) considered a key or professional employee. In determining the reasonableness of restrictive covenants covering employees, the court may consider the economic hardship imposed upon the individual by the enforcement of the covenant when deciding if the restriction is enforceable.
The statute presumes reasonable restrictive covenants sought to be enforced after a term of employment, against former employees for a period of two years or less and presumes unreasonable any restraint of more than two years. Covenants sought to be enforced against distributors, dealers, franchisees, lessees of real or personal property, or licensees of a trademark, trade dress, or service marks are presumed reasonable for a period of three years or less and presumed unreasonable for more than three years from the date of termination of the relationship. In the case of restrictive covenants against the owner or seller of business assets, shares, equity interest or profit participation, restraints of five years or less or restraints equal to the period of time during which payments are being made to the owner or seller for the sale, whichever is longer, are presumed reasonable. Restraints of more than five years or the period of time during which payments are being made to the owner or seller for the sale, whichever is longer, are presumed unreasonable.
As it is the case for restrictions during the term of an agreement, a geographic territory which includes the areas in which the employer does business at any time during the parties’ relationship is reasonable, if the distance encompassed by the restriction is also reasonable; the agreement lists particular competitors as prohibited employers for a limited period of time after the term of employment or a business or commercial relationship, or both. Also, the scope of competition restricted is reasonable if measured by the business of the employer.
Non-Solicitation and Non-Disclosure of Confidential Information
Unlike the restrictions on competition after the termination of an employment or business relationship, which are limited to employees performing specific functions, the non-solicitation of customers and the non-disclosure of confidential information are allowed under the statute both during and after the termination of employment regardless of the employee’s duties or classification. In this regard, in Georgia, an employee may agree in writing to refrain, for a period of time following termination, from soliciting business from the employer’s customers and prospective customers with whom the employee had material contact during his or her employment to offer products or services that are competitive with those provided by the former employer. Georgia does not require the agreement to limit the solicitation to a geographic area or the types of products or services considered to be competitive. A general prohibition against “soliciting or attempting to solicit business from customers” or similar language is considered to be adequate and applicable to employer’s customers and prospective customers with whom the employee had material contact, and products or services that are competitive with those provided by the employer’s business.
The restriction related to activities, products, or services that compete with those of the employer or geographic areas as they related to post-employment covenants entered into prior to termination may be estimated, meaning they could be non-existent when the contract was executed, as long as they could be anticipated to develop throughout the relationship. However, any restriction related to activities, products, or services must be limited to those provided within two years or less prior to termination. Moreover, any restriction pertaining to the geographic area must be limited to the territory where the employee is working at the time of termination.
Any restrictive covenant that does not comply with these limitations is considered to be unlawful, void and unenforceable. Under the new statute courts are authorized to modify or “blue pencil” a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted.