Non—Compete Agreements/Covenants No To Compete – The Basics

Slanted Thin Banner 0003 Slant Banner White

With the combined effort of new legislation and a full-on state constitutional amendment, Georgia has made a 180 degree turn: from an anti non-compete agreement state to one that is wholeheartedly in support of non-compete agreements. How did this happen and what does it mean for GA businesses and employees?

What’s a Non-Compete Agreement?

A non-compete agreement (aka “Covenant to Not Compete” or “CNC”) is a contract between companies and their agents (usually their employees) that restricts the agent from becoming a competitor of the company / employer.

CNCs are usually signed as a part of the employee’s initial employment contract, and are usually used for employees that are managers, “key employees,” or part of the company’s sales team.

For the most part, Covenants to Not Compete have to be limited in time and scope, depending on the state they are created in. In Georgia, an agreement that keeps a key employee from working for a competitor anywhere in Georgia for 1 year after their employment ends, is probably enforceable against the ex-employee.

Georgia’s Old Non-Compete Agreement Laws and the Recent Change

Just a few years ago, the Georgia state legislature passed a new law that would radically change Georgia’s policy on non-compete agreements. Companies started using these more aggressively, in response to the new law, but the GA Supreme Court effectively pulled the rug out from under the legislation, deciding that to enforce the law would violate the Georgia Constitution—specifically, non-competes violated the Constitution by restraining competition.

How did Georgia respond to this decision? We amended the Georgia Constitution! With the successful amendment in hand, Georgia then re-passed the same law as before, and retroactively declared that non-compete covenants signed after May 11, 2011 would be enforceable (as long as they complied with the GA legislation).

The new Georgia statute radically changed the way Georgia views non-compete agreements, very much in favor of businesses. While beforehand, just about any non-compete agreement would be voided altogether as “against public policy,” the new law makes non-compete agreements enforceable and easy to use. Even if a judge rules that a non-compete is overbroad—for example, one that stopped an ex-employee from working at any sales job for 10 years, throughout the world—Georgia courts are now allowed to blue pencil (change) the Covenants to Not Compete to the maximum amount allowed under the new statute. With the previous example, the CNC might be blue penciled to 2 years for any sales job in GA.

What Does the new Non-Compete Law Mean for Georgia Businesses?

Modern businesses have a unique problem with their employees. There’s a tension between the need to train your employees well, so they can do everything for the company and allow the business owner/entrepreneur to manage the business or even setup new companies, and the risk that a well-trained employee will jump ship and setup their own competing version of your company, undercutting your prices, and doing the same job with the benefit of your hard-earned knowledge.

Georgia’s changes to the non-compete law gives Georgia businesses a lot more breathing room in this situation, by allowing them to restrict employees’ ability to compete with them after they leave the company.

Depending on the non-compete agreement’s terms, by utilizing non-competes a Georgia company can now stop an ex-employee from (1) working for a business that competes with theirs, (2) setting up their own company that competes, or even (3) preventing the ex-employee from disclosing the company’s trade secrets, customer lists, or business strategies to a competitor.

But Georgia companies don’t have to stop there! They can even sue to recover the lost revenue from the competition! So if an ex-employee signed a strong non-compete agreement (as in, well… the one that I wrote for you) and then the employee sets up their own version of your business, making $200,000 in profits in the one year after leaving, you could sue them and recover all of those profits! You might even be able to recover your attorney’s fees and litigation costs.

After immense reform including new legislation and a full-on state constitutional amendment, Georgia has switched from a state that highly disfavors non-compete agreements, to one that very much supports them. Savvy business-owners should make sure they’re taking full advantage of this change in the law, and employees should have an attorney review their employment agreements to see if they’re at risk of losing their livelihood for years after their employment relationship ends.

Despite the legislative controversy surrounding the passage and effective date of the bill, the Georgia Restrictive Covenants Act (RCA) O.C.G.A. § 13—8—50, et seq., finally became effective on MAY 11, 2011. Although some controversy still remains regarding the effective date of the new RCA, the following is clear:

  • Restrictive Covenant Agreements entered into before NOV 03, 2010, are governed by the old Georgia common law, which was set forth in court decisions;
  • Restrictive Covenant Agreements entered into after MAY 11, 2011, will be governed by the new RCA; and
  • Restrictive Covenant Agreements entered into on or after NOV 03, 2010, through MAY 11, 2011, will be subject to legal interpretation as to whether the old law or the new RCA applies.

The new RCA represents a dramatic change from the old Georgia common law, which was not favorable to employers attempting to enforce restrictive covenants against former employees. Among other changes, the new RCA:

1) Creates statutory presumptions under which courts must presume that restraints of two (2) years or less in duration are reasonable and that restraints of more than two (2) years are unreasonable;

2) Allows, (but does not require), Georgia courts to “blue pencil” or modify an otherwise overly-broad provision or covenant to make it enforceable, (which under the prior law, an overly-broad provision would have made the entire agreement unenforceable);

3) Allows courts to evaluate non-solicitation covenants and non-compete covenants separately and to enforce one without regard to enforceability of the other;

4) Contains a definition of “confidential information,” which eliminates some uncertainty as to what constitutes “confidential information;”

5) Contains no requirement of a time limit for the protection of “confidential information,” which is similar to the protection provided for trade secrets;

6) Provides that non-compete provisions (as distinguished from non-solicitation and non—disclosure covenants) may be only enforced against employees that:

  • Customarily and regularly solicit customers;
  • Regularly engage in making sales, obtaining orders, or contracts;
  • Perform specified management duties as defined by the new RCA, (which definition is similar to the FLSA’s definition of the executive exemption);
  • Perform duties of a “key employee,” as defined by the RCA; or
  • Perform duties of a professional, as defined by the RCA, (which definition is similar to the FLSA’s definition for the professional exemption); and 7) applies only to the following individuals and entities:
  • Employers and employees (the definition of employee may include independent contractors, depending on the situation);
  • Distributors and manufacturers,
  • Lessors and lessees;
  • Partnerships and partners;
  • Franchisors and franchisees;
  • Sellers and purchaser of a business or commercial enterprise; or
  • Two (2) or more employees.

Please contact us, if we can assist you in redrafting your restrictive covenant agreements to take full advantage of the changes created by the new RCA as well as ensuring that your agreements are enforceable under the new RCA.

Notice: This website consists of attorney advertising and opinions and does not establish any attorney-client relationship. Attorney-client relationships are only formed upon signing an engagement agreement. Neither Jeff Wolford nor THE WOLFORD FIRM, PLLC, can guarantee results; past results do not guarantee future results.

Robert Jeffrey Wolford is licensed to practice law in the States of Tennessee and Georgia.