Georgia Court of Appeals Provides Ammunition for Saving Unenforceable Non-Competes

In the World War II epic Saving Private Ryan, Tom Hanks and his platoon of grunts cross dangerous enemy territory to rescue an American soldier before he becomes the fourth member of his family to be a casualty of the Big One.  In similar fashion, a trial court and a Georgia Court of Appeals panel in Fab’rik Boutique, Inc. v. Shops Around Lenox, Inc., 2014 Ga. App. LEXIS 612 (Ga. Ct. App. Sept. 8, 2014), led by Judge McFadden, recently marched through 40-plus years of hostile Georgia non-compete law to save an equally vulnerable restrictive covenant.

If you’ve been paying attention to this Blog or Georgia non-compete law in general, you know that May 11, 2011, is Liberation Day for Georgia restrictive covenants.  Following the enactment of Georgia’s  new non-compete statute, O.C.G.A. §13-8-50, et seq., restrictive covenants in agreements executed on or after May 11, 2011, were freed from the often draconian constraints of the prior body of case law governing, and usually dooming, Georgia non-compete agreements.  Of most significance, the new law allows a Court to blue-pencil (or modify, for you non-lawyers out there) an overbroad covenant so that it can be reasonable and thus enforceable.  Agreements that pre-date Non-compete Liberation Day, however, must strictly comply with the applicable body of case law or else be deemed not worth the paper they’re written on.  Decisions from state and Federal courts following the enactment of the new statute made it clear that they understood that Georgia non-compete law now existed in two parallel but supremely disparate dimensions — a litigant seeking to enforce a post-May 11, 2011 restrictive covenant could expect a benevolent jurist with a newly-sharpened blue-pencil eager to assist the over-zealous drafter of the non-compete by softening the effect of the over-reaching contractual language.  For those non-compete plaintiffs with a an older covenant, however, the judge’s ruling would likely continue to be as deadly as the bible-quoting sniper in Tom Hanks’ platoon.

InFab’rik,the Court of Appeals construed a restrictive covenant in a lease that prohibited the tenant, a women’s clothing boutique, from opening or operating “another store” within five miles of the leased premises.  Read literally, the clause would prevent the tenant’s owners from opening up an ice cream shop or hardware store in the restricted area, even though such uses would not be competitive with the tenant’s clothing store in the landlord’s retail center.  The tenant argued that under the pre-2011 strict scrutiny to be applied by Courts to restrictive covenants, the provision was grossly overbroad as drafted and thus unenforceable.

If I were a gambling man, I would have put my money on the tenant in succeeding in this argument, having seen many a similarly vague restrictive covenant felled by the prior body of employee-friendly non-compete law. I’m glad Vegas doesn’t take odds on appellate cases, however, because my wallet would be a little lighter today.  The Court of Appeals, recognizing that it could not use the new statute to blue-pencil the covenant, instead applied the rules of contract construction to narrow what it deemed to be an ambiguous phrase and held that, following such judicial construction, the covenant was reasonable and enforceable against the tenant.  In rationalizing its decision, the Court said that “the application of the rules of contract construction, and not the ‘blue pencil’ method, resolve any ambiguity in the lease.” Id. at *7.  It would be interesting to see how many of the legions of unenforceable non-competes from past opinions could be saved in similar fashion, but alas, that is an endeavor well-beyond the scope of this casual blog post.

BURR POINT:  The prevailing thought among non-compete lawyers In Georgia has been that pre-May 11, 2011 non-compete agreements would not receive any benefit of the change in public policy towards restrictive covenants heralded by the 2011 statute.  The most recent Court of Appeals case on the issue perhaps signals that there may yet be hope for Private Ryan-like older non-compete agreements under attack by a barrage of unfriendly pre-statutory case law.

Declaratory Judgments in Non-compete Cases – Electing Offense over Defense

After a weekend of gorging on football as well as turkey, I’ve got offense and defense on my mind, and a recent Georgia appellate decision got me to thinking about how those basic gridiron principles apply to non-compete cases.  The case, Lapolla Indus. V. Hess, No. A13A1097, 2013 Ga. App. LEXIS 926 (Ga. Ct. App. November 15, 2013), involved a variation of the usual scenario of an employee subject to a non-compete agreement leaving his position for a new employer.  The old employer, ready to get its money’s worth for a non-compete agreement it paid good money to an attorney to draft, sends a cease and desist letter to its former employee threatening to sue the employee for breach of contract and seeking an injunction, damages, and attorney’s fees.  The old employer, as happened in Lapolla, often also sends a letter to the new employer putting it on notice of the existence of the non-compete agreement and threatening to sue the new employer for tortuous interference with contract if it continues to employ the employee in contravention of the employee’s  covenants.

What usually happens is that the employee and new employer either throw the cease and desist letter in the trash or fire back a response letter informing the old employer of all the reasons why their accusations are legally or factually wrong and that they’ll counterclaim or seek attorney’s fees if the employer actually sues.  The Lapolla case highlights another option available to employees and their new employers in instances of a potential breach of a non-compete — the filing by the employee and/or the new employer of a declaratory judgment lawsuit seeking a ruling by the Court that the non-compete covenants are unenforceable.  Instead of waiting around to be sued, i.e. playing defense, the employee and new employer take control of the proverbial litigation ball and file their own lawsuit.

There are several potential benefits to the employee and new employer in this strategy:

  • the psychological benefits of being the Plaintiff;
  • choosing the forum to litigate the dispute, which may also dictate which state’s laws apply, which may in turn dictate the result;
  • quickly testing how serious the old employer is about enforcing the agreement;
  • forcing an early resolution of the dispute; and
  • minimizing exposure to liability by getting an answer on the legal issue of enforceability before moving on a hire that might potentially be a breach.

In Lapolla, the tactic worked, because the trial court refused to apply the Texas forum selection and choice of law clause in the non-compete agreement and ruled that the employee’s non-competition covenants with the former employer were unenforceable, and the Georgia Court of Appeals upheld that part of the ruling.

Burr Point:  When being accused of non-compete breaches, employees and their new employers should consider filing a declaratory judgment action.  While defense may win championships in football, an offensive mindset usually pays off when it comes to non-compete litigation.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Concerns Over Economic Growth Leads Some States to Limit Non-Compete Agreements

The Wall Street Journal recently reported a more than 60% rise in non-compete litigation over the past decade.[1]  The article notes that while non-compete agreements were once largely aimed at top executives, they are now “’reaching wider and deeper within organizations’ to include sales representatives, engineers and people involved in research and innovation.”

The article observes that though non-compete agreements allow employers to protect valuable assets and significant investments in their workforce, such agreements also have a chilling effect.  The threat of litigation makes it less likely that employees will change jobs, start their own businesses or join a startup or small firm.

According to Alan Hyde, a professor at Rutgers University School of Law, “while employers may benefit from enforcing the agreements, there is little evidence of any social or economic advantage:  ‘You have slower growth, fewer startups, fewer patents and the loss of brains to jurisdictions that don’t enforce the agreements.’”  For many startups, non-compete agreements often limit the recruiting process due to the potential cost of litigation and the expense of paying a non-productive employee until the agreement expires.

Olav Sorenson, a Yale University management professor, found non-compete agreements appeared to impede innovation.  States that did not enforce non-compete agreements saw more venture capital on the formation of startups, biotech spinoffs and job growth.

As result of the negative economic impact, some states have enacted or are considering laws which limit non-compete agreements.  For example, California voids many non-compete agreements.  New Hampshire voids non-compete agreements which are not provided before or when a job offer is made, or when the current job position changes.  Massachusetts is set to hold hearings on a bill that would limit non-compete agreements to six months.  And New Jersey and Minnesota have introduced legislation that would limit or void non-compete agreements.

Georgia, on the other hand, recently went the other way by enacting legislation in 2011 (OCGA §13-8-50, et seq.) that actually made it easier for employers to enforce non-compete legislation.  The findings of the Georgia legislature run counter to the conclusions of the experts quoted in the WSJ article – the lawmakers determined that Georgia’s prior body of law that greatly favored employees actually impeded efforts to attract new businesses to the state and retain existing ones.

Though Tennessee has not enacted legislation limiting non-compete agreements for economic reasons, the economic impact influences the balance between the need to protect an employer’s legitimate business interest and the desire for free trade.  In Tennessee, the restrictions of a non-compete agreement must be no greater than is necessary to protect the employer’s business interests.  If the restrictions are too great, a court can void or rewrite the agreement.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.


[1] Ruth Simon and Angus Loten, Litigation Over Noncompete Clauses is Rising, Wall St. J., Aug. 15, 2013, at B1.

Is An Assigned Non-Compete Agreement Enforceable?

In the case of a merger or acquisition, the successor company might take an assignment of the current non-compete agreements in favor of the predecessor company.  The enforceability of an assigned non-compete agreement, however, varies from state-to-state, as is true with most issues concerning non-compete law.  Below is a quick survey of how some of the states in the Southeast address the issue:

Georgia – Non-compete agreements, similar to most contracts in the state, are assignable provided that the duties under the agreement do not materially vary from the performance required by the original parties and provided that the contract is not for personal services.  West Coast Cambridge, Inc. v. Rice, 262 Ga. App. 106 (2003) (finding that successor partnership could enforce noncompete agreement against doctor because the law provided no prohibition against the assignment of the agreement and the agreement was expressly binding on successors and assigns, and noting that contract was not for personal services because it only obligated the doctor to not take certain actions).

Tennessee - Tennessee law recognizes that covenants not to compete are assignable absent specific language in the covenants prohibiting assignment.  See Packers Supply Co. v. Weber, 2008 Tenn. App. LEXIS 226 (Tenn. Ct. App. Apr. 14, 2008) (citing Bradford & Carson v. Montgomery Furniture Co., 115 Tenn. 610, 92 S.W. 1104 (Tenn. 1906)).

Alabama - Because non-compete agreements are disfavored as a restraint on trade (see Ala. Code § 8-1-1), a successor employer cannot enforce an employee’s covenant not to compete.  Construction Materials v. Kirkpatrick Concrete, 631 So. 2d 1006 (Ala. 1994) (refusing to enforce noncompete agreement for successor of employer and noting that the legislature’s omission of a specific provision in Ala. Code § 8-1-1 establishing a successor employer’s right to enforce an employee’s covenant with the predecessor employer creates an affirmative interference that this code section was not intended to allow enforcement by successor employers).

Florida - In Florida, the question is answered specifically by  Fla. Stat. § 542.335(1)(f)(2), which provides that a “court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is . . . an assignee or successor” provided that “the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.”  Recently, Florida’s First District Court of Appeal held that a general assignment clause (such as a statement that the agreement will “inure to the benefit of and be binding upon . . . assigns and successor) is sufficient to assign the agreement to a successor.  DePuy Orthopaedics, Inc. v. Waxman, 95 So. 3d 928 (Fla. Dist. Ct. App. 1st Dist. 2012).

BURR POINT:  Special attention should be paid when drafting a non-compete covenant to ensure that the assignability of the covenant is in accordance with the parties’ expectations and the applicable state law.

 

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Potential Antitrust Implications in Resolving Disputes Over An Employee’s Non-Compete Agreement

Resolving non-compete disputes often involves more than just bringing an employee and her former employer together to reach some agreement; successful resolution may also require the involvement of the employee’s new employer as well. An employer who hires an employee subject to a valid non-compete agreement with a former employer is inviting legal claims by the former employer, including claims for “tortious interference” with contract. The new employer is often named as a co-defendant when a former employer sues the employee for breaching her non-compete. Almost by definition, therefore, when there is litigation between a former employer and a new employer over an employee’s non-compete agreement, this means that there are two competitors involved in the litigation. To resolve such a dispute out of court, an agreement must be reached among competitors. But when two or more competitors sit down and reach an agreement, there exists some risk of anti-competitive effects that could create potential liability under antitrust laws.

One potential antitrust predicament arising out of a dispute over a non-compete agreement can be illustrated by the following hypothetical: Suppose that Acme Widget Company, based in Arizona, has been selling widgets in the Southwest and beyond for 50 years.  As a result of its long track-record and reliable products, Acme Widget has a 90% market share in the Southwestern widget-market, although its market share is lower in the rest of the country (where the demand for widgets is not as great).  Acme Widget’s long-time sales manager, Mr. Wolf, is not sure about Acme Widget’s new business model (which would change the way he sells widgets) and is interested in finding new employment elsewhere.  He learns about a relatively new start-up venture based in Georgia, Coyote Widget Company.  Coyote Widget’s niche is finding customers who have never purchased widgets before, and Coyote Widget has been successfully exploiting the previously-untapped widget-market on the East Coast and in the Southeast.  Coyote Widget does sell widgets to a few customers located in Arizona and does sell to some former customers of Acme Widget.  However, because Coyote Widget’s business model focuses on exploiting previously-untapped markets, Coyote Widget is not particularly interested in selling widgets to Acme Widget’s existing customer-base.

Coyote Widget and Mr. Wolf think that they would be a good fit for one another, but Coyote Widget is concerned about the non-compete agreement that Mr. Wolf entered into with Acme Widget when he became Acme’s sales manager.  Acme Widget, for its part, would just as soon part ways with Mr. Wolf and wants to wish him well in his future endeavors.  Then again, Acme Widget is well aware that Mr. Wolf carries a lot of clout with its established customers and is wary about allowing any other widget-maker ready access to these customers.

The three parties (Acme Widget, Coyote Widget, and Mr. Wolf) remain interested in working out a solution.  At the start of negotiations, Coyote Widget and Mr. Wolf jointly propose that, if Mr. Wolf comes to work for Coyote Widget, he will not contact any customer with whom he worked while at Acme Widget for a two-year period (the term of his non-compete).  Acme Widget likes this proposal but is worried that it could be hard to police and might be subject to cheating.  For example, if one of Mr. Wolf’s former Acme customers contacts him at Coyote Widget, Mr. Wolf could refer him to another salesperson at Coyote Widget.  Mr. Wolf’s referral would likely carry significant weight with the customer, even if Mr. Wolf did not initiate the contact or manage the account himself.  Acme Widget also does not trust Coyote Widget’s representations that its business model is focused on previously-untapped markets and that it is not interested in Acme Widget’s customer-base.  Given Mr. Wolf’s long-time contacts in the industry, Acme Widget is concerned that the temptation could be too great for Coyote Widget; once Mr. Wolf is on staff, it would be too easy for Coyote Widget to start raiding Acme Widget’s customer-base.

However, following several rounds of negotiations, the parties reach what appears to be a solution:  Acme Widget will provide Coyote Widget with a list of customers serviced by Mr. Wolf, and Coyote Widget will agree not to accept business from any customer on this list for the next two years. For good measure, Coyote Widget has also offered to agree not to solicit any new customers in Arizona and has agreed to provide Acme Widget with a list of Coyote Widget’s existing customers in Arizona (a small number in any event). Such an agreement would be easy to enforce — if an Acme Widget customer later moves its account to Coyote Widget, Acme Widget will not have to worry about proving that Mr. Wolf initiated contact with the customer. All that Acme Widget would have to prove is either (i) that the customer moved its account from Acme Widget to Coyote Widget and is listed on Acme Widget’s list or (ii) that the customer is in Arizona and is not on Coyote Widget’s list. From Coyote Widget’s perspective, this agreement has few drawbacks, given Coyote Widget’s focus on the untapped widget-market on the East Coast and in the Southeast.

There is, however, a problem with this solution:  the federal Sherman Act and similar state statutes that may be on the books in states where Acme Widget and Coyote Widget do business. Indeed, whereas many potential antitrust violations are judged under a “rule of reason” analysis (wherein the court will conduct an analysis of potential anti-competitive effects), so-called “horizontal” agreements among competitors to allocate markets may be viewed as per se illegal. The potential antitrust violation in the above hypothetical could subject Acme Widget and Coyote Widget to both criminal and civil liability, and once a per se violation is shown, there are few arguments that either company could make in its defense.  For that matter, given that Acme Widget holds a 90% market share in the Southwestern widget-market and that Coyote Widget is a start-up that has made some inroads (however limited) into this market, this is exactly the sort of scenario that could invite antitrust scrutiny from regulators or from customers unhappy about Acme Widget’s high prices.

In conclusion, employers seeking to resolve disputes about non-compete agreements should be aware of other legal risks and exposures, including antitrust laws.  Too much focus on the non-compete agreement in dispute can sometimes lead to even greater exposures in other areas.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

The Inevitable Disclosure Doctrine — A Glimmer of Hope in the Absence of a Non-Compete Agreement

In the hilarious movie Dumb and Dumber, the imbecilic and unattractive character played by Jim Carrey is told by the beautiful woman he is pursuing that the chances of them winding up together are about one in a million, to which he excitedly replies, “So you’re telling me there’s a chance!” Similarly, if an employer wants to enjoin a former employee from working for a competitor, but the employee is not under any sort of non-compete agreement with the former employer, has taken no company records and property, and has not revealed any confidential information or trade secrets to the new employer, the inevitable disclosure doctrine of trade secrets law provides the employer with at least a “chance” of getting the desired injunction.

The inevitable disclosure doctrine is used by employers to stop former employees from working for competitors, even in the absence of a non-compete agreement, on the basis that it is inevitable that the employee will use or disclose the former employer’s trade secrets in connection with the new employment. The significance of this theory is that the employer is not required to prove an actual misappropriation of a trade secret, but rather that the disclosure of the trade secret is inevitable based on the nature of the information and the circumstances of the employee’s new position.

As with all trade secret issues, the law on inevitable disclosure varies somewhat from state to state. For instance, California courts have rejected the doctrine as creating a “de facto covenant not to compete”, Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999), and held that the doctrine “cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets.”  Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 294 (4th Dist. 2002). The Third Circuit Federal Court of Appeals, however, applied a relatively lenient standard under Pennsylvania law for successfully using the theory, holding that an employer need only show a “substantial likelihood” of disclosure of a trade secret. Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102,110 (3d Cir. 2010). (For an excellent nationwide survey of the doctrine, see Ryan A. Wiesner, A State-by-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211 (2012)).

The Georgia Supreme Court has recognized the inevitable disclosure doctrine, although not referring to it by name, in the case of Essex Group, Inc. v. Southwire Corp., 269 Ga. 553, 501 S.E. 2d 501 (1998). In that opinion, the court upheld the trial court’s injunction prohibiting Southwire’s former employee from working for Southwire’s direct competitor’s logistics department for a period of five years. As the basis for its ruling, the court concluded that the competitor had “sought to obtain, by the simple act of hiring [Southwire's former employee], all the logistics information it had taken Southwire millions of dollars and years of testing and modifications to develop as part of Southwire’s plan to acquire a competitive edge over other cable and wire companies ….” Id. at 557. There was neither mention in the opinion of the employee having a non-compete agreement nor any mention of an actual misappropriation by the employee of the alleged trade secret. Instead, the implication of the decision was that disclosure of Southwire’s logistics system was inevitable because of the identity of Southwire and its competitor’s business.

BURR POINT: Even in the absence of an enforceable non-compete agreement, the inevitable disclosure doctrine provides a means for enjoining a former employee’s competitive activities in certain circumstances. For more information on the inevitable disclosure doctrine or how it might apply to your business, don’t hesitate to contact one of the Burr & Forman team members.

Eleventh Circuit Confirms Georgia Legislature Wisely Did a “Do Over” on the New Non-Compete Statute

In golf, a hacker who slices his tee shot into the woods will often announce that he’s going to take a “mulligan”, i.e., hit another ball as if the first one never happened. Georgia’s General Assembly took a legislative mulligan in re-enacting its new non-compete statute, and a recent Eleventh Circuit opinion, Becham v. Synthes (U.S.A.), 2012 U.S. App. LEXIS 11225 (11th Cir. 2012), should make the folks under the Gold Dome glad they did.

In 2009, the Georgia General Assembly passed HB 173, which was a bill designed to make non-compete agreements and other post-employment restrictive covenants much easier for employers to enforce. The effectiveness of HB 173 was dependent upon a positive ratification by Georgia voters of a state constitutional amendment authorizing the new law. In November 2010, Georgia voters passed the amendment by a 2-1 margin. Because HB 173 specifically stated that it would become effective the day after ratification of the amendment, legislators, lawyers and employers all assumed that Georgia finally had its new employer-friendly non-compete statute in place as of November 3, 2010.

Shortly after the ratification of the amendment, however, some non-compete attorneys and commentators, including this author, began to have serious concerns about the effectiveness of the new law due to a discrepancy between the effective date of the new law, November 3, 2010, and the effective date of the constitutional amendment, which by law was January 1, 2011 (because the amendment, due to a legislative oversight, did not have a specified effective date).  The analysis was that because the new statute was not constitutionally authorized on the date it became effective, it was unconstitutional and could not be revived by the later effectiveness of the amendment. This author shared the concerns of practitioners with the sponsor of HB 173, Rep. Wendell Willard, and he eventually concluded that the statute needed to be re-passed in the next session in an abundance of caution. (Go here for a discussion between the author and Rep. Willard about the events leading up to re-passage of the bill).

Thus, in 2011, the General Assembly passed a new bill, HB 30 (codified at OCGA §13-8-50 et seq.), that was essentially identical to the 2009 bill. This new statute, however, by its terms only applied to agreements executed on or after the new effective date of May 11, 2011. This left some uncertainty about how Courts would treat non-compete agreements executed during the legislative twilight zone period between the effective dates of the first and second versions of the new non-compete statute. Would courts give any deference to employers who had their employees execute new non-competes in reliance upon the much ballyhooed passage of the new statute?

That question was answered in the negative by the Eleventh Circuit in the recent Becham opinion. In that case, an employer was attempting to enforce a non-compete agreement dated December 1, 2010, after the ratification of the constitutional amendment and the effective date of HB 173, but before the effective date of the corrective 2011 statute. In affirming the grant of summary judgment in favor of the employee-defendant, the Eleventh Circuit held that “HB 173 was unconstitutional and void the moment it went into effect”, thus confirming the analysis of the practitioners who first reached out to the bill sponsor. The effect of that ruling was that the Court applied the much more onerous pre-statute body of Georgia non-compete law, and the plaintiff’s non-compete covenants were held to be unenforceable

BURR POINT:  The Georgia lawmakers’ nimble legislative repair of its previous misstep on the timing of the new non-compete statute means that all’s well that ends well, unless you’re an employer caught in the gap of the effective dates of the two versions of the law.  For Georgia employers, it is now clear that your non-competes must be executed on or after May 11, 2011, in order to take advantage of the more lenient new statute. For more information or help further understanding the changes to Georgia’s non-compete laws, contact a member of Burr & Forman’s Non-Compete and Trade Secrets team.

Weeding through the Legal Uncertainty of Garden Leave

Employers seeking to limit employees from taking customers with them to new jobs should consider including “garden leave” provisions in their form employment agreements, in addition to or in place of the more traditional non-compete and non-solicitation covenants. A garden leave clause requires an employee to provide a certain period of notice to the employer before voluntarily terminating employment (usually 30-60 days) and restricts the employee from competing against his or her employer during the notice period.  During the notice period, the employee is paid full salary and benefits and is usually directed not to report to work during the notice period. Thus, the  “garden leave” term comes from the notion that, at least metaphorically, the employee will stay at home and tend to his garden during the restricted period, while the employer secures relationships with its customers before the employee goes to work for a competitor.

The potential benefit to garden leave clauses is that they are viewed more favorably by Courts from an enforcement standpoint because the employee is still being paid during the restricted period. Because the concept is relatively new in the United States (as opposed to its common use in the United Kingdom), there is not a lot of case law guidance about their enforceability.   As with non-competes, the law controlling these provisions is very jurisdiction-specific.  For example, garden leave provisions have been regularly enforced in New York. See Estee Lauder Co. v. Batra, 430 F. Supp. 2d 158, 182 (S.D.N.Y. 2006) (granting preliminary injunction of five months against employee in charge of developing strategies for certain brands of employer’s skin care products and finding that risk of employee’s “loss of livelihood is entirely mitigated by the fact that [employer] will continue to pay [his] salary of $375,000 per year for the duration of the ‘sitting out’ period”); Ayco Co., L.P. v. Frisch, 795 F. Supp. 2d 193, 197 (N.D.N.Y 2011) (granting preliminary injunction against employee financial advisors and finding that agreement by employees to “give [employer] ninety days notice of termination, during which time they would remain . . . employees and continue to receive their base salary or salary draw, but would no longer participate in [employer's] compensation plan” was enforceable).

The law in the Southeast is significantly less developed.  The last word in Georgia, for instance, came in Carvalho v. Credit Suisse Securities (USA) LLC, 2007 U.S. Dist. LEXIS 80651 (N.D. Ga. October 31, 2007).  Carvalho indicates that courts applying Georgia law may view garden leave provisions less favorably than those applying New York law.  In Carvalho, the Northern District of Georgia considered the enforceability of a garden leave provision, which provided that the employees were entitled to their base salary and benefits during an unspecified notice period.  The court denied a temporary restraining order and preliminary injunction, reasoning that “[t]he income of these employees is substantially higher than their base salary [and] the employer has the ability to significantly reduce their income and prohibit them from working for another employer of any kind during the notice period.”  The Court also expressed doubt as to whether the covenant was enforceable in light of Georgia’s at will employment standard codified at O.C.G.A. § 34-7-1, reasoning that “because the employee may resign at any time, the Court questions whether he can be ordered to continue in his employment, especially under less favorable terms of employment.”

BURR POINT: Employers should consider adding garden leave provisions in addition to or in place of non-compete provisions in employment contracts.

If you would like to add a garden leave provision to your employee agreements, the Burr & Forman team would be happy to assist you. Please contact us at any time.

Results Matter Radio Discussion on Georgia’s New Non-Compete Employment Statute

Results Matter Radio host Lee Kantor sat down last week with State Representative Wendell Willard and Burr & Forman attorney Chip Collins to discuss the ins and outs of Georgia’s new non-compete employment statute.

Although Georgia has only recently enacted a non-compete statute, it’s not from lack of trying. Rep. Willard, the sponsor of the bill that became the new statute, discussed the difficulty that Georgia has faced trying to codify non-compete standards. Georgia first passed a non-compete statute in 1989, only to have it ruled unconstitutional by the Georgia Supreme Court shortly thereafter.   The state legislature passed another non-compete statute in 2009, which was supposed to become effective upon a majority referendum vote in November 2010 for a constitutional change that would authorize the new statute.   Following the approval of the referendum, however, Collins raised with Rep. Willard some technical concerns that he and other practitioners had with the new statute that potentially exposed it to a legal challenge.  As a result of those concerns, Rep. Willard sponsored what was essentially a re-passage of the statute in the 2011 legislative session, and Gov. Deal signed it into effect on May 11, 2011.  The new statute is codified at OCGA § 13-8-50 and applies to all non-compete agreements signed after May 11, 2011.

Collins and Willard agreed that the new statute dramatically shifts the legal landscape of Georgia’s non-compete law in favor of employers, with perhaps the biggest impact being a Court’s ability under the new statute to “blue-pencil”, or modify,  an overbroad agreement. Under the pre-statute rules, non-compete agreements were often deemed unenforceable by trial courts for being overbroad in scope—either in terms of duration, territory, or restricted activities. Now, however, almost any non-compete is potentially enforceable, at least to a degree deemed reasonable by the court tasked with enforcing it.

As reassuring as the effects of Georgia’s new non-compete law may be for employers, Collins and Rep. Willard give a strong warning to employers that this new statute only applies to non-compete agreements signed after May 11, 2011; the old pro-employee rules still apply to any agreements that pre-date the statute. Thus, if you are an employer who has not had a new agreement drafted and executed by your employees in the last year, they urge you to do so as soon as possible.

For more details, listen to Georgia State Representative Wendell Williard’s and Burr & Forman attorney Chip Collins Jr.’s full broadcast on Results Matter here.

Wendell Willard, State Representative 49th District Georgia House of Representatives, is the co-sponsor of Georgia’s new non-compete employment statute that became effective last year and drastically changed the legal landscape for non-competes. Read more about the Georgia House of Representatives

William (Chip) Collins, Jr. is the attorney who heads Burr and Forman’s new non-compete and trade secrets group. He continues to successfully help businesses of all types prevent unfair competition. Read more about Chip and his experience on the Burr & Forman site.

Burr & Forman LLP’s Results Matter Radio brings you pertinent business information and real life solutions to help drive desired results for you – whatever your business may be. Please join us right here every Tuesday 10:00 am Eastern for our LIVE Broadcast, and CLICK HERE to listen to our Archived Shows anytime.

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Early Court Opinions Construing Georgia’s New Non-Compete Statute Confirm Need For Employers to Have Employees Execute New Agreements

As previously reported by this commentator and others, Georgia enacted a new non-compete statute (O.C.G.A. §13-8-50 et seq.), effective May 11, 2011, which drastically alters non-compete agreements in Georgia.  Georgia was previously one of the most difficult states in which to enforce a non-compete agreement, but overnight, Georgia law and public policy changed to become more favorable to employers. The most significant deviation from the prior law is that courts are now allowed to judicially modify (“blue-pencil”) non-compete agreements that are deemed to be overbroad. Before this change, Georgia court had no choice but to rule as void any non-compete that did not meet Georgia’s strict drafting requirements.  Thus, under the new statute, any agreement is potentially enforceable to some degree.  The one catch with the statute is that it only applies to non-compete agreements executed on or after the effective date.

While the new statute was favorably received by Georgia employers, it immediately raised at least two questions for attorneys practicing in the non-compete arena: (1) How would judges use their new found blue-pencil powers for agreements they deemed to be overbroad? and (2) Would courts give any deference to Georgia’s new pro non-compete public policy in interpreting and enforcing non-compete agreements that pre-date the effective date of the statute, even though technically it’s not applicable to those agreements? Eight months into life under the new statute, those questions are starting to get answered, as evidenced by two opinions by Judge Story of the United States District Court for the Northern District of Georgia.

Judge Story’s ruling on a motion for preliminary injunction in Pointenorth Insurance Company v. Zander (2011 U.S. Dist. LEXIS 11341) provides the first published opinion wherein a court applied the new statute and used the judicial “blue pencil” to modify and then enforce a no-compete agreement.  In this case, the plaintiff-employer sued a former employee to enforce a customer non-solicitation covenant contained in an employment agreement dated May 11, 2011 (the effective date of Georgia’s new non-compete statute).  Judge Story found the non-solicit provision to be overbroad because it purported to forbid the employee from soliciting “any of the Employer’s clients”, as opposed to just those with whom the customer interacted.  In exercising the powers granted under the new statute, however, the court modified the non-solicit provision to apply only to customers that the former employee “contacted and assisted” while employed with the plaintiff and granted the requested injunction in accordance with the blue-penciled terms of the agreement.

Another ruling by Judge Story, however, highlights the answer (in the negative) to the question of whether the new public policy would have any effect on non-compete agreements pre-dating effective date of the new statute.  In Boone v. Corestaff Support Services, Inc. (2011 U.S. Dist. LEXIS 85454 (N.D.Ga. 2011)), the court reconsidered a previous decision and held that Georgia’s new non-compete statute, and the employer-friendly public policy it embodies, cannot apply in any way in interpreting and enforcing a non-compete executed prior to the statute. For the agreements drafted prior to the statute, the more-strict prior rules apply, regardless of whether the outcome may be vastly different than if the new statue applied.  In so holding, Judge Story followed the decision of the Georgia Court of Appeals in Bunker Hill Int’l, Ltd. v. Nationsbuilder Ins. Servs, Inc., (309 Ga. App. 503, 710 S.E. 2d. 662 (2011)).  This same conclusion has subsequently been reached by other Federal District Court judges and appellate panels in the state.  See Fantastic Sams Salons Corp. v. Maxie Enterprises, Inc., (2012 U.S. Dist. LEXIS 8106 (N.D.Ga. 2012)); Hix v. Aon Risk Servs. South, Inc., (2011 U.S. Dist. LEXIS 134569 (N.D. Ga. 2011)); Murphree v. Yancey Bros. Co. (311 Ga. App. 744, 716 S.E. 2d. 824 (2011)).

BURR POINTThe early indication is that courts in Georgia are readily willing to use their new statutory power to judicially modify overbroad non-compete agreements, but only for those agreements executed on or after the effective date of the statute (May 11, 2011).  Any older agreements will still be reviewed under the previous statutes with no help from the newly declared pro non-compete public policy.  Accordingly, Georgia employers should consult an attorney to assist them in having employees under non-compete agreements predating May 11, 2011, execute new agreements.