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.