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.

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.