Georgia’s Pro-Employee Restrictive Covenant Law Is Back (If Only Briefly)
Just when it seemed safe for companies with employees in Georgia to try to enforce their restrictive covenant agreements, the Eleventh Circuit has brought back to life – if only for one last hurrah – the old Georgia law that made non-competition and other restrictive covenant agreements virtually impossible to enforce. The Court did so in Becham, et al. v. Synthes USA, et al., No. 11-14495, 2012 U.S. App. LEXIS 11225 (11th Cir. June 4, 2012), by holding that Georgia’s first attempt to re-write the State’s non-competition law was unconstitutional and that the second attempt did not apply to the agreement at issue.
The backdrop, well known to those who practice in Georgia, is a frustrating one for employers who have attempted to enforce restrictive covenant agreements. For years, Georgia statutory and constitutional law disfavored non-competition and other restrictive covenants and, through a very narrow view of what is reasonable and a refusal to reform overly broad agreements, made them nearly impossible to enforce. This changed beginning in 2009 when the Georgia legislature approved a law allowing the enforcement of previously unenforceable covenants, by, among other things, creating presumptively reasonable time periods for restrictions, removing the requirement of an expiration date for certain confidentiality covenants, and, perhaps most importantly, giving Georgia courts the ability to reform overly broad agreements. The law was subject to a constitutional amendment permitting the change, which occurred on November 2, 2010 through Georgia’s citizens’ ratification of the amendment.
The confusion then began. The new law went into effect on November 3, 2010, the day after the constitutional amendment was ratified. The constitutional amendment, however, did not take effect until January 1, 2011. Fortunately, the Georgia General Assembly recognized the gap and passed a second law that repealed the first law and authorized a second, virtually identical law effective May 11, 2011. Problem solved, right?
Not so fast. Unfortunately for Synthes, the restrictive covenants at issue were reaffirmed on December 1, 2010, after the effective date of the first law, but before the effective date of the second law. The Eleventh Circuit thus focused on the first law and held that, because the law was implemented before the constitutional amendment went into effect, it “was unconstitutional and void the moment it went into effect.” The Court then went back to “old” Georgia law, and like so many agreements before it, found Mr. Becham’s restrictive covenant agreement unenforceable.
Although the result was an unfortunate one for Synthes, the impact can be managed going forward by making note of the critical May 11, 2011 date. Restrictive covenant agreements entered into on or after May 11, 2011 will be subject to the second new law, and hence subject to more favorable court review. Agreements entered into prior to that date, even if after the November 2, 2010 constitutional amendment, will be judged under “old,” pro-employee Georgia law. Employers of Georgia employees will therefore want to make sure that their restrictive covenant agreements are effective on or after May 11, 2011 and, where they are not, arrange for the execution of new agreements.