Executive Summary: The Eleventh Circuit recently addressed one of the most confusing questions surrounding Georgia's new Restrictive Covenant Act (RCA): did the law become effective on November 3, 2010, as the General Assembly intended, or did it become effective May 11, 2011, when the legislature reenacted the statute? In answer to this question, the Eleventh Circuit held unequivocally that the new law did not become effective until May 11, 2011. Accordingly, Georgia's pre-existing law governing restrictive covenants applies to all non-compete agreements signed during the "gap period" between November 3, 2010 and May 11, 2011.
Background: The Questionable Constitutionality of the Restrictive Covenant Statute
The long, convoluted history of the RCA started on November 2, 2010, when Georgia voters voted "yes" to the following question: "Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?" This amendment was designed to give the General Assembly the power to authorize restrictive covenants, which was previously forbidden under the Georgia Constitution. However, the legislature failed to include an effective date for this amendment. As such, pursuant to the Georgia Constitution, the amendment became effective on the first day of the following year, or January 1, 2011.
The lack of an effective date would not have created any constitutional issues had the General Assembly simply waited until January 1, 2011 to pass the RCA. However, the legislature, anticipating that voters would approve the amendment, passed the RCA (House Bill 173) prior to the passage of the constitutional amendment. Specifically, House Bill 173 stated that it would become effective on November 3, 2010, approximately two months prior to the effective date of the amendment. Moreover, House Bill 173 represented a sea change in how Georgia restrictive covenants are drafted and enforced, due in large part to the fact that the Act permits courts to reform ("blue pencil") overly broad restrictive covenants.
Immediately after this legislative victory, however, the validity of the new law was called into question over concerns related to the effective date of the amendment. Specifically, many in the legal community speculated that because the legislature passed the RCA prior to the enactment of the constitutional amendment on January 1, 2011, there was a strong likelihood that House Bill 173 was unconstitutional.
In an attempt to remove any uncertainty, the General Assembly re-enacted the RCA in January 2011 by introducing House Bill 30, in order to eliminate any potential constitutional challenge. On April 21, 2011, House Bill 30 was sent to Governor Nathan Deal, who signed the legislation on May 11, 2011. Accordingly, while the General Assembly has cured any doubts as to enforceability of the RCA with regard to non-competes signed after May 11, 2011, the passage of House Bill 30 failed to address lingering concerns regarding the enforceability of "gap period" non-compete agreements signed between November 3, 2010 and May 11, 2011.
Eleventh Circuit Holds That RCA Is Not Effective Until May 11, 2011
In June 2012, the Eleventh Circuit held that House Bill 173 is indeed unconstitutional, meaning that the RCA cannot apply to non-competes signed prior to May 11, 2011
In a per curiam opinion, the Eleventh Circuit held that House Bill 173 was unconstitutional from the moment that it went into effect. Specifically, the Eleventh Circuit held that when House Bill 173 was passed on November 3, 2010, the Georgia Constitution still prohibited the General Assembly from enacting legislation authorizing the enforcement of restrictive covenants. Consequently, House Bill 173 was unconstitutional from its inception and was only "revived" when the General Assembly reenacted the legislation as House Bill 30 on May 11, 2011. In an opinion that is likely to foreshadow the future outcome of many other "gap period" non-compete agreements, the Eleventh Circuit went on to hold that the plaintiff's restrictive covenants were unenforceable under Georgia's pre-amendment case law.
Employers' Bottom Line
Although it is important to note that the Eleventh Circuit's decision will not be binding on Georgia state courts, these courts are likely to adopt the Eleventh Circuit's holding given the strength of the Court's reasoning. Accordingly, Georgia's RCA will not apply to non-compete agreements signed prior to May 11, 2011. Instead, Georgia courts likely will apply the state's pre-amendment common law to any such agreements.
Consequently, employers with any restrictive covenant agreements that have an effective date prior to May 11, 2011 should consider replacing these agreements to comply with the RCA.
If you have any questions regarding the Georgia RCA or restrictive covenants in general, please contact the FordHarrison attorney with whom you usually work or the authors of this Noncompete News article, Cullen Stafford, cstafford@fordharrison.com or Jeff Mokotoff, jmokotoff@fordharrison.com, who is also the editor of the Noncompete News.