Welcome to the first edition of Noncompete News, a monthly newsletter dedicated to restrictive covenant and trade secret issues. Restrictive covenants are agreements between an employer and employee (or between partners or between the seller and purchaser of a business) that restrict the employees’ (or partner’s or business owner’s) ability to do certain things after the relationship ends (such as compete, solicit customers and/or employees, or use company information). As this author practices law in Georgia, and Georgia restrictive covenant law is unique among the states, the first issues of Noncompete News will focus on Georgia restrictive covenant topics.
A brief overview of Georgia restrictive covenant law is necessary before springing into our first topic (a nonsolicitation of customers provision). As a general proposition, after employment ends, absent an agreement containing enforceable “restrictive covenants,” there are few restrictions on an employee’s ability to compete directly with his or her former employer or solicit his or her former employer’s clients or employees. Georgia is one of the strictest states in the country in terms of how narrowly a restrictive covenant must be drafted to be enforceable in an employer-employee relationship.
A Georgia employer often can be overhead lamenting how difficult it is to enforce restrictive covenants in Georgia. Yet, Georgia law is unusual in that the determination of whether a particular covenant is enforceable can be made – more often than not – by reviewing the agreement on its face instead of delving into the facts behind the agreement. This is because Georgia courts will not “blue-pencil” (which is to say modify or rewrite) restrictive covenants in the employer-employee context. In so refusing, Georgia courts actually have developed fairly bright guidelines for drafters of Georgia restrictive covenants. Accordingly, if drafted appropriately on the front-end, restrictive covenants have a better chance of being enforced in Georgia than in other states, regardless of whether the employee violating the covenant is a janitor or a C.E.O.
Types of Covenants and Levels of Scrutiny
There are four types of restrictive covenants in Georgia: (1) a noncompete; (2) a nonsolicitation of customers; (3) a nonsolicitation of employees; and (4) a nondisclosure. The first step in reviewing or drafting an agreement is to determine the proper level of scrutiny a court will apply to the restrictive covenant. Georgia courts have three levels of scrutiny – strict, middle, and low-level – based on the relative bargaining power between the parties.
The majority of agreements will be considered ancillary to an employment agreement and, thus, be given the strictest level of scrutiny, i.e., they must be the most narrowly drafted and will be the hardest to uphold. Generally, restrictive covenants ancillary to professional partnership agreements – whether formed as a partnership or P.C. or LLC – are viewed with a middle level of scrutiny. This is because partners hold relatively equal bargaining positions and, normally, restrictive covenants in professional partnership agreements are mutually advantageous to all signatories, and the consideration flows equally among the contracting parties. While not fully fleshed out, it appears that a court applying middle level scrutiny may “blue-pencil” an overbroad provision, but only to “mark” out an overbroad provision and not to rewrite the covenant.
Finally, low level scrutiny a/k/a “sale of business” covenants, are those covenants ancillary to the sale of business. Georgia courts reason that, in the context of a “sale of business,” both parties have relatively equal bargaining power and, accordingly, courts are more willing to modify and enforce restrictive covenants in this context. In other words, a covenant that would be unenforceable against a former employee may be blue-penciled and enforced as modified where the covenant is given by an individual in his capacity as a seller of a business. Be careful, however, as many covenants entered into as part of the acquisition of a business will receive strict scrutiny rather than low level scrutiny, particularly where the seller continues to work for the buying company and the restrictive covenants are not triggered until after the seller/employee terminates his/her employment with the buying company.
In this month’s article, we will focus on a nonsolicitation of customers provision ancillary to an agreement between an employer and employee.
A Recent Georgia Court of Appeals Nonsolicit Decision
A few months ago, the Georgia Court of Appeals addressed a nonsolicitation of customers provision between a company and its former owner. In that case, a former owner of an insurance agency (“Mr. H”) sold his agency to another company, and then agreed to continue working for the company. As part of the sale, Mr. H entered into two agreements: one in which he agreed to not solicit or accept business from his former customers for a period of five years from the sale date in return for the company’s purchase of Mr. H’s business; and the other an agreement not to solicit or accept business from the company’s customers for a period of time after his employment ended with the company.
A little over five years after entering into the agreements, Mr. H resigned from the company and began working with a competitor of the company. When Mr. H started soliciting the company’s customers, the company filed a suit against Mr. H. At issue was the agreement prohibiting Mr. H from soliciting or accepting business from the company’s customers for a period of time after his employment ended (the “sale of business” agreement expired because five years had elapsed since the sale date).
The Court of Appeals first determined what level of scrutiny it would apply to the agreement. It held that it would apply “strict scrutiny,” meaning that the agreement was an employment contract (one between an employer and employee). Because the court applied strict scrutiny, the agreement could not be “blue-penciled.” Next, the court turned to the language of the nonsolicitation provision:
Employee covenants and agrees that, in the event of termination of his employment, whether voluntary or involuntary, he shall not . . . during the Restricted Period contact or solicit or accept an entreaty from, a Known Customer for the purpose of providing Prohibited Services to such a Known Customer.
The Court focused on the language prohibiting Mr. H from accepting business from his customers. Relying on express Georgia law, the Court held that the provision was overbroad and unenforceable. Why? Because in Georgia, an employer cannot prohibit an employee from accepting or receiving business from its customers, at least in a nonsolicitation provision. Any nonsolicitation of customers provision in Georgia that restricts an employee from accepting unsolicited business from his former customers is automatically unenforceable in Georgia.
There are other guidelines that Georgia courts have put in place to determine whether a nonsolicitation of customers agreement between an employer and employee is enforceable. But we save those tidbits for another day. In the meantime, we look forward to bringing you our next edition of Noncompete News!
Jeff Mokotoff, Partner, Ford & Harrison LLP
Editor-in-Chief, Noncompete News