In May 2011, Georgia’s Restrictive Covenant Act (OCGA 13-8-50 et seq.) (“RCA”) became effective and applied to all agreements executed on or after May 11, 2011. In 2020, the Georgia State-wide Business Court (“Business Court”) began hearing cases that included, among others, restrictive covenants. On March 5, 2021, the Business Court, in Martin v. Hauser, Inc., issued its decision on a 2014 restrictive covenant agreement that contained non-solicit of customers and non-recruitment of employees provisions. Hauser is an insurance and benefits brokerage company. Martin worked for Hauser in Georgia, initially (when he executed the agreement) as a Team Leader and ultimately as an Executive Vice President and Managing Director of Hauser’s Risk Advisory Practice (where he was the third-highest ranking member of the company). Ultimately, Martin decided to leave and filed a declaratory judgment, asking the court to declare the non-solicit provisions of the agreement unenforceable.
As drafted, the agreement prevented Martin, for a three-year period post-employment, from soliciting any of Hauser’s customers who were Hauser customers during the last 18 months of his employment with Hauser to switch or move their insurance or other business to another company. The Business Court held that the non-solicit of customers was unenforceable but determined that it would modify the provision to render it enforceable. It recognized that, first, under OCGA 13-8-57(b) of the Act, any restraint more than two years is presumed to be unreasonable. Applying the “modification” provision of the Act, however, the court modified the time restriction to a one-year post-employment restriction. It also used its modification powers and OCGA 13-8-53(b) to narrow the restriction to only those customers with which Martin had material contact. Finally, it narrowed the non-solicit to apply only to current customers (i.e., those customers that were Hauser customers at the time of Martin’s termination), rather than former customers who may not have been existing customers of Hauser at the time of his termination.
As to the non-recruitment of employees provision, the court referenced the Belt Power court’s holding that the Act applies to these provisions. The provision at issue prevented Martin, for a three-year period post-employment period, from, in any manner whatsoever, inducing any employee or other agent to terminate his association with such entity or in any manner interfere with the relationship between Hauser and the employee. However, the Business Court refused to modify the non-recruitment provision, holding that it would have to “install new and material terms” – e.g., a territorial restriction, a definition or clarification for the term “interfere” in the restriction and a limitation as to which employees he could not solicit. Based on these “opaque” descriptions, the Business Court concluded it was not salvageable and, accordingly, held it unenforceable.
This decision underscores the uncertainty in Georgia restrictive covenant litigation, both with regard to what a court may do in modifying an otherwise overbroad non-compete and, further, the determination (after Belt Power) by at least this court that a non-recruitment provision is subject to the Act (as there is no provision in the Act which expressly relates to a non-recruitment provision). As more practitioners bring restrictive covenant cases to Georgia courts, we are seeing some unique developments in this area of the law.
Also note that, on May 13, 2021, the Supreme Court of Georgia approved new rules governing the Business Court. The new rules become effective August 1, 2021. Before adopting the Business Court's new rules, the Business Court could hear cases only if both parties consented. As of August 1st, the consent requirement no longer applies. Under the new rules, a plaintiff can now file suit in the Business Court even if the defendant does not consent. However, defendants can object to the action proceeding in the Business Court by filing an "objection to jurisdiction." Additionally, the parties may agree to a forum selection provision in an agreement (e.g., a restrictive covenant agreement) mandating the Business Court as the forum for resolving disputes.
Jeff Mokotoff is Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group. If you have any questions regarding this decision, please feel free to contact Jeff at jmokotoff@fordharrison.com, or the FordHarrison attorney with whom you usually work.
Ford & Harrison will be conducting a webinar on new developments in Georgia and North Carolina non-compete laws. If you have not signed up to receive our webinar invitations and would like to do so, please click here.