The Georgia State-wide Business Court (the “Business Court”) recently clarified several important issues related to restrictive covenants. These clarifications offer words of caution to employers.
- History of the Georgia Restrictive Covenants Act
In 2011, Governor Nathan Deal signed into law the Georgia Restrictive Covenants Act, as codified in O.C.G.A. § 13-8-50, et seq (the “Act”). The Act was created to bolster Georgia’s business climate by providing clarity on what was historically a murky and ever-changing body of law. As such, the Act changed the restrictive covenants landscape for restrictive covenants entered into after the Act’s effective date of May 11, 2011. Before the Act, restrictive covenants were governed by judicial precedent rather than statute. Key provisions of the Act include (1) allowing for judicial modification (known as “blue-penciling”) of an otherwise unenforceable restrictive covenant to make it enforceable; (2) providing for the separate analyses and enforcement of non-solicitation covenants and non-compete covenants; and (3) enhancing the enforceability of non-disclosure covenants by defining “confidential information” and eliminating the need for a time limit as to non-trade secret confidential information.
Though the Act clarified many issues with respect to restrictive covenants, it also left other issues unanswered. Georgia courts have attempted to clarify some of these issues, but relatively few cases have arisen under the Act to allow the courts the opportunity to do so. Recently, however, the Business Court provided some additional clarity and cautions, as discussed below.
- History of the Georgia State-Wide Business Court
The Business Court is a recent development in Georgia. Georgia voters authorized the creation of the Business Court in a 2018 referendum, and the Georgia General Assembly adopted enabling legislation creating the Business Court in the 2019 legislative session. After approximately 18 months of preparation, the Business Court commenced operations in August 2020. The Business Court was created to provide focused judicial expertise to complex business issues and to foster more efficient resolution of those business issues, including restrictive covenants in employment agreements.
- Background of the Hauser Case
In Cameron Martin v. Hauser, Inc., Case No. 20-GSBC-0008, March 5, 2021 (“Hauser”), the plaintiff (the “Former Employee”) was a former executive of the defendant, Hauser Inc. (the “Company”). While working for the Company, the Former Employee regularly interacted with company leadership, developed close relationships with clients of the Company, obtained valuable non-public information about the Company’s clients, and was integrally involved in the overall strategy for business development and in increasing revenue for the Company.
The Former Employee left the Company and joined a competitor. Before he left the Company, the Former Employee solicited two colleagues to also leave and join the same competitor. Further, multiple clients of the Company terminated their relationships with the Company and followed the Former Employee to the competitor. The Company sent the Former Employee a cease-and-desist letter reminding him of his post-employment restrictive covenants under his 2014 employment agreement with the Company. The employment agreement contained several covenants restricting the Former Employee’s post-employment actions, including a customer non-solicitation covenant, an employee non-recruitment covenant and a non-interference covenant. The Company used the same employment agreement for all full-time employees, regardless of an employee’s location, role or access to confidential information, and had done so for more than a decade.
The Former Employee moved for a declaratory judgment in the Business Court, seeking to establish that the restrictive covenants in his employment agreement were unenforceable under the Act.
- Key Holdings of the Hauser Case
- Blue Penciling Powers Clarified
Before the Act, courts did not have the ability to modify unenforceable restrictive covenants. As a result, if a court found that a restrictive covenant was unenforceable, the entire covenant was simply stricken from the agreement. The Act grants courts discretionary power to modify otherwise unenforceable restrictive covenants to make them enforceable, often referred to as “blue penciling” powers. After the Act was enacted and up until Hauser, courts were willing only to strike out unenforceable constraints within restrictive covenants. However, the Business Court in Hauser went a step further and exercised its blue penciling power, modifying the terms of the restrictive covenant to comply with the Act.
The Act provides that, to be enforceable, all restrictive covenants must be reasonable as to time, territory and scope. As to time, the Act presumes that, with respect to a post-employment restrictive covenant, a duration of two years or less is reasonable, and any duration longer than two years is presumed unreasonable. Any employer seeking to enforce a restrictive covenant longer than the presumed reasonable duration must prove sufficient legitimate business interests to rebut the presumption.
In Hauser, the non-solicitation covenant had a post-employment duration of three years. The Company argued that it had sufficient legitimate business interests to justify the three-year duration as (i) the Company had made significant investments in time and money in the Former Employee during his six years with the Company, (ii) the Former Employee gained valuable insights into, and had unique access to information concerning, the Company’s customers, and (iii) the Former Employee had a deep knowledge of the Company’s unique business strategies. While the Business Court did not analyze why the Company’s business interests were or were not sufficient, it emphasized that the Company had no specific reason for putting a three-year duration in the employment agreement and that it used the same duration for all its employment agreements, regardless of an employee’s title, geographic location, contact with customers, or access to sensitive company information. The Company’s failure to narrowly tailor the restrictive covenants to the Former Employee appeared to offset, in the Business Court’s eyes, the Company’s legitimate business interest in the three-year duration. As a result, the Business Court held that the Company did not have sufficient business interests to justify the three-year duration. However, the Business Court recognized that the Company did have some legitimate business interests, and that the parties originally intended to agree to a duration, and ultimately used its blue penciling power to reduce the three-year duration to one year. Notably, the Business Court reduced the duration of the customer non-solicitation covenant below the two-year presumption of reasonableness provided in the Act.
The Hauser case represents the first time a Georgia court has gone beyond striking out unenforceable constraints within a restrictive covenant by modifying the terms instead. The Business Court’s holding emphasizes the need for employers to thoroughly describe an employer’s business interests in any restrictive covenant agreement as well as to narrowly tailor any restrictive covenants not only to the Act but also to the individual employee’s role, location, level and type of contact with customers, access to customer information and other circumstances. One-size-fits-all restrictive covenants appear to be disfavored and may need to be reviewed by employers.
- Employee Non-Recruitment and Non-Interference Covenants are Subject to the Act; A Word of Caution
The Act explicitly addresses three types of restrictive covenants: (i) covenants that restrict competition, (ii) non-solicitation covenants and (iii) non-disclosure covenants. Until Hauser, courts had not addressed whether employee non-recruitment and non-interference covenants were subject to the Act. Importantly, the Business Court in Hauser concluded that employee non-recruitment and non-interference covenants are indeed subject to the Act because each type of covenant ultimately restricts competition. As a result, the Business Court concluded that employee non-recruitment and non-interference covenants needed to be reasonable as to time, territory and scope to be enforceable.
The Business Court analyzed each of the time, territory and scope factors separately and ultimately concluded that the employee non-recruitment and non-interference covenants at issue in the Hauser case were too broad and burdensome to be enforceable. However, instead of using its discretionary blue-pencilling power to modify the non-recruitment and non-interference covenants as it did with the customer non-solicitation covenant, the Business Court declined to modify them and instead struck them entirely. The Business Court stated that “the covenants were not the byproduct of a deliberate and thoughtful drafting process targeted at protecting the Company’s interests, while considering the specific requirements of [Georgia’s] laws. Rather … these covenants are boilerplate restrictions imposed on virtually every [Company] employee across the country and have gone unchanged for more than a decade. To repair the deficiencies of [the covenants] would require the Court to rewrite the covenants, almost entirely, and to pretend that the parties actually ‘intended’ this language to mean anything at all.” Ultimately, the Business Court concluded that it would need to rewrite the covenants to make them enforceable, which it refused to do.
In respect of the non-recruitment and non-interference covenants, the Hauser case is an example of the Business Court refusing to use its discretionary blue-pencilling powers to modify the language in restrictive covenants to make them enforceable, even though it exercised those powers to modify a customer non-solicitation covenant in the same case. Despite the divergence in the Business Court’s willingness to exercise its blue-pencilling power with respect to those covenants, the court consistently criticized standardized, non-tailored, one-size-fits-all restrictive covenant provisions and cited them as the basis for the Business Court’s decisions that, in the end, were unfavorable to the employer. Accordingly, the Hauser case should be seen as a caution for employers to narrowly tailor restrictive covenants to the Act and the circumstances of the individual employee and not to rely on boilerplate restrictive covenants.
- Key Takeaways for Employers
- Most importantly, the Hauser case cautions employers not to rely on boilerplate restrictive covenants but, instead, to narrowly tailor restrictive covenants to the Act and the circumstances of the individual employee or risk that the restrictive covenants may be significantly modified or stricken entirely.
- The Hauser case makes clear that the Business Court is willing to exercise its blue-pencilling power to modify unenforceable restrictive covenants, and it provides clues as to when the court will and won’t do so.
- The Hauser case clarifies that employee non-recruitment and non-interference covenants are indeed subject to the Act and, therefore, should be narrowly tailored to comply with the Act and the circumstances of the individual employee who is a party to the covenants.
- Restrictive covenants entered into prior to May 11, 2011, are still governed by judicial precedent, or “common law.” ↑
- Before the enactment of the Act, if a restrictive covenant was found to be unenforceable, the courts had no power to modify, or blue-pencil, the restrictive covenant at issue and instead invalidated the entire covenant. ↑