Impact on Technology Companies/Entrepreneurs (part one)

A Community Guest post by John Yates and Jason D'Cruz, Morris, Manning & Martin, LLP

The Georgia legislature has approved a proposed constitutional amendment to give effect to House Bill 173 (the “Georgia Restrictive Covenant Act”), which will dramatically change the law in Georgia with regard to the enforceability of restrictive covenants in employment agreements.

This is a two part series addressing important questions for technology companies and entrepreneurs in Georgia (and any company with employees in our state).   In this Part 1, we address general questions relating to the impact of the law.  In Part 2, we’ll look at specific sections of the Act and practical pointers for drafting restrictive covenants in employment agreements.

When does the Georgia Restrictive Covenant Act become law in Georgia?

Answer: Not until voters approve the constitutional amendment on the ballot in Georgia for the November 2^nd election.

What is the wording of the amendment that Georgia voters will be asked to approve or reject?

Answer:  Georgia voters will be asked this question: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?”  The actual text of the proposed amendment revises Article III, Section VI, Paragraph V of the Constitution as follows:

"(c)(1) The General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, or encouraging a monopoly, which are is hereby declared to be unlawful and void. Except as otherwise provided in subparagraph (c)(2) of this paragraph, the General Assembly shall not have the power to authorize any contract or agreement which may have the effect of or which is intended to have the effect of defeating or lessening competition, which is hereby declared to be unlawful and void.

(2) The General Assembly shall have the power to authorize and provide by general law for judicial enforcement of contracts or agreements restricting or regulating competitive activities between or among:

(A) Employers and employees;

(B) Distributors and manufacturers;

(C) Lessors and lessees;

(D) Partnerships and partners;

(E) Franchisors and franchisees;

(F) Sellers and purchasers of a business or commercial enterprise; or

(G) Two or more employers.

(3) The authority granted to the General Assembly in subparagraph (c)(2) of this paragraph shall include the authority to grant to courts by general law the power to limit the duration, geographic area, and scope of prohibited activities provided in a contract or agreement restricting or regulating competitive activities to render such contract or agreement reasonable under the circumstances for which it was made."

What’s the impact of the proposed amendment?

Answer:  If a majority of the Georgia voters vote “yes” on November 2^nd, then legislation signed by Governor Perdue on April 29, 2009 that vastly broadens the permissible scope of contractual restrictions on competitive activity will become effective immediately.

What’s the current state of the law relating to non-compete provisions and restrictive covenants in Georgia?

Answer:  Currently, Georgia courts enforce restrictive covenants on a case-by-case basis, without statutory standards for determining enforceability.  In the employment context, Georgia Courts strictly scrutinize such covenants, which must be narrowly crafted to be enforceable, and have refused to permit “blue penciling” (editing by the court). 

What’s the impact under current law if a restrictive covenant in an employment agreement is held to be unenforceable; does it impact other provisions?

Answer:  Even a minor flaw in a restrictive covenant can render the entire covenant unenforceable.  Moreover, if one covenant is unenforceable, it can prevent enforcement of other covenants in the same agreement that might otherwise be enforceable.  Current case law therefore makes drafting enforceable employment covenants particularly challenging for Georgia businesses.

Generally, how would the Georgia Restrictive Covenant Act change the current law in Georgia relating to restrictive covenants?

Answer:  The new law would grant Georgia courts the power to “blue pencil” (i.e. edit) restrictive covenants, “as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties.”  The law also defines common terms, which definitions appear to expand the permissible scope of certain covenants. 

What’s an example of how the new law could broaden the scope of  enforceable covenants?

Answer:  For example, a customer non-solicitation covenant limited to those customers with whom the employee had “material contact” would apply not only to those customers or potential customers with whom the employee dealt, but also to those “about whom the employee obtained confidential information in the ordinary course of business as a result of such employee’s association with the employer.” 

In addition, non-solicitation covenants could permissibly restrict a former employee from merely accepting business from customers.  Current case law prohibits such restrictions. 

Under current law, time limits on the length of restrictive covenants must be very limited and there is no uniform standard; how is this altered by the Georgia Restrictive Covenant Act?

Answer:  The Act sets presumptively reasonable time limits, allowing for enforcement against former employees for up to two years; against a distributor, dealer, franchisee, lessee of property, or licensee of a trademark for up to three years; and against the seller of a business for up to the longer of (a) five years, or (b) the time during which purchase payments are being made to the seller. 

What is a main policy reason for enacting the new Georgia Restrictive Covenant Act?

Answer:  The new law’s drafters believe that establishing standards for restrictive covenants will make it easier for businesses to draft enforceable covenants that can survive a court challenge, resulting in fewer restrictive covenants lawsuits. 

What is the downside of passing the Georgia Restrictive Covenant Act?

Answer:  Critics warn that the law will make it more difficult for Georgia businesses to recruit desired talent, and litigation — although perhaps less frequent — may prove much more costly because the dispute will focus on fact intensive issues such as the actual services performed by the employee, the geographic territory within which the services were provided, and whether and to what extent the former employer actually competes with the new employer.  Under current law, the dispute usually focuses on the language of the covenant itself.

Does the Georgia Restrictive Covenant Act apply only to new contracts (as opposed to agreements that are already in effect)?

Answer:  Yes.  The new law would apply to those agreements entered into on or after the law’s effective date; existing agreements would still be interpreted and enforced under current case law.  Given the dramatic change in the permissible scope of covenants under the new law, and the greater ease with which such covenants may be enforced, employers will likely be preparing to implement new contracts with employees that are designed to extract maximum benefit from the changes. 

PART 2 will address key questions relating to specific sections of the Georgia Restrictive Covenant Act and practical pointers for drafting restrictive covenants in employment agreements.

This article is presented for educational and informational purposes only and is not intended to constitute legal advice.

John Yates, a member of the TAG Board of Directors, chairs the Technology Group ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) and Jason D’Cruz the Employment Group ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) of the law firm of Morris, Manning & Martin, LLP (www.mmmlaw.com).

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written by Melanie Brandt, May 10, 2010

John and Jason, thank you for this comprehensive look at this important new legislation. The Technology Association of Georgia joined TechAmerica and other organizations that include the Georgia, Gwinnett, and Metro Atlanta Chambers in supporting this HB 173 and HR 178. Georgia is one of two states in the nation that contains statutory barriers which strictly prevent judges from enforcing employment agreements that are entered voluntarily by both employer and employee. Without the capability to amend disputed provisions, Georgia’s judges are left with no option but to completely enforce or completely nullify the contract. In the case of the former, valid disputes can be disregarded by a judge who does not want to void the entire contract. In the case of the latter, as these contracts define the protections of both the company as well as the employee, both sides become vulnerable. Companies may be less reluctant to relocate here if they were aware of the issue, and companies who grow here may feel compelled to leave if this proprietary issue was really critical to their efforts. As a member organization comprised of individuals and technology companies of all stages and sizes, TAG is committed to protecting and honoring intellectual property. At the end of the day, we believe the citizens of Georgia should have the opportunity to weigh in, which is what the resolution will provide.

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entrepreneur
written by Russ Wood, May 11, 2010

It is baffling that any organization supporting business growth, such as TAG, or a chamber of commerce, would support this initiative. Employment covenants are a classic example of the tensions between large companies and the small entrepreneur. Georgia is growing much faster than the rest of the country precisely because it lacks many common regulations that favor big business over the entrepreneur. This initiative takes the state in the wrong direction. What's next, more union friendly laws? No thanks.

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HB 173 Will Harm Entrepreneurship in Georgia
written by Michael Cross, August 02, 2010

I'm an attorney who practices in this area, largely on behalf of employers, as well as on behalf of start-up companies. HB 173 is a HORRIBLE idea.

Contrary to what some would argue, Georgia's non-compete and non-solicitation law is pretty clear and well understood by attorneys who regularly practice in this area. Nearly every instance where courts have declared a non-compete or non-solicitation of customers provision to be invalid arises because (i) the employer did not have a Georgia lawyer prepare the document or (ii) the employer did not have ANY lawyer prepare the document.

What's even more frustrating is the currently proposed law will make non-competes MORE confusing, not less. Here's why --

Under current law, if the employer drafts a restriction that is too broad, the court simply invalidates the provision. This is a simple remedy and is similarly applied by judges throughout the 159 counties of Georgia.

Under the proposed law, the court will have to REWRITE the restriction. Think about that. The many judges throughout our 159 counties (and the federal courts located in Georgia as well) will have to REWRITE the restriction. Before, whether the judge was located in Atlanta or Waycross, the remedy was the same. Now, it's possible for a multitude of "re-writings".

It gets even worse if an employer has bad intentions from the start. Suppose for a moment that "John Doe", while working from home on something not related to his job or in any way using employer resources, develops a great idea. Suppose also that the employer previously required John to execute a non-compete precluding him from competing in any way, anywhere in the world, with the employer.

That type of provision is unenforceable under current law, and the court would find the restriction unenforceable. Worst likely case scenario, the employee may have to spend around $10K to prevail.
It's likely the judge will make this decision in response to a motion, and it is unlikely there will even be a trial. (Not a great result, but a manageable one.)

Under the proposed law, however, a frightening set of circumstances could arise. The employer could sue John for violation of the restrictive covenant knowing:
-- The judge will re-write the restriction so that SOMETHING is enforceable;
-- John CANNOT win on a motion; the case will have to go to trial; and
-- John will probably spend $75K or more.

As a result, John's idea will never see the light of day unless John, somehow, is able to take a job for another company, wait for years until the term of his unreasonable non-compete agreement expires, and then hope no one else independently thought of the idea in the interim.

In other words, employers will be motivated to draft the most onerous, unreasonable provisions they can conceive, knowing that SOMETHING will be enforced.

By contrast, under current law, employers are motivated only to protect what they absolutely need to protect.

Do not be misled by the title. This bill is not intended to protect or promote jobs. The intent is to protect large employers (to the detriment of employees and entrepreneurs).

Michael Cross

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Representing Myself
written by Lance Weatherby, October 28, 2010

Like you Melanie I thank Jason and John for the thoughtful articles and all that they and MMM have done for the Georgia technology community. I also believe TAG has accomplished many great things to foster a stronger technology industry in Georgia. If TAG can support of the bill, as a member I also feel that I should be able to say that this support does not represent my best interests and the interests of many entrepreneurs and employees. While worded in a way that is most likely to ensure its passage, I believe the amendment will limit the free flow of labor and hamper the development of new technology startups in the state of Georgia. Thus I do not support the bill.

While I have read the arguments about companies potentially leaving the state or economic development groups not having the ability to attract new companies to the state I am unmoved. The large number of companies that have recently relocated to the state is evidence of the attractiveness of Georgia and the Vice President of Economic Development for Gwinnett Chamber of Commerce publicly stated it was not an issue (http://bit.ly/aXkMEm). No one has mentioned specific companies that have left Georgia due to the state of employee non-competes. It just does not hold water to my thinking.

As ladies, gentlemen, and professionals I trust that we can agree to disagree on this single issue and continue to move things forward where we are aligned.

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written by Melanie Brandt, November 03, 2010

Lance, thanks for your comments and in particular for acknowledging TAG’s ongoing efforts to better the community. Tino mentioned a few of our entrepreneur-focused efforts in response to an email he received about the amendment that passed last night, such as the business launch competition, Venture Atlanta, our partnership with ATDC on CapVenture, the angel tax credit, and the Where Georgia Leads maps which are coming out next week. I would add to that list:

- The implementation of an Economic Gardening project in Savannah which provides free market research and staffing assessments to growing companies in the coastal region
- The passage of law allowing the Firefighters pension to invest in the alternate investment class, setting the stage for what we hope will lead to overall pension reform in this regard
- The creation of a position paper for the Gubernatorial candidates complete with the solicitation, receipt, and publishing of their respective stances on technology-related issues, so that the community could be aware when they cast their ballots
- Our testimony to the special council on tax reform which included special consideration for tax policies that would benefit entrepreneurshi ps (lower thresholds, simpler application processes, etc.)
- An ongoing Atlanta entrepreneur “rockstar” series featuring Atlanta entrepreneurs who have been successful in Georgia telling their stories and the secrets to their success
- Recognition events such as the Georgia Technology Summit which identifies the top 40 most innovative companies in Georgia, designations which companies can then use to solicit funding etc.

As for TAG’s support of HB178: A TAG appointed Government Relations committee voted unanimously to support this bill. I believe they did so because they thought it to be in the best interest of the majority of the 10,000+ TAG members and member companies. When I learned about the controversy I did three things simultaneously: 1) I solicited clarification from a respected legal expert in the technology community who broke down what the amendment was and was not, and posted it months before anyone else I knew at least was talking about this, 2) I made our position public, and 3) I had conversations with successful entrepreneurs, venture capitalists, venture catalysts, additional legal experts, economic developers, and (con'd)

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...
written by Melanie Brandt, November 03, 2010

(con'd) executive search experts to get additional input, so that I could advise Tino accordingly. There were many differing opinions but I would say the general consensus was split down the middle, with some thinking it was a good thing and others not. Tino also solicited additional input directly. In the end we agreed that TAG had made the right decision in our support of this being on the ballot. Perhaps the most compelling thing for me was the conversation I had with a well respected and successful entrepreneur who had been successfully legally challenged as a result of an employment agreement in Georgia, and who now requires his employees to sign them at his new, growing company. The executive recruiter was also compelling, stating that clear employment agreements would make his job much, much easier. But most importantly, again to me, was that there seemed to be logic on both sides and what we were ultimately supporting was the right for Georgians to vote on the issue. And while the debate you have been involved in seemed to focus on the merit of the existence of non competes, I do not see that as the issue – non competes exist in Georgia. What TAG was supporting was the right for a Georgia business and employee to expect the legal contracts they entered into voluntarily would be upheld. Again, that seemed and still seems to be something entirely reasonable for a large technology membership organization to support. Furthermore, the negative consequences of the bill that were being described seemed inconsistent with what we knew to be true in the overwhelming majority of other states who have such protections in place.

As for the negative economic development effects of Georgia’s nebulous abilities to enforce employment agreement: economic development projects are highly confidential and the people made aware of them are done so on a need to know basis. Even with the existence of talented, bulldog business journalists in Atlanta, the general community does not hear about the vast majority of them, particularly the losses. Why would they? But that does not mean they don’t exist. You would also likely not be aware of companies who don’t even consider Georgia in the first place or companies who choose not to have key executives in Georgia, or chose not to expand the mission critical elements of their businesses here (note: I am not claiming to be an expert in this area or someone who is “in the know” – my point is that economic development projects are, in my experience, very well kept secrets, and for good reasons.)

So that’s the long and short of it – TAG wrote a letter of support as a result of a committee’s decision to support the bill, made our support public, explained why we did so, and used our resources to educate the community on the issue very early on. Can we, as ladies, gentlemen, and professionals agree to disagree? Of course. And while it disappoints me to hear that one of our members was unhappy with our position on this, I am heartened to know that you also see this for what it is – one such instance out of many positive things TAG is doing for the technology and technology entrepreneur community.

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0 # RE: Georgia's New Restrictive Covenant Act — melanie 2010-05-10 14:22

John and Jason, thank you for this comprehensive look at this important new legislation. The Technology Association of Georgia joined TechAmerica and other organizations that include the Georgia, Gwinnett, and Metro Atlanta Chambers in supporting this HB 173 and HR 178. Georgia is one of two states in the nation that contains statutory barriers which strictly prevent judges from enforcing employment agreements that are entered voluntarily by both employer and employee. Without the capability to amend disputed provisions, Georgia’s judges are left with no option but to completely enforce or completely nullify the contract. In the case of the former, valid disputes can be disregarded by a judge who does not want to void the entire contract. In the case of the latter, as these contracts define the protections of both the company as well as the employee, both sides become vulnerable. Companies may be reluctant to relocate here if they were aware of the issue, and companies who grow here may feel compelled to leave if this proprietary issue was really critical to their efforts. As a member organization comprised of individuals and technology companies of all stages and sizes, TAG is committed to protecting and honoring intellectual property. At the end of the day, we believe the citizens of Georgia should have the opportunity to weigh in, which is what the resolution will provide.

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0 # COO — melanie 2010-11-03 06:19

Lance, thanks for your comments and in particular for acknowledging TAG’s ongoing efforts to better the community. Tino mentioned a few of our entrepreneur-focused efforts in response to an email he received about the amendment that passed last night, such as the business launch competition, Venture Atlanta, our partnership with ATDC on CapVenture, the angel tax credit, and the Where Georgia Leads maps which are coming out next week. I would add to that list:
- The implementation of an Economic Gardening project in Savannah which provides free market research and staffing assessments to growing companies in the coastal region
- The passage of law allowing the Firefighters pension to invest in the alternate investment class, setting the stage for what we hope will lead to overall pension reform in this regard
- The creation of a position paper for the Gubernatorial candidates complete with the solicitation, receipt, and publishing of their respective stances on technology-related issues, so that the community could be aware when they cast their ballots
- Our testimony to the special council on tax reform which included special consideration for tax policies that would benefit entrepreneurshi ps (lower thresholds, simpler application processes, etc.)
- An ongoing Atlanta entrepreneur “rockstar” series featuring Atlanta entrepreneurs who have been successful in Georgia telling their stories and the secrets to their success
- Recognition events such as the Georgia Technology Summit which identifies the top 40 most innovative companies in Georgia, designations which companies can then use to solicit funding etc.
As for TAG’s support of HB178: A TAG appointed Government Relations committee voted unanimously to support this bill. I believe they did so because they thought it to be in the best interest of the majority of the 10,000+ TAG members and member companies. When I learned about the controversy I did three things simultaneously: 1) I solicited clarification from a respected legal expert in the technology community who broke down what the amendment was and was not, and posted it months before anyone else I knew at least was talking about this, 2) I made our position public, and 3) I had conversations with successful entrepreneurs, venture capitalists, venture catalysts, additional legal experts, economic developers, and executive search experts to get additional input, so that I could advise Tino accordingly. There were many differing opinions but I would say the general consensus was split down the middle, with some thinking it was a good thing and others not. Tino also solicited additional input directly. In the end we agreed that TAG had made the right decision in our support of this being on the ballot. Perhaps the most compelling thing for me was the conversation I had with a well respected and successful entrepreneur who had been successfully legally challenged as a result of an employment agreement in Georgia, and who now requires his employees to sign them at his new, growing company. The executive recruiter was also compelling, stating that clear employment agreements would make his job much, much easier. But most importantly, again to me, was that there seemed to be logic on both sides and what we were ultimately supporting was the right for Georgians to vote on the issue. And while the debate you have been involved in seemed to focus on the merit of the existence of non competes, I do not see that as the issue – non competes exist in Georgia. What TAG was supporting was the right for a Georgia business and employee to expect the legal contracts they entered into voluntarily would be upheld. Again, that seemed and still seems to be something entirely reasonable for a large technology membership organization to support. Furthermore, the negative consequences of the bill that were being described seemed inconsistent with what we knew to be true in the overwhelming majority of other states who have such protections in place.
As for the negative economic development effects of Georgia’s nebulous abilities to enforce employment agreement: economic development projects are highly confidential and the people made aware of them are done so on a need to know basis. Even with the existence of talented, bulldog business journalists in Atlanta, the general community does not hear about the vast majority of them, particularly the losses. Why would they? But that does not mean they don’t exist. You would also likely not be aware of companies who don’t even consider Georgia in the first place or companies who choose not to have key executives in Georgia, or chose not to expand the mission critical elements of their businesses here (note: I am not claiming to be an expert in this area or someone who is “in the know” – my point is that economic development projects are, in my experience, very well kept secrets, and for good reasons.)
So that’s the long and short of it – TAG wrote a letter of support as a result of a committee’s decision to support the bill, made our support public, explained why we did so, and used our resources to educate the community on the issue very early on. Can we, as ladies, gentlemen, and professionals agree to disagree? Of course. And while it disappoints me to hear that one of our members was unhappy with our position on this, I am heartened to know that you also see this for what it is – one such instance out of many positive things TAG is doing for the technology and technology entrepreneur community.

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