Georgia’s new Restrictive Covenant Act became effective May 11, 2011. On that day, Georgia swung abruptly from being one of the least friendly states for noncompete enforcement, to a much more flexible stance toward them. A key feature of the new Act is its express authority for courts to modify covenants as necessary to become enforceable. But a recent federal trial decision in Macon, and a 2013 Fulton County case, raise a red flag. Both cases remind us that if there is any question at all about enforceability of pre-Act covenants, in order to bring them under the liberal new law it is crucial to sign FRESH new noncompete documents after May 11, 2011.
In Lowe Electric, a federal trial court considered a 2014 agreement meant to “amend and modify employee compensation”, and with all other terms of a January 2011 agreement incorporated by reference and to “remain unchanged”. Interestingly, the amendment was silent on the 2011 restrictive covenants. The court found that the 2014 agreement was a modification of the 2011 agreement, and that because the restrictive covenants were void (for overbreadth as against then Georgia public policy) under the old Georgia law, they remained void from the beginning and “cannot be ratified to life”. The court found instructive the rationale in Cone v. Marietta Recycling Corp., an unpublished 2013 case in Fulton County Superior Court. The court went on to focus on the clear non-retroactive provision of the Act, concluding that to accept the “ratify back to life” argument would remove the teeth from that part of the Act.
In Cone, an employee signed a severance agreement after the new Act became effective. The agreement expressly superseded all prior agreements, except his pre-Act noncompetes which remained in effect. In a thoughtful ruling, the court found that the restrictions were variously flawed under pre-Act law. It rejected the employer’s argument that ratification brought the defective covenants under the new Act with its modification provisions. Instead, the court held that the restrictive covenants could not be saved by mere ratification in a new document. The court reasoned that the covenants were invalid and void from the beginning (as against public policy), so there was nothing to be ratified or resurrected. That is, despite their detailed nature, from the court’s standpoint the covenants always were just a “nothing.”
- Lowe Electric appears to be the first published decision on the subject addressed in Cone. Both the Lowe and Cone courts are trial courts, however, so it remains to be seen how appellate courts would treat the issue. Nevertheless, both cases lay out the reasoning of thoughtful jurists and are therefore influential.
- Under the Act’s express modification authority, other courts have, in fact, modified seriously flawed post-Act covenants, so the Act appears to be generally received by courts. An example is PointeNorth Insurance Group v Zander (11th Circuit 2012).
- Important questions about the Act remain. For example, how will the Act affect covenants not to solicit employees (vs customers)?
If you are an employer expecting enforcement of your pre-May 11, 2011 Georgia restrictive covenants, this is a good time to have them reviewed and to consider whether to have fresh new documents signed and expressly based on the concepts and provisions of the Act.