Dick & Jane – Covenant Not to Compete

Justin cropped Super LawyerBy Justin O’Dell

 

This month we switch gears from Probate Court to the business world.  Recall that Dick is a project manager with a mid-sized engineering firm.  Dick has been approached by a well-respected member of the industry about a business opportunity.  The opportunity calls for Dick to take a position with a new company.  Dick would be offered a good compensation package and ownership interest in the enterprise.  The potential is well-worth considering.

However, Dick has an employment contract signed in 2005.  In June 2011, he was told to sign a new version of the contract.  Although his employment is labeled “at-will”, Dick has a clause labeled “COVENANT NOT TO COMPETE; NON-SOLICITATION.”  The paragraphs, in summary, prohibit Dick from:

  •   –     Accepting any position with another engineering firm anywhere in the State of Georgia for a period of 2 years following his separation from his current employment; and
  •    –    Soliciting any customer of his current employer with whom Dick has had contact in the 2 years prior to his separation from his current employment.

The first question for Dick is whether the Covenant Not to Compete is enforceable and, if so, to what extent?

Part one of the legal analysis involves determining which body of law to apply.  In Georgia, the law for decades held that a contract containing a covenant not to compete was in the nature of a restraint on trade.  As a result, these covenants were enforceable if, and only if, they satisfied a three part “reasonableness test”; that is that the limitations were reasonable in duration, scope and geographic area.  Over dozens of years of case law and litigation, the area seemed settled that an agreement of 2 years or less, limiting the individual to a similar position to the one currently held and limiting the area to the current area of operations would be enforced.  Any agreement more restrictive would not generally be upheld, absent other evidence or facts justifying the restriction.  Thus, Dick could be bound to an agreement which prohibited him from working as a project manager in the Atlanta area for 2 years.  The key to the law was that an unreasonable agreement was thrown out entirely.  The theory of the result was that employers would be motivated to try and draft reasonable restrictions if they knew of such a negative potential consequence.

In 2010, thanks in part to a highly misleading Constitutional Amendment, this jurisprudence was replaced with the “blue-pencil” rule.   Rather than throw out an agreement entirely, the “blue-pencil” rule allows the Court the ability to edit the restrictive language downward to a less restrictive agreement.  As a result, employers now have no fear in drafting incredibly onerous and restrictive language knowing that the worst possible outcome is simply a rewrite downward to what should have been stated originally.   The new statute (O.C.G.A. §13-8-50, et seq.) does state that it only applies to agreements entered after May 2011 (the date it was signed into law).

Under this scenario, Dick has a problem.  His agreement was originally signed in 2005 and is covered by the old law.  However, his HR department circulated a new version (probably in response to the new law) in June of 2011.  In order for the new version to apply, his company would have to demonstrate that it was presented along with some new consideration (a promotion, a raise, etc…).  If the document was merely circulated and signed as a updated “contract” it is probably not valid.

In either event, the analysis and guidelines for reasonableness set forth in the statutes are incorporated from Georgia case law, the dramatic change is in the outcome of an unreasonable agreement.

Customer solicitation is another matter.  As a general rule, these provisions are enforceable provided they are reasonably written.  This is where the change in Georgia law is of manifest importance.  Under the old rule, if the covenant was unreasonable and the contract went out, the non-solicitation of customers went with it.  Under the new rule, the contract stays and is merely edited downward and the non-solicitation clause survives.

Next month we will dive into the analysis and see whether or not Dick can take the position.  If so, what level of contact with existing customers will be permitted?

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Prior to the passage of the above-mentioned Constitutional Amendment, Justin O’Dell wrote a letter to the Editor at the Marietta Daily Journal on the proposed amendment which was published October 12, 2012. Read Justin’s letter in it’s entirety:  http://www.odelloneal.com/wp-content/uploads/2013/01/2010.10.12.The-Marietta-Daily-Journal-Passage-of-Amendment-1-would-hurt-little-guy.pdf