By: Mel Haas & Sarah Phaff
The History of Georgia’s Restrictive Covenant Law
Originally, Georgia’s public policy was strongly opposed to restrictive covenants. In fact, the Georgia Constitution would not allow the legislature to enact legislation that allowed restrictive covenants. However, in 2009, the General Assembly placed an action on the November 2010 ballot that would change the Georgia Constitution and allow the General Assembly to legislate as to restrictive covenants. This amendment, however, lacked an effective date. Anticipating that the constitutional amendment would pass, the Georgia General Assembly passed HB 173, which would have allowed courts to reform overly broad restrictive covenants. In an unfortunate turn of events, because the legislature did not yet have the authority to promulgate a regulation, they had to make it effective upon the constitutional amendment. This led to a discrepancy between the effective date of the constitutional amendment, January 1, 2011, and the effective date of HB 173, November 3, 2010. To address any confusion about the gap in the dates, the Georgia general assembly promulgated HB 30 which became effective on May 11, 2011 and applies to contracts entered into on or after its effective date. The new law allows courts to “blue pencil” or modify restrictive covenants that would have been previously ineffective.
The Old Law Can Still Have an Impact
However, while the new Georgia law on restrictive covenants is in effect., there are still cases whose restrictive covenants will be decided under the old law. What about restrictive covenants entered into at the time of HB 173? In Becham v. Synthes USA, 482 Fed. Appx. 387 (11th Cir. 2012), the Eleventh Circuit Court of Appeals found that a restrictive covenant was unenforceable under Georgia law. The covenant was entered into on December 1, 2010, after HB 173 would have taken effect. The employer argued that when HB 173 was enacted that Georgia’s public policy as to restrictive covenants changed. However, the Eleventh Circuit held that because HB 173 was unconstitutional and void since there was no constitutional authority to enact it, that the Georgia public policy had not changed until May of 2011. Accordingly, the choice of law clause in that agreement that would have made the covenant enforceable was struck and the covenant was found unenforceable.
What should employers take away from this? Employers should carefully examine when their restrictive covenants were entered into and recognize that just because we have a new law does not mean it applies to all restrictive covenants. Further, as we wait for further case law under the statute, we are unsure the degree to which courts will modify these covenants. If issues arises, employers should consult an attorney experienced in this practice area.