Overview of Georgia\'s NEW Restrictive Covenants Act

1. Georgia’s New
Restrictive
Covenant Act
Presented by:
Jason D’Cruz
Partner, Executive Compensation
and Employment Law Practice
jdcruz@mmmlaw.com
404.504.7601
Brian Harris
Partner, Executive Compensation
and Employment Law Practice
bharris@mmmlaw.com
404.504.7683

2. Georgia’s New Restrictive Covenant Act
Is The Restrictive Covenant Act In Effect?
• Yes. Georgia voters approved a constitutional amendment giving
effect to House Bill 173 (the “Act”)
• The Act was signed by Governor Perdue in April, 2009, but did not
take effect until yesterday, November 3, 2010
• The Act dramatically changes the enforceability of restrictive
covenants in employment agreements entered into on or after the
Act’s November 3 effective date.

3. Georgia’s New Restrictive Covenant Act
Pre-Act Law
• The Act is not a replacement for existing law, which will still govern
covenants entered into prior to the effective date of the new law
• Georgia courts currently enforce restrictive covenants on a case-by-
case basis, without statutory standards for determining enforceability
• Employment Context:
– Courts subject covenants to strict scrutiny
– Covenants must be narrowly crafted to be enforceable
– Blue penciling (judicial editing) is prohibited

4. Georgia’s New Restrictive Covenant Act
Impact Of Pre-Act Law
• Even a minor flaw in a restrictive covenant can render the entire
covenant unenforceable (no blue penciling)
• If one covenant is unenforceable, it can prevent enforcement of other
covenants in the same agreement that might otherwise be
enforceable (“all-or-nothing rule”)
• Drafting enforceable employment covenants had been particularly
challenging for Georgia businesses
• Often prohibits businesses based outside of Georgia from enforcing
their covenants in Georgia

5. Georgia’s New Restrictive Covenant Act
How The Act Differs
• Expressly permits restrictive covenants, including non-compete
covenants
• Relaxes certain standards for drafting enforceable covenants
• Grants Georgia courts power to “blue pencil” (i.e. judicially modify)
covenants, “as long as the modification does not render the covenant
more restrictive with regard to the employee than as originally drafted...”
• Defines common terms, which definitions appear to expand the
permissible scope of certain covenants
• Establishes presumptively reasonable time limits for covenants

6. Georgia’s New Restrictive Covenant Act
Noncompete Covenants
• Permitted if reasonable in time, geographic area, and scope of activity
– limited to activities performed within 2 years prior to termination
• Only applies to employees who:
1) Customarily and regularly solicit customers or prospects;
2) Customarily and regularly engage in making sales;
3) Have a primary duty of managing the enterprise (or a department or
subdivision); direct the work of two or more other employees; and
have the authority to hire or fire other employees (or have particular
weight given to recommendations as to the change of status of other
employees); or
4) Perform the duties of a “key employee” or of a “professional”

7. Georgia’s New Restrictive Covenant Act
Noncompete Covenants
• “Key Employee” = employee who, through employer’s investment of time,
training, money, etc., has gained a high level of notoriety or reputation as the
employer’s representative, or has gained a “high level of influence or credibility”
with customers, vendors, or other business relationships
– also includes those “intimately involved in the planning for or direction of
the business” and those with “selective or specialized skills, learning, or
abilities or customer contacts or customer information”
• “Professional” = employee whose primary duty involves performing work requiring
advanced knowledge “customarily acquired by a prolonged course of specialized
intellectual instruction” or requiring talent “in a recognized field of artistic or
creative endeavor”

8. Georgia’s New Restrictive Covenant Act
Nonsolicit Covenants: Broadly Defined Terms
• “Material Contact” Example:
– A non-solicitation covenant applicable to any customer or
prospective customer with whom the employee had “material
contact” would apply not only to a customer or prospective customer
with whom the employee dealt on behalf of the employer, but also to
a customer or prospective customer:
• “about whom the employee obtained confidential information in the
ordinary course of business as a result of such employee’s
association with the employer; or
• who receives products or services authorized by the employer, the
sale or provision of which results or resulted in compensation,
commissions, or earnings for the employee within two years prior to
the date of the employee’s termination.”

9. Georgia’s New Restrictive Covenant Act
Nonsolicit Covenants: Relaxed Drafting Standards
• While a non-solicitation covenant must be limited to prohibiting
solicitation for the purpose of providing products or services
competitive with the employer’s business:
– “no express reference to geographic area or the types of products
or services considered to be competitive shall be required in
order for the restraint to be enforceable.”
• Existing case law requires employers to clearly define and limit the scope
of products and services considered competitive, usually by reference to
a clear definition of the employer’s “business”

10. Georgia’s New Restrictive Covenant Act
Nonsolicit Covenants: Relaxed Drafting Standards
• Existing covenants must also be limited either by express reference to a
narrowly defined geographic territory or to those customers with whom the
employee had material contact during employment
• Under the new Act, a general reference to prohibiting soliciting or attempting to
solicit business from customers is presumed to apply to:
– Customers or prospects with whom the employee had “material
contact”; and
– Products or services competitive with (meaning the same as or similar
to) those provided by the employer
• Limited to products or services sold or provided within 2 years prior to termination

11. Georgia’s New Restrictive Covenant Act
Blue Penciling
• Act grants Georgia courts the authority to judicially modify covenants that are
otherwise too broad to enforce
• Under pre-Act law, without the authority to blue pencil, Georgia courts often
render an entire covenant unenforceable based on a minor flaw
• New Act limits the court’s new authority by defining “modification” to mean the
“limitation of a restrictive covenant to render it reasonable in light of the
circumstances in which it was made. Such term shall include:
– Severing or removing that part of a restrictive covenant that would otherwise
make the entire restrictive covenant unenforceable; and
– Enforcing the provisions of a restrictive covenant to the extent that the
provisions are reasonable
• Does not include re-writing or adding terms

12. Georgia’s New Restrictive Covenant Act
Presumptively Reasonable (And Unreasonable) Time Limits
• Pre-Act Law:
– Duration of restriction must be very limited
– No uniform standard
• New Law:
– Sets presumptively reasonable time limits, allowing for enforcement
of restrictive covenants against former employees for up to two (2)
years
– Any covenant applicable for more than two (2) years following
termination is presumptively unreasonable

13. Georgia’s New Restrictive Covenant Act
Presumptively Reasonable (And Unreasonable) Time Limits
• New Law expressly permits nondisclosure covenants protecting
confidential information (that does not rise to the level of a trade
secret) to remain in effect for so long as such information remains
confidential
– Under pre-Act law, the lack of a reasonable, definitive time limit is
fatal to nondisclosure covenants
• Both pre-Act law and the new Act permit protection against use and
disclosure of trade secrets for so long as the information constitutes a
trade secret as defined by Georgia law

14. Georgia’s New Restrictive Covenant Act
Who Is An “Employee”?
• Executives;
• R & D personnel or others (including independent contractors) in possession
of confidential information that is important to the business of the employer;
• Those in possession of selective or specialized skills, learning, or abilities or
customer contacts, customer information, or confidential information who has
obtained such skills, learning, abilities, contacts, or information by reason of
having worked for the employer; or
• Franchisees, distributors, lessees, licensees, or parties to a partnership
agreement, or sales agents, brokers, or representatives in connection with
franchise, distributorship, lease, license, or partnership agreements
• Does not include any employee who lacks selective or specialized skills,
learning, or abilities or customer contacts, customer information, or
confidential information

15. Georgia’s New Restrictive Covenant Act
What Constitutes A Protectable Business Interest
• Defined by new Act, but same under pre-Act law:
– Trade secrets;
– Valuable confidential information;
– Substantial relationships with specific prospective or existing
customers, patients, vendors, or clients;
– Customer, patient, or client good will associated with (i) an ongoing
business, commercial, or professional practice; (ii) a specific
geographic location; or (iii) a specific marketing or trade area; and
– Extraordinary or specialized training

16. Georgia’s New Restrictive Covenant Act
Potential Negatives and Downside To Act
• Litigation may be less frequent, but much more costly; disputes will focus on fact issues:
• Whether person is an “employee” under the Act for former employees and
current employer
• Actual services performed by the employee for current and former employer
• Geographic territory within which the services were and are provided
• Whether and to what extent the former employer competes with the new
employer
• Economic hardship to the employee caused by enforcement
– If covenants are unreasonable as drafted, court will then consider whether and to
what extent to blue pencil
– Under pre-Act law, the dispute usually focuses on the language of the covenant itself

17. Georgia’s New Restrictive Covenant Act
Potential Negatives and Downside To Act
No Guarantees:
• Act/Amendment may be subject to Constitutional attack
• Judges may still find covenants “unreasonable” and/or elect not
to blue pencil
• Judges may find “undue economic hardship” on the employee
and refuse to enforce
• Ambiguity/Inconsistency within the Act
• Don’t overreach

18. Georgia’s New Restrictive Covenant Act
Act Is Not Retroactive
• The new law only applies to those agreements entered into on or
after the law’s effective date (November 3, 2010)
• Existing agreements will still be interpreted and enforced under
existing case law (i.e. strict scrutiny and no judicial modification)

19. Georgia’s New Restrictive Covenant Act
Top Ten Practical Pointers
1. Review existing covenants agreements to determine whether they
are enforceable under pre-Act law (this will help form the
Company’s strategy with regard to whether and how to implement
new agreements)
2. Evaluate which groups of employees should be subject to broader
restrictions permitted under the new Act
3. Do not ask all employees to sign; the Act specifically excludes
employees who lack selective or specialized skills, learning, or
abilities or customer contacts, customer information, or confidential
information

20. Georgia’s New Restrictive Covenant Act
Top Ten Practical Pointers
4. Prepare a strategy to implement new contracts with appropriate employees
designed to comply with and extract maximum benefit from the Act
– Options for roll out:
• Sign or be fired?
– Continued employment alone is sufficient consideration to support an
employment covenants agreement
– Risk losing good employees?
• Roll out with some benefit to ease pain?
– Salary increases
– Bonus payments
– Stock option grant

21. Georgia’s New Restrictive Covenant Act
Top Ten Practical Pointers
5. Consider defining applicable scope of products and services with respect
to nonsolicitation covenants, if only to avoid the issue at a later date
6. Maximize advantages of blue-pencil authority: consider using language
that, if found overbroad, is readily susceptible to selective deletion
– Example: Definition of “Territory”
• “Territory” means within: (a) the continental United States; and
(b) the continental United States east of the Mississippi River;
and (c) the states of Georgia, Florida, and Alabama; and (d)
the state of Georgia; and (e) Fulton County and Cobb County,
Georgia; and (f) within a fifteen (15) air mile radius of the
Company’s offices located at 3343 Peachtree Road, NE,
Atlanta, Georgia, 30326; and (g) the territory where the
employee is working at the time of termination.

22. Georgia’s New Restrictive Covenant Act
Top Ten Practical Pointers
7. Because the Act presumes reasonable a time limit of 2 years or
less, make all covenants applicable for this time frame
8. Include governing law provision specifying Georgia law and
mandatory forum selection clause requiring that disputes be
litigated in Georgia courts
9. Get the contract signed, keep a hard copy in your file, keep a soft
(electronic) copy stored securely on the Company server, and send
a signed copy to your attorneys for safe keeping
10.Consider and plan for added cost of enforcement under the new
law, including both attorneys’ fees and time

23. Georgia’s New Restrictive Covenant Act
MMM Action Plan
• Provide a “Restrictive Covenant Worksheet”
– completed (on your own time) to indicate the nature and scope of
desired covenants for various levels of employees
• Deliver customized agreements based on your input, containing
covenants specifically tailored to meet your needs and extract maximum
protection from the Act

24. Georgia’s New Restrictive Covenant Act
Questions?

25. Please contact our
presenters with any
questions after the
presentation.
Jason D’Cruz
Partner, Executive Compensation
and Employment Law Practice
jdcruz@mmmlaw.com
404.504.7601
Brian Harris
Partner, Executive Compensation
and Employment Law Practice
bharris@mmmlaw.com
404.504.7683
Thank you for
joining us today for
Georgia’s New
Restrictive
Covenant Act