On March 5, 2021, Georgia’s newly created statewide business court issued an Order in Martin v. Hauser (Case No 20-GSBC-0008) which analyzes restrictive covenants contained in an employment agreement under Georgia’s Restrictive Covenants Act, O.C.G.A. § 13-8-50 et seq. (RCA). The RCA was enacted nearly ten years ago on May 11, 2011, but there remains limited caselaw out of Georgia state courts which applies and interprets the RCA.
Prior to the enactment of the RCA, Georgia courts were among the strictest in the country when it came to the enforcement of restrictive covenants in employment agreements. The enactment of the RCA was a major shift in Georgia’s public policy towards restrictive covenants. The RCA does away with the “strict scrutiny” standard previously applied by Georgia courts and aims instead to honor the intent of the contracting parties and give deference to the legitimate business interests of employers.
A notable change introduced under the RCA is that Courts may now modify, or “blue pencil,” unreasonable restrictive covenants. Prior to the enactment of the RCA, if a Court determined a restrictive covenant was unreasonable or overly broad, then the provision was simply deemed unenforceable. The RCA allows, but does not require, a Court to modify a restrictive covenant that is otherwise unenforceable under the law, so long as the modification does not render the covenant more restrictive to the employee than as originally drafted.
In Martin, a former employee filed an action in Georgia’s Business Court seeking a determination that certain post-employment restrictive covenants contained in an employment agreement were void and unenforceable.
Following his resignation, Hauser suspected Martin was in violation of a non-solicitation provision which prohibited Martin from soliciting Hauser’s former, existing, and potential customers for a period of three years following his termination. The Court determined that the restrictive covenant, as written, was unreasonable as to its duration and scope and thus was unenforceable unless modified.
The Court elected to modify the provision after Hauser was able to establish the existence of legitimate business interests justifying the covenant. Specifically, Hauser established that it had made a significant investment of time and money in Martin over the course of his six years with the company, and that Martin, a member of Hauser’s executive team, had gained valuable insights into Hauser’s customer relationships. The Court ultimately revised the provision to apply only to existing and actively sought customers and limited the duration to one-year post-employment.
The Court then turned its attention to a non-recruitment and non-interference provision that prohibited Martin from inducing certain parties, including employees, suppliers, and customers, to terminate their “association” with Hauser or from interfering with the “business relationship” between those parties and Hauser for a period of three years following Martin’s termination. The Court determined that, as written, the covenants which sought to restrict competition were unreasonable as to time, geographic scope, and the activities restricted. The Court declined to modify the restrictive covenants stating that it could not “completely reform and rewrite contracts by supplying new and material terms whole cloth.” Accordingly, the non-recruitment and non-interference provision was deemed unenforceable.
The Court’s decision in Martin sheds light on how Georgia courts will wield their discretionary “blue pencil” power going forward. It appears if a restrictive covenant requires a Court to narrow an overbroad stated restriction (such as a specified time period or geographic radius) or strike impermissible language, it will be more inclined to exercise its modification power. However, if employers draft vague and overbroad covenants that require a Court to install new and material terms, the Court will likely decline to modify the covenant and will deem it unenforceable—thus, providing an employer with no protection.
There are several important take-aways from the Martin case that employers with restrictive covenant agreements should take note of:
- First and foremost, to avoid the blue-pencil determination, employers should ensure that their restrictive covenants are drafted in compliance with the RCA;
- Employers must be prepared to set forth legitimate business interests to support their restrictive covenants; and,
- Restrictive covenants in employment agreements should be the byproduct of a deliberate and thoughtful drafting process rather than boilerplate provisions used for all employees.
The RCA applies to restrictive covenants agreements entered on or after May 11, 2011. In light of the enactment of the RCA and recent Georgia case law interpreting the Act, Employers should revisit existing restrictive covenant agreements and consider the RCA when drafting future restrictive covenant agreements.
If your business needs assistance drafting compliant restrictive covenant agreements for its workforce, an experienced business attorney can help.
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