27 July 2023
Berman Fink Van Horn P.C.
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In recent weeks, we have heard from many of you regarding the
recent decision from the Georgia Court of Appeals on the
enforceability of employee non-recruitment covenants. With this
decision, there is a good chance that your employee non-recruitment
covenants are impacted by the new ruling and may need to be
revised.
We developed the FAQ below to help you understand this decision
and what it means for your business. We hope you find this
information helpful.
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WHAT DID THE COURT DECIDE?
The decision holds that non-recruitment and no-hire covenants
must have a territory to be enforceable under Georgia law.
THIS DECISION SEEMS IMPORTANT TO MY BUSINESS/ORGANIZATION. HOW
DID WE GET HERE?
In North American Senior Benefits, LLC v.
Wimmer, two insurance agents left their employer and
started a competing business. Their former employer then sued them
for violating their restrictive covenants, including their employee
non-recruitment covenants. Georgia’s State-wide Business Court
found that those covenants were invalid.
The Georgia Court of Appeals agreed, holding that
non-recruitment and no-hire covenants must have a territory to be
enforceable. Prior to this case, trial courts disagreed on whether
a territory was required for this type of restrictive covenant.
This is the first appellate decision on this issue.
SO, WHAT DOES THIS MEAN FOR MY COMPANY?
At BFV, we review agreements with restrictive covenants every
day. In most agreements, employee non-recruitment covenants do not
include a territorial limitation. Therefore, there is a
good chance your employee non-recruitment covenants are impacted by
the ruling and may need revisions.
WHAT SHOULD I DO NEXT?
You should review the restrictive covenant agreements that your
organization has in use. You may need to have employees sign an
amendment or a new agreement to be sure that the non-recruitment
covenant is enforceable under Georgia law. We recommend you work
with legal counsel to ensure that the geographic scope selected is
reasonable and enforceable.
WILL WE NEED TO GIVE EMPLOYEES MONEY TO SIGN A NEW
AGREEMENT?
No, not in Georgia. In Georgia, continued employment is still
sufficient consideration to support a new or amended restrictive
covenant agreement. If you have employees in other states, you may
need to offer additional consideration for the new agreement.
THIS DECISION SEEMS UNUSUAL. IS THERE ANY CHANCE THAT IT WILL
BE OVERTURNED?
The Georgia Court of Appeals ruling was a split ruling, meaning
that one of the three judges dissented. The losing party has asked
the Georgia Supreme Court to review and reverse the decision. It is
possible it could be overturned but it is very difficult to predict
the likelihood of that happening.
SHOULD I WAIT TO SEE WHAT HAPPENS?
We recommend employers act now, particularly if your
organization is concerned about departing employees soliciting
colleagues. The Georgia Supreme Court does not review every
decision from the Court of Appeals. The Georgia Supreme Court may
thus simply choose to let the Court of Appeals’ decision
stand.
WHAT ABOUT CUSTOMER NON-SOLICITS AND NONDISCLOSURE COVENANTS IN
OUR AGREEMENTS? DO THEY NEED A GEOGRAPHIC SCOPE?
No. Georgia’s statute expressly says that customer
non-solicits and nondisclosure covenants are not required to have a
geographic scope.
Based on those exceptions in the statute, the Court of Appeals
concluded that other restrictive covenants that restrict
competition after the term of employment, such as noncompetes and
employee non-recruitment covenants, must have a geographic scope.
Importantly, this could mean other restrictive covenants
that are less frequently used, such as referral source, vendor, and
supplier non-solicits, may require a territory to be
enforceable. If your company uses these covenants, you
should evaluate whether those covenants need to be revised.
IS THERE ANY ADDITIONAL INFORMATION THAT I SHOULD KNOW
REGARDING THIS DECISION?
Yes. The Court of Appeals made one other important ruling. It
held that courts can “blue-pencil” overbroad covenants by
striking offending language. However, courts cannot
write in terms where none exist. For example, courts
cannot write in a territory where no territory is present in the
agreement.
This is a key clarification of Georgia restrictive covenant
law.
WHAT ABOUT THE FTC’S PROPOSED RULE? AREN’T ALL
NONCOMPETE AGREEMENTS GOING TO BE BANNED ANYWAY?
The FTC’s proposed rule is still pending.
However, the proposed rule would not ban reasonable employee
non-recruitment covenants, except perhaps in very limited
circumstances. Non-recruitment covenants can be an important tool
to protect against unfair competition. Thus, employers
should not let the FTC’s potential actions stand in the way of
updating their agreements.
Georgia law and other relevant laws are constantly evolving. You
can count on BFV to continue to keep you updated on decisions that
can affect your business or organization.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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