What does Obamacare have to do with non-compete agreements?  Well, technically speaking, nothing.  But the Supreme Court recently focused on what it should do with the remainder of the healthcare law if it decided to strike the individual mandate.  Justice Scalia asked, "Once you cut the guts out of it, who knows which parts were desired and which ones weren't?"  The manner in which courts treat overly broad non-compete agreements is not terribly different.  If a court finds part of a non-compete agreement unenforceable, what should it do with the rest of the agreement?  The answer varies from state to state, and unlike Congress with the healthcare bill, employers should include language that clarifies their intent. 

First, consider the approach employed by various courts.  Generally speaking, there are three approaches.  In some states (e.g., Vermont), if a covenant is overbroad by an inch, it might as well be overbroad by a mile because overly broad covenants will be invalidated in their entirety.  In other states (e.g., Arizona), overly broad covenants will be blue-penciled – meaning that courts will strike through offending language but will stop short of rewriting the agreement.  In still other states (e.g. Ohio), courts are free to reform restrictive covenants so that its restrictions are reasonable under the circumstances.

Recognizing the different approaches among states, employers should consider including severability clauses in their agreements.  But caution is required concerning how such a clause should be worded.  This is because the law from state to state with regard to modification and enforcement of overly broad non-compete agreements varies, and an argument can be made that a severability clause gives an employer less protection than it otherwise would receive absent its inclusion.  Stated differently, depending on the wording of a severability clause, an overly broad restriction might just get severed from the agreement (i.e. not modified) leaving an employer with little or no protection.

How can this happen?  A typical severability clause in a non-compete agreement might provide that “the provisions of this agreement are severable. If any provision is deemed to be invalid, void or unenforceable, the remaining provisions shall not as a result be invalidated.” Such a clause can be of great help in states like Louisiana or Wisconsin where overbreadth can be fatal. Upon finding a non-compete provision unenforceable, courts in these states are powerless to modify or blue-pencil the agreement. Under these circumstances, a severability clause may salvage a separate, independent non-solicitation or confidentiality provision contained in the same agreement.

So what’s the problem? Unless your severability clause is carefully drafted, a compelling argument can be made that the parties’ inclusion of a severability clause precludes modification of an overly broad non-compete in states like Ohio and Pennsylvania where courts are empowered to judicially modify overly broad covenants.  After all, if an agreement provides that unenforceable provisions should be severed, judicial modification of overly broad provisions would ignore the parties’ clear intent as set forth in a severability clause. The consequences can leave employers with little or no protection.

For example, consider an employment agreement that contains a fifty-mile non-compete clause, a customer non-solicitation clause, and a confidentiality clause. Imagine that an employee accepts employment with a competitor right across the street in violation of the non-compete, but complies with the non-solicitation and confidentiality clauses. What happens if the court finds the non-compete clause to be ten miles overbroad? If it chooses to strictly apply the severability clause as written and severs the overly broad non-compete provision instead of modifying it, the employer would be powerless to prevent the employee’s employment with its competitor. In the absence of such a severability clause, a court might choose to modify the fifty-mile non-compete downward to a forty-mile radius. In the presence of a poorly worded severability clause, a court may simply sever the non-compete based on the parties’ intent as reflected in the clause.

Such unintended results might be avoided by including a carefully drafted severability clause that takes into account the difference between jurisdictions that blue pencil, modify, or strike overly broad provisions. For example, consider the following clause:

"If any provision of this Agreement is held to be unenforceable, then this Agreement will be deemed amended to the extent necessary to render the otherwise unenforceable provision, and the rest of the Agreement, valid and enforceable. If a court declines to amend this Agreement as provided herein, the invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions, which shall be enforced as if the offending provision had not been included in this Agreement." 

This sample clause may enable an employer to reap the benefits of a court’s common law discretion to modify overly broad provisions, while providing the same benefit needed in states where overly broad provisions must be struck. In other words, this clause may provide the best of both worlds. If a non-compete provision is overbroad, the clause provides that a court may modify and enforce it to the extent permitted by law. If the court chooses not to modify the restraint, the invalid provision may be severed, leaving in place the remaining, and hopefully enforceable, provisions.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

This is the second in our series on international non-compete and trade secrets law for U.S. corporate counsel.  Today, we examine the law in the world’s second largest economy, The Peoples Republic of China (PRC).  The heated competition for qualified talent in the PRC makes non-compete protections a crucial topic.  In a recent survey, members of the US-China Business Council reported that their #1 challenge doing business in China was “talent recruitment and retention”: 

Companies reported that it is becoming increasingly difficult to recruit and retain talented employees because the demand for such employees – by multinational corporations (MNCs) and, increasingly, Chinese employers – outstrips availability.  In particular, companies noted difficulties in recruiting qualified managerial and technical talent.

USCBC 2011 China Business Environment Survey Results at p. 8.  In another study, the MRI China Group surveyed more than 3,000 mid- to senior-level managers in China and Hong Kong, and found with respect to Mainland China respondents that:

• 64% had received offers in the prior 18 months, and 24% had received three or more offers
• 46% had moved to a new job with a compensation increase of 30% or more (another 46% received increases of 11 – 30%)
• 42% are not satisfied with their current compensation
• 24% had already determined to make a job change sometime in 2011

See MRI China 2011 Greater China Talent Environment Index at pp. 5-6. 

All of this adds up to a very competitive and unstable market for key management and technical talent in an enormous and fast-growing economy.  There is not much to do about the increasing spiral of salary levels in China, but at least companies are not left empty-handed when it comes to protecting competitive assets such as confidential business information and client relationships.  It may come as a surprise to some that, with the advent in 2008 of the Labor Contract Law of the People’s Republic of China (also known as the Employment Contract Law or ECL), the rules for employee contracts have been simplified and China’s environment has emerged as more friendly to companies seeking to protect their interests than some US states. 

Counsel who have been handling US domestic non-compete issues on a multi-state basis may note that, in some ways, the basic outline of non-compete law in PRC looks a bit like Colorado in that it permits covenants, but only for specified types of employees:

o Senior management
o Senior technicians
o Employees with access to trade secrets

ECL Articles 23 & 24 (Cornell University Unofficial English translation).  Compare Colo. Rev. Stat. 8-2-113(2)(d) (permitting non-competes only for “executive and management personnel” or “officers and employees who constitute professional staff to executive and management personnel”).  The terms of any post-employment restrictive covenant must be contained in a written employment agreement.  Indeed, all employment in the PRC must be by written agreement signed within one month of commencement of employment (ECL Art. 10).  See generally To Write or Not to Write? International Laws on Employment Agreements (discussion by my colleague of written employment agreements internationally, including in PRC, on our sister blog, Cross Border Employer).

Under the ECL, non-compete, non-solicitation and confidentiality agreements can be enforceable in the PRC if they meet the following requirements:

o Against one of the listed class of employees (ECL Arts. 23 & 24)
o Duration of  no more than 2 years (ECL Art. 24)
o Reasonable geographic scope
o Compensation must be paid to employee monthly during the restriction term (ECL Art. 23); the amount varies by province (by way of example, it may range as high as 60% of prior compensation in Beijing)

The ECL specifically provides for an award of damages for violation of an otherwise enforceable non-compete agreement, and a specific liquidated damages clause may be advisable.  See Art. 23 (“If the laborer breaches the non-competition provisions, he shall pay damages to the Unit as stipulated.”).   

Interestingly, the ECL statutorily provides for severability of unenforceable terms, employing a structure akin to US “blue pencil” states.  The law stipulates that “if certain provisions of a labor contract are invalid and such invalidity does not affect the validity of the remaining provisions, then the remaining provisions shall still remain valid.”  ECL Art. 27. 

In addition to the ability to impose contractual non-compete restrictions on the listed types of employees, the ECL also imposes a mandatory 30-day notice period for any employee who wishes to leave a job by dissolving his or her employment agreement (ECL Art. 37).  This requirement gives the company a built-in de facto 30-day non-competition period against any employee who resigns.  The only exception is if the employee seeks to dissolve the employment agreement for what in US law would be referred to as “good cause,” the requirements for which are laid out in Article 38 and if satisfied would allow an employee to dissolve his or her agreement immediately and disregard the normal 30-day notice requirement. 

In addition to the protections and requirements outlined in the ECL, it is worth noting that other sources of law in the PRC may offer protection for employers:

• The Company Law statutorily mandates a duty of loyalty (including a duty of non-competition and non-appropriation of corporate opportunities) during employment term for directors, supervisors and senior managers (Company Law § 6, Art. 148 & 149)

• Trade secrets are protected under the Ant-Unfair Competition Law (UCL), Article 10

o Requirements are substantially similar to Uniform Trade Secrets Act standards
o 2007 judicial interpretation makes clear that “client lists” can be trade secrets, although it suggests no violation if the employee can prove customers approached him or her on their own

Despite the potential protections of the UCL and the Company Law, the better approach for protecting confidential business information and ensuring non-competition during the term of employment is to have written covenants in employment agreements rather than relying solely on statutory provisions. 

Next week, we will visit another fast-growing Asian economy, India, where the law on post-employment restrictive covenants looks quite different than it does in China. 

Christopher P. Stief is the chair of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group.  To receive notice of future blog posts either follow Christopher P. Stief on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Many companies have employees located in states across the country.  Drafting restrictive covenants for employees in all of these locations can be a daunting task.  To minimize the burden, some employers opt for a one-size-fits-all approach -- that is, every employee across the country signs the exact same agreement.  Depending upon the locations of these employees and the interests sought to be protected by the employer, this approach may work out.  But just as commonly, it may not.  This does not mean that employers need to draft fifty different agreements for use in all fifty states.  Here’s a quick sketch alternative to the one-size-fits-all approach:

1.  Categorize Locations – Although the law governing restrictive covenants varies from state to state, most states can generally be placed into one of three categories:

(a) states where courts are empowered to modify, sever, or blue pencil overbroad agreements -- The vast majority of states fall into this category.  For example, if you have employees located in Pennsylvania and Ohio, the law is substantially similar, and to the extent it varies, the courts in each state are empowered to modify contractual provisions they deem to be unenforceable.  Consequently, employers might consider using one form of agreement for employees located in the states that fit within this category.

(b) states where overbreadth will be fatal to the entire agreement -– A handful of states fall into this category.  In these states, if a non-compete is overly broad in any respect (e.g., if it lasts too long or covers too broad of a geographic area), courts will strike the entire agreement even if a simple modification would cure the overbreadth.

(c) states where the law is so unique that nothing but a state-specific covenant will do -– California and Louisiana are the quintessential examples of states that fall within this category.  The law in each state is so unique that virtually all covenants an employer may desire require adjustments to meet applicable legal requirements.

2.  Categorize Employees and Interests to be Protected – It is well known that restrictive covenants come in all shapes and sizes ranging from non-solicitation agreements to full blown non-competition agreements to confidentiality and non-disclosure agreements.  These different types of restrictions protect different types of interests.  For example, a customer non-solicitation agreement protects employers from the exploitation of customer goodwill acquired by employees during employment, and it can also protect against the misuse of confidential information.  In contrast, a confidentiality and non-disclosure agreement is more narrowly tailored to address the possible misuse of proprietary information.  Companies should give some thought to the types of employees that will be signing agreements and the types of interest sought to be protected.  If salespeople will be signing the agreements, the company may choose to require both a confidentiality and a non-solicitation agreement.  If a non-sales related employee is signing the agreement, the company’s interests may possibly be protected by a confidentiality agreement alone.  In contrast, senior executives might be expected to sign a non-solicitation, non-compete and a confidentiality agreement.

Juggling the competing concerns raised by differences in state law can be difficult, but it is not impossible.  Methodically identifying the types of employees who will sign covenants, the interests sought to be protected, and the jurisdictions within which each employee works will go a long way.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Settlement of lawsuits is almost universally considered a good thing.  Among the many benefits is the notion that the conflict ends immediately and the parties can go on with their lives with the comfort of certainty.  Right?  Well, maybe.  In non-compete cases, an employer might consider settling because it fears an unfavorable determination by the court that the geographical, temporal, or substantive scope of the non-compete agreement at issue may be overly broad.  But some cases suggest that settlement might simply postpone this determination until another day.   According to these courts, this is true because restrictive covenants in settlement agreements are subject to the same strict judicial scrutiny applied to employment agreement covenants.

The thought that a restrictive covenant set forth in a settlement agreement may be unenforceable may be hard to swallow. After all, a widely recognized incentive for settling cases is the opportunity to achieve finality while at the same time eliminating the risks inherently intertwined with litigation. For this reason, an employer who fears that its three-year, nationwide noncompete agreement may be overly broad may seek the seemingly safe harbor of settlement. It may seem like a good deal. From the employer’s perspective, voluntarily reducing the scope of the covenant through settlement might seem akin to taking sleeves off a vest: if the restrictive covenant is overly broad, it is likely to be judicially modified or blue penciled to some virtually unpredictable extent; and settlement may bring side benefits such as certainty and mutual releases. But what happens if the former employee violates the settlement? At first glance, you might think that enforcement is a certainty because the employee consented to the reduced covenant in place of the previous covenant. Not so fast. Some courts see it differently.

For example, in Cranston Print Works Co. v. Pothier, 848 A.2d 213, 216 (R.I. 2004), the Rhode Island Supreme Court “noted that these covenants not to compete were unusual because they were part of a settlement agreement, rather than an employment contract, a contract for the sale of a business, or a partnership agreement.” After finding that the trial court had interpreted the restrictive covenants in the settlement agreement incorrectly, it remanded the case for further consideration with instructions that the court “should uphold [the restrictive covenants] only to the extent they are necessary to protect the promisee’s legitimate interests.” Id. at 220.

A similar result can be found in the Texas Supreme Court’s opinion in Justin Belt Co. v. Yost, 502 S.W.2d 681 (Tex. 1973). In Yost, the court observed that the “non-competition covenant at issue was ancillary to an agreement that settled the dispute between Justin and his former employees and accomplished a termination of the pending litigation.” Id. at 684. Noting that the covenant at issue was not ancillary to an employment agreement, the Court stated that it nonetheless “was ancillary to an agreement highly favored by the courts.” Id. Nonetheless, the Court went on to uphold the trial court’s decision to modify the overly broad restraints set forth in the settlement agreement because they were unreasonable as written. Id. at 686.

Yet another court has explained that strict judicial scrutiny of a covenant in a settlement agreement may be necessary based on the relative bargaining power of the parties. Ken Manufacturing Corp. v. Sant, 355 S.E.2d 437, 444 (Ga. App. 1987). The Sant court explained: “If it appears that [the employee’s] bargaining capacity was not significantly greater than that of a mere employee, then the covenant should be treated like a covenant ancillary to an employment contract,” and subjected to strict judicial scrutiny. Id. See also Herndon, Jr. v. The Eli Witt Co., 420 So.2d 920, 923 (Fla. Ct. App. 1982) (“this Court is willing to subject the restraint imposed by the settlement agreement to a ‘reasonable standard test’”).

Lessons to be learned

The above-cited cases do not mean that employers should refrain from settling non-compete cases.  But there are some lessons to be learned:

First and foremost, there is no substitution for restrictive covenants that follow the law. Include reasonable restrictions in settlement agreements that comport with applicable law, and specifically lay out the reasons that the covenants are necessary to protect legitimate business interests.

Second, be sure to include additional covenants that usually are not subject to strict scrutiny, such as confidentiality, non-use, and non-disclosure obligations.  These covenants should be contained in individual paragraphs so that a court, if it chooses, can easily sever offending paragraphs.

Third, memorialize your settlement agreement by way of consent decree.  If possible, include within the decree the parties’ agreement, and the court’s specific finding, that the restrictions in the settlement agreement are reasonable and necessary to protect the employer’s legitimate interests (such as customer relationships, or confidential/trade secret information).

Fourth, require the employee to agree to a stipulated permanent injunction that tracks the language of the restrictive covenant included in the settlement agreement. Employees may be tempted to violate settlement agreements, but violating a court order raises the possibility of civil and/or criminal contempt, which in turn may act as a deterrent.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

A recent decision from the Court of Appeals of New South Wales, Australia, illustrates the potential value of using a series of independent but “cascading” covenants to create options for enforceability of restrictive clauses depending on what a reviewing court may find to be reasonable.  In Hanna v. OAMPS Insurance Brokers Ltd., NSWCA 267 (Oct. 19, 2010), the Court of Appeals upheld a trial judge’s decision enforcing a 12-month restriction prohibiting a former insurance brokerage executive from soliciting or dealing with clients anywhere in Australia with whom he had contact during the final two years of his employment.  Notably, the covenant said that he could not “during the Restraint Period” and “within the Restraint Area” directly or indirectly “canvass, solicit or deal with” the described clients, with the following definitions:

"2.  Restraint Period means, from the date of termination of your employment:   

(a) 15 months;
(b) 13 months;
(c) 12 months.

Restraint Area means:

(a) Australia;
(b) The State or Territory in which you are employed at the date of termination of your employment;
(c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment."

The contract also specified that “each restraint contained in this Deed (resulting from any combination of the wording in clauses 1 and 2 constitutes a separate and independent provision, severable from the other restraints.”

The defense argued that the covenant left the employee unable to determine where and for how long he was entitled to compete.  The court rejected this argument, relying largely on the language specifying that the covenants were independent, and noting that a series of “repetitive and overlapping restraints of ever widening reach and subject matter” were a reasonable commercial response to the perils of the common law “blue pencil” rule.  The court accepted the legitimacy of the employer trying to obtain for itself “some post-contractual restraint … within the temporal and geographic ranges identified.” 

The lesson for companies with employees in New South Wales and those other British and American common law jurisdictions that continue to use a traditional “blue pencil” approach to the enforcement (or non-enforcement) of assertedly overbroad covenants?  Consider whether a cascading set of interlocking but severable covenants might provide an avenue to obtain some level of post-employment protection when a contract is challenged by a former employee.

A copy of the court's opinion is available in pdf format below.

Christopher P. Stief is the Chair of the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either by Mr. Stief or other members of the Practice Group, you may subscribe to this blog's RSS feed or follow Mr. Stief on Twitter at @CStiefLaborLaw.  As always, please feel free to share your thoughts or pose your questions in the comment field below.

Hanna v. OAMPS Insurance Brokers.pdf (1.42 mb)

In a landslide victory with 68% of the votes, the constitutional amendment authorizing a new statutory framework for enforcement of restrictive covenants in Georgia was passed by Georgia voters on November 2, 2010.  The new framework goes into effect immediately, but it will only be applied to restrictive covenants that are signed today (November 3, 2010) or hereafter.

Is this a big deal or a radical change?  Absolutely.  Georgia law has long been known for its “unfriendliness” towards non-competes and other post-employment restrictive covenants.  However, the statutory framework which has now been endorsed via the constitutional amendment will allow Georgia courts/judges flexibility in enforcing non-compete and other restrictive covenant provisions in employment agreements whereas before they had no meaningful wiggle room.  The law also affects franchisor-franchisee, distributorship, lease, and partnership agreements.

But remember, the new law will only apply to agreements that are signed beginning November 3, 2010 and after.  If an agreement was signed prior to that time, it will be governed by the old case law.  Therefore, unless your agreements were tightly written to comply with the previous law, the constitutional amendment is of no impact for you … until and unless you get new/amended agreements signed by your workforce.

Although the changes that will result from the new law are many, the most significant change is that Georgia courts/judges will have the ability to modify what would be an otherwise overbroad provision.  Previously, Georgia judges did not have the discretion to modify, sever or blue pencil restrictive covenants in employment agreements (although there was a limited exception in the context of a sale of a business).

Click here if you are interested in reviewing the new statutory framework, or click on the pdf link below.

GA Noncompete law HB 173 full text.pdf (124.63 kb)

Previously, we have written about the Top Ten Things to do When an Employee Resigns to Join a Competitor and the Top Ten Mistakes Made by Departing Employees.  Given the favorable feedback, we continue with the following Top Ten Things to Consider When Drafting a Non-Compete  Agreement. 

1. Tailor restrictions to the jurisdiction in which employees work or reside.   In some states, an overly broad non-compete clause can be fatal because courts will refuse to enforce the entire agreement even if the non-compete is slightly overbroad.  In other states, courts will “blue pencil” overly broad provisions (i.e., simply strike the offending language).  Still, other state courts will modify overly broad language to make it enforceable.  If you are drafting agreements in a multi-jurisdictional context, generally a handful of versions – a few for “problem” states and others for “typical” states – will account for most variations in the law.

2. Include choice of law & venue provisions.  Many employers are tempted to choose the law and venue of the state where they are incorporated or headquartered.  If this requires the application of law contrary to the public policy of the state where the employee works or resides, or if it requires an employee to defend an action far from home, these provisions may not be honored.  In many instances, tying the choice of law and venue provisions to the state where the employee works or resides is a good choice because it may spread the risk of negative court decisions and minimize the chance that the choice of law or venue provision will be rejected. 

3. Tailor the contract to the employee’s position.  A common refrain among courts is that a non-compete or non-solicitation agreement must be no more burdensome than necessary to protect a legitimate interest of the employer.  Legitimate interests commonly recognized by courts include confidential information, goodwill, and/or unique training.  Tailoring the duration, scope, and geographic restrictions of the covenant to the particular position and circumstances of the employee (or category of employees) is likely to enhance the enforceability of the agreement.
  
4. Determine what constitutes sufficient consideration for the covenant.  Virtually all states agree that covenants executed prior to the start of employment are supported by consideration (note, however, some states say that an agreement is not supported by consideration if it is executed after the offer is accepted by the employee).  Other states hold that if execution of the agreement is followed by a substantial period of continued at-will employment, the employment will suffice as consideration.  But other states require specific, additional consideration for agreements signed after the start of employment. 

5. Determine what type of restrictions most appropriately protect the company.  Do you need a non-competition, non-solicitation of customers, non-solicitation of employees, non-disclosure provision, or all four?  Identify the legitimate interests that you seek to protect, and choose a restraint suited to protect each interest.

6. Include provisions regarding injunctive relief.  Consider including clauses providing for a presumption that any harm done is irreparable and difficult to quantify, and consenting to injunctive relief.  Including such a clause rarely makes injunctive relief a certainty, but the absence of such a clause can hurt even more.

7. Consider an attorneys’ fee provision.  You may be able to increase your leverage with a clause providing that the company will be reimbursed for reasonable attorney’s fees and costs in the event litigation is required to enforce the covenants.   However, be aware that some jurisdictions may not enforce a one-sided provision that purports to award fees only to the employer.  Some jurisdictions may convert such a provision to a “prevailing party” provision, meaning that the “loser” is required to pay the other side’s fees.  

8. Require return of confidential documents and information.  Contracts should require employees to return any information or documents relating to the company upon request or within a short time after their termination.  Don’t forget to cover copies, derivations of company documents, and information contained on electronic devices, such as cell phones, blackberries and the like. 

9. Include an assignability provision.  Many states will not enforce a restrictive covenant when the identity of the employer has changed (e.g., by an asset sale) unless an agreement includes a consent to assignability.  Where the jurisdiction permits and/or requires such a provision, make clear the company may assign the covenant to an affiliated company or successor in interest without notifying the employee.  Defining the "Company" at the beginning of the agreement to include the company, its successors and assigns is also a good idea.

10. Include language extending the term of the covenant in the event of a breach.  If the jurisdiction permits such a restriction, make sure your contract states that the period of the covenant is automatically extended for any time during which it was being violated. 

In a state that is otherwise generally recognized as being “employer friendly,” Georgia law has long been known for its “unfriendliness” towards non-competes and other post-employment restrictive covenants.  However, a radical shift in that law is on the horizon – and the fate of the sea change actually resides in the hands of Georgia voters.

At the end of the 2010 legislative session, the Georgia legislature voted to approve – and Governor Sonny Perdue signed the bill – a statutory framework that would literally turn on its head the ability to enforce post-employment covenants in Georgia.  A similar effort was rejected by the Georgia Supreme Court in 1991 when the court ruled that the legislation was unconstitutional. 

This time around Georgia lawmakers are heading off that argument by putting the issue before the voters with an enabling constitutional amendment – i.e., the statutory framework is already in place; the voters just need to approve a constitutional amendment paving the way for the framework to become law.  The specific question on the ballot will read as follows: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?”  If the majority of voters vote “yes,” the new statutory framework will become effective.  Only agreements entered into after the election will be governed by the new law.

There are too many changes that will result from the new law to detail in this short blog.  However, the most significant change is that Georgia courts/judges will have the ability to modify what would be an otherwise overbroad provision.  Currently, Georgia judges do not have the discretion to modify, sever or blue pencil restrictive covenants in employment agreements (there is a limited exception in the context of a sale of a business). 

Under the present law, if a non-solicitation of customer or non-compete provision is overbroad in any respect (and there are numerous ways it might be overbroad), the covenant fails and cannot be enforced.  Not only that, an overbroad non-compete will also render unenforceable a non-solicitation provision in the same agreement even if the non-solicit was otherwise enforceable standing on its own. 

If you are interested in reviewing the statutory framework, click on the pdf link for the full text at the bottom of this post.

If the majority of voters vote “no” in the November 2010 election, nothing changes.  However, that does not mean that you cannot enforce non-competes or non-solicits in Georgia.  You can … so long as the factual circumstances justify such restrictions and so long as they are carefully tailored to those facts.  Without careful drafting though, you will likely find that the agreement is not worth the paper it is written on.

GA Noncompete law HB 173 full text.pdf (124.63 kb)

For companies with employees in multiple jurisdictions, creating a single non-compete agreement for use by employees throughout the country can be tempting.  A single agreement is less expensive to draft than multiple agreements, and less cumbersome to distribute to employees in different states.  But will a single agreement be enforceable in multiple jurisdictions?  The answer:  it depends where the company’s employees are located.  The laws governing enforceability of restrictive covenant agreements vary by state, and an agreement that is enforceable in one state may well be unenforceable in another.  Depending upon the jurisdiction, the risk of attempting to use a single agreement in multiple states can vary from simple unenforceability to exposure to a claim for damages for requiring an employee to sign an unenforceable agreement. 

The following is a brief summary of some of the issues that vary from state to state and that should be considered when determining how many agreements a company needs and how to maximize the likelihood of enforcement of a company’s agreements across jurisdictions:

1.         The duration and geographic scope of the covenant.

In evaluating whether the terms of the agreement at issue are reasonable, most jurisdictions will scrutinize the duration and geographic scope of the covenant to determine whether it is reasonable.  What is reasonable in one state may not be reasonable in another.  Although the analysis will likely be fact-based in most states, in others, it may also be a matter of statute.  Some states specify, for example, that any covenant that is beyond two years in length is presumptively unenforceable.  Other states absolutely require that a covenant contain a geographic limitation in order to be reasonable.  In Louisiana, for example, a statute dictates that unless the restrictive covenant names the specific parishes to which it applies by name, it will not be enforced. 

2.         Does the state permit “modification” or “blue-penciling” of overly broad covenants?

Some states permit courts to revise overly broad covenants to make them enforceable.  For example, in Pennsylvania, a court has discretion to modify the terms of an overly broad covenant if they are unreasonable as drafted.  Other states, like North Carolina, follow a strict “blue pencil” approach, meaning that courts in those jurisdictions will not rewrite a contract if it is too broad, but will simply not enforce it.  In “blue pencil” states, if the contract is separable, and one part is reasonable, the courts are permitted to enforce the reasonable provisions.  Still other jurisdictions, like Georgia, do not permit courts to enforce any portion of an agreement if even one part is unenforceable as drafted.  Where courts will not modify an agreement, or will strike unenforceable provisions, it is particularly important to scrutinize every portion of the agreement to ensure that each provision is enforceable as written.

3.         What constitutes adequate consideration for the restrictive covenant?

As is the case with any agreement, a restrictive covenant must be supported by consideration to be enforceable.  In some states, if a restrictive covenant is signed after the commencement of employment, it must be supported by new and independent consideration, such as a promotion or a raise, in order to be enforceable.  In other states, the promise of continued employment constitutes sufficient consideration in exchange for execution of the covenant.  If covenants are being distributed to employees in multiple jurisdictions after the commencement of employment, the company should be aware of the law in each jurisdiction to determine whether new consideration is necessary to make the covenant enforceable.

4.         Is the covenant is assignable?

In some jurisdictions, corporate acquisitions and mergers can raise issues about the enforceability of a restrictive covenant.  Some states permit assignment of the covenant to the purchaser as a matter of course regardless of whether the employee consents to the assignment.  Other states, such as Pennsylvania, do not.  In Pennsylvania, the court will consider the nature of the transaction in determining whether the covenant is assignable without employee consent.  Still other states will require employee consent regardless of the nature of the transaction.   Employers should be aware of the requirements of the states in which they do business and should make efforts to obtain express consent where it is required.  In some jurisdictions, this can be accomplished through the incorporation of an assignment provision in the agreement.

5.         Is the covenant enforceable if the employee is terminated?

Even if the covenant is otherwise enforceable, some states will not permit enforcement of a restrictive covenant if an employee is terminated by his or her employer.  Other states, like Massachusetts, will examine whether the termination was conducted arbitrarily or in bad faith in determining whether the covenant is enforceable.  The company should be mindful of the requirements for the jurisdictions in which its employees are signing restrictive covenants and ensure that any terminations are conducted with knowledge of the impact they may have on an existing restrictive covenant.  Where the state in which the employee is located is likely to evaluate the circumstances surrounding the termination in determining whether the covenant is enforceable, special care should be taken to properly document the reasons for the termination. 

6.         When and how the covenant must be presented to be enforceable? 

Some states have specific requirements as to when and how a covenant must be presented to an employee.  In those states, an employer may be required to present the covenant at the time the offer is extended, or prior to the commencement or employment.  North Carolina has specific requirements for the timing and manner of presentation of restrictive covenants, for example.  Other states have similar requirements.  An otherwise enforceable agreement can be rendered unenforceable in these states unless it is presented to an employee at the right time and in the right manner.  It is therefore important to evaluate the requirements in each state in which the covenant is being presented to employees to ensure that the timing and manner of presentation of the covenant meets all applicable requirements.

7.         Does the state permit provisions extending the period of the restrictive covenant in the event of an injunction?

Many states permit provisions in agreements that purport to extend the period of a restrictive covenant by the amount of time in which it was violated prior to entry of an injunction.  For example, in those states, an employee with a one-year non-competition agreement who violates the agreement by working for a competitor for one month before being enjoined from further competition may be enjoined for the remaining duration of the covenant plus one month in order to account for the period in which the employee was violating the agreement.  While many states permit this type of extension of the covenant, some states expressly forbid it, and in other states, the court is unlikely to extend the covenant absent specific language in the agreement allowing such an extension.  It is important to consider the jurisdiction and tailor the language of the covenant and any provisions relating to injunctive relief accordingly if the company is interested in attempting to obtain an injunction that extends the period of the restrictive covenant to account for any period of non-compliance.

8.         Does the state permit non-competition agreements at all?

Some states, such as California, do not permit non-competition agreements in any form.  In those states, although the company cannot present employees with a non-competition agreement, the company may have reasonable alternatives that would still afford some protection.  In California, for example, while a non-competition agreement is not enforceable, a properly drafted confidentiality agreement is enforceable. 

9.         What types of employees will be signing the restrictive covenants?

Most states commonly ask whether a restrictive covenant contains restrictions that are reasonably necessary to protect one or more of an employer’s legitimate interests.  Commonly recognized legitimate interests include confidential information, customer relationships, and unique or unusual training.  Consequently, it is important to consider the types of employees who will be signing the restrictive covenants and to think about what interest the company seeks to protect.  It may be easier to justify a broad geographic restriction on competition for employees with access to confidential information that could be used throughout a geographic region.  Similarly, when an employer seeks to protect against the exploitation of customer relationships, a non-solicitation agreement may suffice. 

In sum, although the law can vary significantly from jurisdiction to jurisdiction, this does not mean that employers must have separate agreements for every state in which they do business.  Generally, a handful of agreements will suffice to address the variations in law between different jurisdictions, as there is significant overlap between the law of many jurisdictions.  The key to ensuring enforcement of restrictive covenants in multiple jurisdictions is to be knowledgeable about the differences in state law and to address those differences both in the agreements themselves and in the manner in which they are presented and enforced.

Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business.  Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business.  However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

State law on the enforceability and interpretation of non-compete/confidentiality agreements differs from state to state, and what is entirely reasonable in one state may be viewed as entirely unreasonable—and unenforceable—in another state.  If you do business in multiple states and want to effectively protect your customer good will and confidential and proprietary information, we recommend that you review the enforceability of various provisions of your non-compete/confidentiality agreements under the laws of each of the relevant states.

There are many ways in which relevant laws, and courts’ views, differ in various states on the enforceability and interpretation of non-compete/confidentiality agreements.  Some of the more important variables include—but are not limited to—what constitutes adequate consideration, whether the court will edit or amend an overbroad agreement to bring it within permissible state law restrictions, the extent to which an employer may enforce an agreement against an employee terminated without cause, and whether the court will grant injunctive relief in addition to liquidated damages.

Consideration:  All agreements must have adequate legal consideration to be enforceable.  Courts in some states hold that consideration for a non-compete/confidentiality agreement does not exist—and therefore that the agreement is not enforceable—unless the employer provided separate monetary compensation or the parties entered into the agreement at or near the inception of employment.  On the other hand, courts in other states hold that continued employment by itself (even without separate monetary compensation) is an adequate form of consideration that will support enforcement of a non-compete/confidentiality agreement.

Editing an overbroad agreement:  Courts in some states will amend or edit an overly broad non-compete/confidentiality agreement to bring it into compliance with state reasonableness requirements, while courts in other states will not.  The approach can vary from state to state, with courts in some states following a strict blue pencial approach (i.e., striking unenforceable, severable language), while other states permit courts to exercise their equitable discretion to modify covenants.  Still yet, courts in other states may decline to enforce the entire agreement even if only one term or provision is slightly overbroad (e.g., geographic scope).

Termination without cause:  State law—and court temperament—varies on the issue of enforceability when an employer terminates an employee’s employment without cause.  Courts in some states refuse to enforce restrictive covenants against employees who have been separated from employment through no fault of the employee.

Injunctive Relief/Liquidated Damages:  Many non-compete/confidentiality agreements contain both liquidated damage and injunctive relief provisions.  Courts in some states will not grant injunctive relief if the agreement also contains an enforceable liquidated damages provision.  In this view, an adequate “legal” remedy exists in the form of monetary damages, and therefore equitable relief in the form of an injunction is not be available.

If you have employees in multiple states, and you want to effectively protect your legitimate business interests against employee defections to competitors, you should take steps to tailor your non-compete/confidentiality agreements to ensure that they will be enforceable to the greatest extent permitted in each state in which you do business.