Enforceability of Non-Compete and other Restrictive Covenants In Employment Agreements

Many employers utilize employment contracts which contain restrictive covenants in order to protect their legitimate interests in their customers and proprietary business information. Restrictive covenants, which include non-compete, non-solicit and non-disclosure covenants, are closely scrutinized by the Georgia courts in employment agreements, primarily because of the perceived inequality of bargaining power between employer and employee. The courts also place great emphasis on the employee's right to earn a living, usually discussed in terms of the privilege of free competition. Even though there are a great many reported decisions in this area, the enforceability of restrictive covenants is usually subject to uncertainty in any particular case.

An initial distinction must be made between covenants entered into as part of the sale of a business, versus covenants which are included in employment contracts. Covenants entered into as part of the sale of a business are usually enforceable, at least in part. The rationale for this distinction is that a sale of business contract is far more likely to be entered into by parties on equal footing. In addition, the courts recognize that such covenants are often necessary to protect the value bargained for by the purchaser of a business. For these reasons, lesser scrutiny is also applied to restrictive covenants in partnership agreements.

While contracts in restraint of trade or tending to lessen competition are against public policy and are therefor unenforceable, restrictive covenants in employment contracts are considered to be in partial restraint of trade and will be upheld if strictly limited (1) as to time; (2) as to territorial effect, and; (3) are otherwise reasonable, considering the scope of the employer's business interest sought to be protected and the effect on the employee. This three-element test has been described by the courts as a "helpful tool" in examining the reasonableness of the covenants being evaluated. The judge, rather than the jury, applies this test and determines whether the restraints are reasonable.

Georgia does not recognize the so-called "blue pencil" rule; thus, if any portion of the covenant is unenforceable, the entire covenant becomes invalid. The result is unchanged even if the contract contains specific language to the contrary. However, a covenant not to disclose confidential information can be served and enforced independently of non-compete and non-solicit covenants which are overbroad and unenforceable. Non-disclosure covenants are treated differently, because they are less burdensome on the employee.

In applying the three element test discussed above, the courts have typically been willing to enforce covenants which apply for a period of two years following employment, and possibly longer. Although an express territorial restriction (for example, a thirty mile radius) was historically required in Georgia, in 1992 the Georgia Supreme Court acknowledged the expansive nature of today's marketplace and held that such covenants can be enforced without an express geographic limitation. W.R. Grace & Co. v. Mouyal, 262 Ga. 464, S.E.2d 529 (1992). Specifically, the court held that there is no need for a territorial restriction expressed in geographic terms where the former employee is prohibited from post-employment solicitation of those customers which the employee contacted during his tenure. Id. A corollary of this rule is that a specific geographic restriction is required where a restrictive covenant contains a prohibition against doing business with any of the employer's customers, whether or not a relationship existed between the customer and the former employee. Id. The Supreme Court has thus provided a blueprint for the drafting of a non-solicitation covenant which will be enforceable in Georgia. However, employers may not be content with the relatively narrow circumstances to which such a covenant will apply.

The Georgia courts have often refused to enforce restrictive covenants which prohibit a former employee from passively accepting business from clients of the former employer, where no solicitation has occurred. One stated rationale for this rule is that to hold otherwise would unreasonably impact the public's ability to choose service providers. The court is usually able to strike down virtually any covenant on this ground if it is so inclined, because most employers will find it counterproductive to expressly state in the contract that former employees are entitled to passively accept business. Even if the employer opts to do so, a thorny fact question will frequently exist as to whether the former employee has solicited or merely accepted business. A disputed question of fact will preclude the issuance of a preliminary injunction, a remedy which is often sought by employers.

The bottom line is that employers must carefully craft employment contracts which contain non-compete, non-solicit and non-disclosure provisions if the employer ever tends to legally enforce the agreement. Employers which elect to include broad restrictive language in employment contracts are likely to receive a hostile reception in the courts.