While we await the FTC’s final rule on non-compete agreements, the Georgia Court of Appeals recently issued a ruling with potential impacts for other types of restrictive covenants that will not be impacted by the FTC’s proposed rule.
The Georgia Restrictive Covenants Act (“GRCA”) governs contracts that restrict competition, including clauses that prohibit individuals from competing, soliciting employees to take new employment, soliciting customers, and disclosing certain information. O.C.G.A. § 13-8-50, et seq.
This particular case, N. Am. Senior Benefits, LLC v. Wimmer, No. A23A0162, 2023 WL 3963931 (Ga. Ct. App. June 13, 2023), dealt with a contractual provision prohibiting a former employee from soliciting other employees to leave their positions with the employer.
The defendant/employees sought a declaratory judgment that the non-solicitation-of-employees clause was invalid. The state-wide business court agreed, finding that the lack of a geographic restriction rendered the clause invalid. It further held that the court could not blue-pencil to add a geographic restriction as it would “materially alter” the terms of the agreement.
In affirming the lower court, the Court of Appeals made two notable rulings: (1) to be valid, provisions barring solicitation of employees after employment must contain a geographic restriction and (2) consistent with the language of the GRCA and existing case law, courts should limit the use of “blue penciling” to merely striking or narrowing offending terms, but not writing in new terms, such as geographic limitations.
1) Non-Solicitation-of-Employees Clause
On appeal, counsel for the plaintiff/employer echoed the conventional wisdom regarding non-solicitation clauses—unlike clauses that prohibit competition (which prohibit an individual from engaging in certain activities), non-solicitation clauses are inherently narrow because they are limited to a set of individuals or clients.[1] Thus, a textual geographic restriction in the contract at issue would be unnecessary because defendants/employees know the geographic location in which solicitation is prohibited—i.e. anywhere the plaintiff’s current employees are located.
The Court of Appeals rejected this approach, carefully scrutinizing the text of the GRCA, applying canons of statutory construction, and concluding that non-solicitation-of-employees clauses must contain a geographic restriction to be valid.
The Court of Appeals interpreted O.C.G.A. § 13-8-53(a) to reach this decision, meaning that the ruling applies to business-to-business restrictive covenants, as well as restrictions employers entered into with former employees. O.C.G.A. § 13-8-53 is a catch-all provision, meaning that this rule potentially applies to other, less well known forms of restrictive covenants such as contracts that prohibit use of particular suppliers or vendors.
Given that this ruling changes the conventional thinking about employee non-solicitation provisions, there is no precedent yet on how courts will interpret geographic limitations in this context. Potentially, a geographic restriction could be applied to the situs of the solicited individual, the company soliciting for new employment, or the physical location of the solicitor.
Client Take Away: Employers should review their restrictive covenant agreements to ensure that non-solicitation of employees or no-hire clauses have specific geographic limitations. In our experience, most existing clauses do not contain this limitation. This review needs to occur regardless of whether the FTC bans non-compete clauses, as this issue does not relate to non-compete clauses.
2) Blue-Penciling
The GRCA expressly instructs courts to “blue pencil” (i.e. modify) provisions that are not compliant with the provisions of the GRCA. “[I[f a court finds that a contractually specified restraint does not comply with the provisions of O.C.G.A. § 13-8-53, then the court may modify the restraint provision and grant only the relief reasonably necessary to protect such interest or interests and to achieve the original intent of the contracting parties to the extent possible.” O.C.G.A. § 13-8-54. Under the GRCA, “modification” is defined to be:
the limitation of a restrictive covenant to render it reasonable in light of the circumstances in which it was made. Such term shall include:
(A) Severing or removing that part of a restrictive covenant that would otherwise make the entire restrictive covenant unenforceable; and
(B) Enforcing the provisions of a restrictive covenant to the extent that the provisions are reasonable.
O.C.G.A. § 13-8-51(11) (emphasis added).
Georgia state and federal courts have previously held that “modification” does not allow a court to supply new terms, but rather solely to strike unreasonable restrictions or narrow existing provisions. See Belt Power, LLC v. Reed, 354 Ga.App. 289 (Ga. Ct. App. 2020); LifeBrite Labs., LLC v. Cooksey, No. 1:15-cv-4309-TWT, 2016 WL 7840217, at *6 (N.D. Ga. Dec. 9, 2016).
The Court of Appeals in Wimmer, applied this doctrine to the plaintiff/employer’s request to blue pencil a geographic territory into the non-solicitation-of-employees clause, finding that it was not permissible under the GRCA to do so.
Client Take Away: Clients should not rely on courts to blue-pencil unenforceable restrictive covenants.
At Krevolin & Horst, our attorneys are experts in applying and interpreting Georgia and federal law on non-compete agreements, non-solicitation agreements, trade secret protection, and non-disclosure agreements. Please contact us if you have questions about this decision or how best to protect your company’s interests in light of the changing legal landscape.
[1] The GRCA provision regarding customer non-solicits expressly allows that “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.” O.C.G.A. § 13-8-53(b).
