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Is Georgia law really so friendly to non-competes?

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Is Georgia law really so friendly to non-competes?

Many employers and employees are aware that Georgia’s law on non-competes[1] has changed.  Most view that change—the 2011 Georgia Restrictive Covenants Act, which we’ll call the “Act”—as making non-competes easier to enforce in Georgia.[2]

Indeed, making enforcement easier was the legislature’s intent in passing the Act.[3] But is enforcement easier?

Two 2017 decisions under the Act—released about three days apart—suggest maybe not.

The Act allows you to sign a non-compete and compete in Georgia but not if you move to Saudi Arabia?

Let’s look at two executives who were defendants in the two cases.

Mr. Smith—a New York resident—worked for the Georgia-headquartered Novelis for about 30 years until resigning in 2016, at which time he was a plant manager for a plant making rolled aluminum sheets for cars and cans.[4]  Novelis primarily produces, markets, and sells rolled aluminum products.  In 2014, Mr. Smith signed a Non-Competition, Non-Solicitation & Confidentiality Agreement.  A few weeks after resigning, Mr. Smith relocated to Saudi Arabia and became the President of Ma’aden Rolling, which, like Novelis, produces rolled aluminum for use in cans and cars.  The Court did not find that Mr. Smith took confidential information or trade secrets from Novelis.  The Court did find that Mr. Smith did not directly interact with customers as President of Ma’aden Rolling.

The second executive, Mr. Hammonds,[5] was in sales, specifically the sale of industrial cleaning supplies and chemicals to food processing facilities for ChemStation.  Mr. Hammonds signed 2010 and 2012 non-compete agreements and had most of his territory and most of his client contacts in Georgia.  While still at ChemStation, Mr. Hammonds developed a business plan for his own competitive business, emailed ChemStation’s proprietary information to his personal email account, forwarded his contacts to his personal device, and emailed a potential business lead to his personal email account.  A few days after leaving ChemStation, Mr. Hammonds told ChemStation people that he did not intend to compete with ChemStation.  Yet, on about the same day, he created his new chemical company.

Under the Act, Mr. Smith could not compete; Mr. Hammonds could.

What made the difference?

In both Mr. Smith’s case and Mr. Hammonds’, the former employer brought breach of contract claims (for breach of restrictive covenants) under the Act.

Yet the results were opposites.

Perhaps the biggest difference was the court deciding the case.  In the Smith case, a Georgia federal court made the decision; in the Hammonds case, an Alabama federal court interpreted Georgia law.  And the Alabama court seemed to view the Act differently than the writers of the Act.  The Alabama court appeared to view the Act as limited “to prohibiting solicitation of the employer’s customers by the former employee.”[6]  The Alabama court also refused to blue pencil or redraft the restrictive covenant based on cases pre-dating the Act and stated that “the basic rules of law remain essentially unchanged after the new statutory enactment.”[7]

Yet factual reasons beyond each court’s view of the Act suggest why these cases came out differently.  For example, Mr. Smith, unlike Mr. Hammonds apparently, had a back-up plan—a side agreement that allowed him to keep working at the new employer—which may have made the court more willing to ban Mr. Smith from competing.  Additionally, Mr. Hammonds apparently tried to honor the restrictive covenants that his former employer gave him at his exit interview, even though he signed other, more restrictive covenants later.[8]  The Alabama court may have had less sympathy for a former employer who could not find the correct agreement at first.

As a final—perhaps most important—example, the contract language of the restrictive covenants was different.  The Smith contract had useful admissions by Mr. Smith, while the Hammonds contract had potentially confusing labeling.

In the Smith case, the contract contained provisions in which Mr. Smith made important concessions that the court seemed to enforce without requiring additional evidence.[9]  For example, the contract stated that (1) Mr. Smith “has been and will be provided, and will have access to, some or all of Novelis’s Trade Secrets and Confidential Information;” (2) that Mr. Smith “has had and will have access to Novelis customers and prospective customers;” and (3) that ‘“it would be impossible for Smith to perform similar duties for another company engaged in the same or similar business as Novelis’ without using the confidential information—including client information—or trade secrets gained” from Novelis.[10]  Perhaps because of that language, the court never probed what information Mr. Smith had access to and whether that information was confidential or met the standards to be trade secrets.

In the Hammonds case, the contract labeled as a “nonsolicitation covenant” what was, in effect, a non-compete.[11]  And, perhaps oddly, the “nonsolicitation covenant” did not have a standard ban on soliciting customers or clients.  Though probably an attempt to avoid what in many states is a harsher review of non-compete provisions, the labeling may have contributed to how the court analyzed the contract under the Act.

Well, what do we know about the Act?

  • We cannot assume the Act has made it easier to enforce non-competes. The Act will not always fix a poorly drafted non-compete.  And even a well-drafted non-compete still requires a company to prove it has at least one “legitimate business interest” to support whatever restrictive covenant it wants to enforce.  A legitimate business interest usually means “(1) trade secrets; (2) valuable confidential information that is not a trade secret; (3) substantial relationships with specific prospective or existing customers, patients, vendors, or clients; (4) customer, patient, or client good will associated with ongoing business, commercial, or professional practice, a specific geographical location, or a specific marketing area; and (5) extraordinary or specialized training.[12]  Not all courts have required a high level of proof, but the requirement is still there.
  • Courts are probably not going to add words courts feel the parties should have. The Act allows courts to rewrite or “blue-pencil” non-competes with former employees. That said, employers shouldn’t rely on a court to draft for them. Specifically, Georgia courts have refused to add terms that a non-compete is missing, such as a geographical area.  For example, a court could narrow a non-compete area from seventy-five miles to fifty but could not fix a non-compete that said nothing about geography and thus applied anywhere in the world
  • Companies should draft and label restrictive covenants clearly. Though specific tips are beyond the scope of this article, companies should create separate non-solicit, non-compete, non-recruitment, and confidentiality provisions in Georgia.  Companies should further try to tailor those provisions to specific interests.  For example, a company could structure the non-solicit to protect its customer relationships, the non-compete to protect its training of the person signing the non-compete, the non-recruitment to protect its training of other employees, and the confidentiality to protect its information. Deviating from these well-known types may lead to an unexpected result—like the Hammonds case in which the court treated a non-compete like it was a non-solicitation.
  • Taking information from an employer can anger courts—but not always. Taking an employer’s information when leaving a job always risks making a court angry.[13]  An employee caught taking a former employer’s information is at an immediate disadvantage.  Perhaps the law and other facts can overcome that disadvantage.  Perhaps the court focuses on that information taking only.  Either way, employers should always be ready to analyze departing employees’ electronic devices; departing employees should, conversely, not take anything, no matter how personal or seemingly innocent.  That said, as the Hammonds case suggests, while “they took our stuff,” may work in some courts, it won’t be enough in others.
  • Where you sue might matter as much as the law you choose in the contract.  You may be better off suing where the non-compete is going to be enforced.  In the Hammonds case, the Alabama company probably would have gotten a better result by suing in a Georgia court.  Non-compete issues are an exception to the general principle of free competition—a principle that some states put in their constitutions.  Thus, policy sometimes trumps what the parties write in their contracts.  Considering where the person entering into the non-compete lives and where an employer might have to enforce a non-compete can help flag potential policy issues.  But people move, and courts are not guarantees.

[1] Non-competes are just one type of restrictive covenant historically recognized in Georgia.  Non-solicitation, confidentiality, and non-recruitment provisions also fall into the category of restrictive covenant.

[2] Seyfarth Shaw, Top five trends in Georgia restrictive covenants law three years after constitutional amendment (Nov. 13, 2013), available at https://www.lexology.com/library/detail.aspx?g=99069a60-aa00-4e7a-8815-1d1065dbe307 (last visited October 10, 2017).

[3] House Study Comm. on Restrictive Covenants in the Commercial Arena, 149th Gen. Assembly, Final Report (Ga. 2008).

[4] Novelis Corp. v. Smith, No. 1:16-CV-1557-ODE, 2017 WL 1745635, at *1 (N.D. Ga. Mar. 10, 2017).

[5] DJR Assocs., LLC v. Hammonds, 241 F. Supp. 3d 1208, 1218 (N.D. Ala. 2017).

[6] Hammonds, 241 F. Supp. 3d at 1227, 1229 (holding that “the non-compete covenant, there can be no question that, under Georgia law, it is void and unenforceable [because] restrictive covenants can only limit the ability of a former employee to solicit customers of the former employer”).

[7] Id. at 1228, n.7.

[8] Id. at 1217-18.

[9] Smith, 2017 WL 1745635, at *6.

[10] Smith, 2017 WL 1745635, at *3.

[11] Id. at 1214-15.

[12] O.C.G.A. §§ 13-8-54, 13-8-55.

[13] Sci. Games Int’l, Inc. v. Cash, No. 2:16-CV-00142-WCO, 2017 WL 542034, at *6 (N.D. Ga. Jan. 25, 2017) (barring former employee from competing even though he honored non-compete agreement because “volume of information he took was staggering, and it had the potential to cause grave harm”).

Kana Caplan

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