Good Fences Make Good Neighbors: Restrictive Covenants and Your Agency

Your business partner calls you at St. Simons Island. “Do you want the bad news or the worse news?” “Um, you know I’m on vacation, right?  This couldn’t wait until Monday.” “Definitely not,” says your partner.  “Our best producer gave notice this morning and cleaned out her desk. And that’s only the bad news. I’ve gotten calls from three clients this afternoon saying they’re moving their business to the producer’s new agency. What are we going to do?”

An employment restrictive covenant limits an employee from engaging in a particular activity. The most common types are non-competition agreements and non-solicitation agreements. Before 2009, many employment restrictive covenant agreements were illegal under the Georgia Constitution.[i] Following a constitutional amendment to permit these types of agreements,[ii] the legislature passed the Restrictive Covenant Act, (the “Act”) with an eye toward making Georgia a more business-friendly state. The Act is designed to permit “reasonable restrictive covenants contained in employment and commercial contracts [that] serve the legitimate purpose of protecting legitimate business interests and creat[e] an environment that is favorable to attracting commercial enterprises to Georgia.”[iii] Two things to keep in mind: (1) any restrictive covenant entered into before May 11, 2011, is not governed by the Act; and (2) in July the Biden administration issued a wide-ranging Executive Order that, among other things, asks the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”[iv] That Executive Order does not change Georgia law, but it suggests change may be coming. To quote the Robert Frost poem from which the title to this Article comes, “something there is that doesn’t love a wall.”[v]

1. Non-Competition.

Generally, a non-competition agreement between employer and employee imposes post-employment restrictions on the employee to protect the company’s trade secrets, proprietary information, intellectual property, and other valuable assets. However, not every employee may be subjected to a non-competition agreement. Georgia limits the types of employees that can be subject to a post-employment non-competition agreement to sales employees, management employees, key employees or professionals, and employees who regularly solicit customers for the company.[vi]

Under Georgia law, a valid non-competition agreement is limited to restrictions that “are reasonable in time, geographic area, and scope of prohibited activities.”[vii] First, the non-competition agreement must be reasonable in time. Georgia presumes reasonable any non-competition agreement with a duration of less than two years post-employment.[viii] This means that your agency should not attempt to prevent an employee from competing for more than two years. Second, the agreement must be reasonable in geographic scope.[ix] Georgia courts strike down non-competition agreements lacking a geographic restriction.[x] That restriction should be clearly written and narrowly tailored to protect your legitimate business interests without unduly limiting the employee’s right to make a living. For example, “the territory where the employee actively works at the time of termination” or similar language shall be considered sufficient as a description of geographic areas if the person or entity bound by the restraint can reasonably determine the maximum reasonable scope of the restraint at the time of termination”[xi] Finally, the agreement must be clear and reasonable in defining the scope of prohibited activities, such as “of the type conducted, authorized, offered, or provided within two years prior to termination’ or similar language containing the same or a lesser time period.”[xii] If you have questions about implementing a non-competition clause in you employee contracts, please contact an attorney of your choosing.

2. Non-Solicitation.

A non-solicitation agreement, one that prohibits a former employee from soliciting either customers or employees, must clearly define whom the employee is prohibited from contacting.[xiii] It also needs to be tied to a legitimate business interest you are seeking to protect.[xiv] However, unlike non-competition agreements, non-solicitation agreements do not require a geographic limitation.[xv] A customer focused non-solicitation agreement should be limited to customers the employee actually contacted while working for your agency. [xvi] Mere passive acceptance of business is unlikely to be considered solicitation.[xvii] The former employee must take an action to violate a non-solicitation clause.

3. Enforcing a restrictive covenants agreement

If you suspect a former employee violated their non-competition or non-solicitation agreement, there are several steps you can take. Collect all documents and information related to the suspected violation. Investigate the activity of the former employee or independent contractor. Before speaking to clients, employees or others who may have first-hand knowledge of a violation, speak with an attorney! This is critical to avoid you being on the receiving end of claims for defamation or tortious interference with contractual or business relations. With the assistance of your attorney, consider whether to send a cease and desist letter notifying the former employee of the violation, whether to contact the new employer and, if so, what you can say to the new employer. Finally, consider taking formal legal action such as mediation, arbitration, or litigation.

4. Hiring Employees Subject to a Restrictive Covenant Agreement.

There are several types of claims that may be brought against a company that is allegedly complicit in an employee’s violating their restrictive covenant agreement with a former employer. These include tortious interference, aiding and abetting a breach of fiduciary duty or duty of loyalty, misappropriating trade secrets, and participating in unfair competition. Before you hire an employee, the following steps will reduce your risk. First, determine if the employee is subject to any restrictive covenant. Second, determine if the covenant is likely to be enforceable. Consider seeking a legal opinion about the enforceability of the restrictive covenant. Third, determine whether the duties the employee will perform for your company might violate the restrictive covenant. Fourth, remind the employee that she is bound by a restrictive covenant with the former employer and that she cannot use the former employer’s confidential information such as customer lists, renewal dates and rates. If applicable, remind the employee that she cannot recruit other employees of their former employer. Document this conversation. Finally, if you receive a letter from a lawyer alleging that an employee working with your company has violated a restrictive covenant agreement with a former employer, contact legal counsel as soon as possible.

This article is not intended to provide “legal advice” on the issues discussed in it and does not create an attorney-client relationship. It is only for informational purposes. Please contact Slotkin Law Firm or another attorney who is knowledgeable in this area of the law about your specific situation before taking any action.

 

[i] Ga. Const. art. III, §6, para. V(c) (1983); see also Jackson & Coker, Inc. v. Hart, 261 Ga. 371 (1991).

[ii] Georgia Employment Contract Enforcement, Amendment 1 (2010)(amending the Georgia constitution to authorizing legislation to uphold reasonable competitive agreements).

[iii] O.C.G.A. § 13-8-50.

[iv] Executive Order on Promoting Competition in the American Economy.

[v] Robert Frost, Mending Wall, in North of Boston 11-13 (11th ed. 1924).

[vi] O.C.G.A. § 13-8-53(a); see also O.C.G.A. § 13-8-51.

[vii] O.C.G.A. § 13-8-53(a); see also O.C.G.A. § 13-8-56; O.C.G.A. § 13-8-57.

[viii] O.C.G.A. § 13-8-57. (However, when the non-competition clause is part of the sale of a business, the courts will presume that any duration less than five years is reasonable).

[ix] O.C.G.A. § 13-8-56.

[x] Carpetcare Multiservices, LLC v. Carle, 347 Ga. App. 497, 500 (2018).

[xi] O.C.G.A. § 13-8-53(c)(2).

[xii] O.C.G.A. § 13-8-53(c)(2).

[xiii] For further information about how the Act defines contact see O.C.G.A. § 13-8-51(10).

[xiv] “Legitimate business interest” is defined in O.C.G.A. § 13-8-51(9).

[xv] O.C.G.A. § 13-8-53(b).

[xvi] PointeNorth Ins. Grp. v. Zander, Civil Action No. 1:11-CV-3262-RWS (N.D. Ga. 2011).

[xvii] Waldeck v. Curtis 1000, Inc., 261 Ga. App. 590, 592 (2003).