By Michael Elkon[1. Michael Elkon is an associate with Seyfarth Shaw LLP in Atlanta. Michael, along with his colleagues Erika Birg and Erin Wetty, worked with bill sponsor Kevin Levitas on Georgia’s new non-compete statute. Michael can be reached at firstname.lastname@example.org. ]
First principles, Clarice. Simplicity.
Silence of the Lambs is one of only three films to win the five major Academy Awards: Best Actor, Best Actress, Best Director, Best Picture and Best Screenplay (Adapted). Much of the cause for the movie’s success can be found in the dialogue between Hannibal Lecter and Clarice Starling. Starling is an FBI trainee who is (at first unwittingly) trying to find a serial killer named Buffalo Bill. Lecter is a brilliant former psychologist turned mental facility inmate. As the movie progresses, it becomes clear that Lecter knows about Buffalo Bill. Although he grows to like Starling, he does not share his knowledge directly with her. Instead, he gives her faint clues: an oblique reference to a storage facility containing Buffalo Bill’s first victim; an anagram that leads Starling to realize that Lecter did not provide Bill’s true identity to the authorities; a vague hint buried in Starling’s voluminous case file. At the end of the movie, Starling finds and kills Buffalo Bill because of her ability to decipher Lecter’s subtle tips. [quote1]
Attempting to solve a difficult riddle can make for great entertainment, but it can be an unnecessary challenge for a business or an individual when trying to figure out the rules applying to certain situations. This is the case with the law governing non-compete, non-solicitation of customers, and non-disclosure of confidential information covenants in Georgia.[2. These three types of covenants are often lumped together into the category of “restrictive covenants.”] Georgia law is hostile to these covenants, but not in an explicit way like, say, California or North Dakota, which have an outright prohibition on non-competes (with limited exceptions). Instead, Georgia has a dense thicket of cases that create a series of traps for companies seeking to enforce restrictive covenants. Georgia common law has evolved over decades to create a bevy of bushes, branches, and fallen logs over and around which employers must navigate to enforce non-competes and other restrictive covenants. To keep with the Silence of the Lambs metaphor, Georgia courts have not come out and said, “Buffalo Bill lives in a house in Ohio; here’s the address.” Instead, the courts leave hints and clues, requiring a lawyer, much like Agent Starling, to piece them together to decipher what is permissible in a restrictive covenant. The cases on the subject are not anagrams, but they can feel like that, especially to a lawyer who does not practice in the area regularly.
To provide predictability and encourage enforceability of reasonable restrictive covenants, the Georgia General Assembly passed and Governor Perdue signed HB 173, which is codified at O.C.G.A. § 13-8-50, et seq. The statute sets forth rules for the temporal and geographic scope of restrictive covenants, as well as the types of activities that can be proscribed and the categories of employees who can be bound by such prohibitions. The goal of the statute is to create an easily understood legal regime to govern the enforcement of restrictive covenants, as opposed to the heavily populated universe of case law that supplies the current framework.
The statute’s guiding principles will not become effective unless an enabling constitutional amendment passes the Legislature and is then ratified by the voters in the November 2010 election. An amendment is required because the Legislature’s previous effort to pass a statute governing restrictive covenants – O.C.G.A. § 13-8-2.1 – was ruled unconstitutional by the Georgia Supreme Court.[3. Jackson & Coker, Inc. v. Hart, 261 Ga. 371, 405 S.E.2d 253 (1991).] Also, the new statute will apply only to agreements executed after the statute’s provisions become effective, so the current legal rules still remain relevant, although decreasingly so over the passage of time.
Technology companies should be especially interested in HB 173. This is so because restrictive covenants are particularly important in the technology field. “Tech” companies have to be especially vigilant to protect their confidential, company-specific information because so much of their value is bound up in this information, unlike brick-and-mortar assets that dominate the balance sheets of companies in other industries. Instead, tech companies derive much of their worth from information that is, by its nature, portable. Also, because of the novelty of what tech companies often do, they are more likely to have key employees whose move to a competitor could have serious repercussions. The savvy tech company should have tailored agreements for its key employees, and HB 173 will give those companies more latitude in protecting their information and tailoring their agreements. The statute raises three particular issues for technology companies to consider.
1. Replacement of an Outdated System
[quote2]Georgia’s current rules for non-competes require that an employer specify the exact geographic area covered by a non-compete provision at the time that the employee puts pen to paper.[4. AGA, LLC v. Rubin, 243 Ga. App. 772, 533 S.E.2d 804 (2000).] Nationwide non-compete provisions are almost certainly forbidden under Georgia law.[5. American Software Inc. v. Moore, 264 Ga. 480, 448 S.E.2d 206 (1994).] These rules make sense for professions where an employee will have a defined, local geographic area. For instance, a door-to-door salesman who works within certain zip codes in Fulton, DeKalb, and Clayton Counties could be specifically restrained from competing in those areas. Such geographic specificity is not the case for most tech companies.
Imagine a fictional software company – Figment Programming – that employs high-level developers to create and improve upon the company’s offerings, which are designed for amusement parks. These developers can do their work anywhere in the country as long as they have a computer and an Internet connection. Figment is in a competitive field with a few primary rivals. The current Georgia rules for non-compete provisions do not provide Figment with many options. A nationwide non-compete provision is out of the question, no matter how narrowly the software company draws up the definition of proscribed activity. There is no concept of a sliding scale in Georgia law. A non-compete provision that prevents the employee from working for specific competitors is also an unlikely proposition.[6. There is no clear authority on this question, though arguments can be made that a prohibition against working for specific competitors or starting a competing business should be allowed as within the types of restraints that the courts previously have adopted.]The new statute would help Figment protect its interests. A nationwide non-compete would no longer be forbidden if the particular situation justified such a restraint. If Figment drafted a provision that covered the entire country, but was limited to the narrow field of programming software specific to amusement parks, it would have a reasonable chance of enforcing the provision. As long as Figment can show that it made a “good faith estimate of the activities, products, and services, or geographic areas” covered by the provision, then it can show that the restriction was reasonable.[7. O.C.G.A. § 13-8-53(c)(1)] Figment could also replace the geographic provision with a specific ban on its programmers going to work for its primary competitors.[8. O.C.G.A. § 13-8-56(2)(B).] The risk with this latter approach is that it would be ineffective against programmers starting their own companies, which is a factor in an industry with lower barriers to entry such as software programming. Finally, and most importantly, the new statute would permit courts to modify restrictions (sometimes known as “blue penciling”) to fit Figment’s legitimate interests.[9. O.C.G.A. §§ 13-8-53(d); 13-8-54(d). The term “blue-penciling” is sometimes used to refer to modification of contracts. In other instances, such as current Georgia law involving restrictive covenants in the sale of a business, it only refers to striking unenforceable provisions out of agreements. Hamrick v. Kelley, 260 Ga. 307, 308, 392 S.E.2d 518, 519 (1990).] Thus, if Figment lists five competitors as being off-limits and a Court finds that an employee would pose a threat if he or she moved to only one or two competitors, the Court can limit the restriction accordingly.
Figment also will need to account for one other provision in HB 173 when considering non-compete provisions for its employees. The new statute states that only four categories of employees can sign non-compete provisions: (1) sales employees; (2) key employees; (3) professionals; or (4) managers.[10. O.C.G.A. § 13-8-53(a). The statute does not prevent employees who fall outside of these four categories from signing non-solicitation or non-disclosure covenants.] There is some question as to whether a high-level programmer is a “professional.” If the answer to that question is no, then a programmer will have to fall into the category of “key employee” to be eligible for an enforceable non-compete agreement.[11. The new statute has a lengthy definition of “key employee”:'Key employee' means an employee who, by reason of the employer's investment of time, training, money, trust, exposure to the public, or exposure to customers, vendors, or other business relationships during the course of the employee's employment with the employer, has gained a high level of notoriety, fame, reputation, or public persona as the employer's representative or spokesperson or has gained a high level of influence or credibility with the employer's customers, vendors, or other business relationships or is intimately involved in the planning for or direction of the business of the employer or a defined unit of the business of the employer. Such term also means an employee in possession of selective or specialized skills, learning, or abilities or customer contacts or customer information who has obtained such skills, learning, abilities, contacts, or information by reason of having worked for the employer. O.C.G.A. § 13-8-51(8).]
2. New Rules for Non-disclosure Covenants
Technology companies rely heavily on non-disclosure of confidential information provisions because, comparatively speaking, their value often is bound up in proprietary information, including customer data and information. Under current Georgia law, there are two traps for employers who rely on non-disclosure covenants as the sole means to protect this information. The first is that Georgia is one of two states to require a time limitation on non-disclosure covenants.[12. Pregler v. C&Z, Inc., 259 Ga. App. 149, 151, 575 S.E.2d 915, 917 (2003).] The second is that non-disclosure covenants cannot cover any information that is otherwise publicly available, even if the provision also covers truly confidential information.[13. Nasco, Inc. v. Gimbert, 239 Ga. 675, 238 S.E.2d 368 (1977).] Because of Georgia’s strict prohibition against modification or blue-penciling of restrictive covenants,[14. Habif, Arogeti & Wynne, P.C. v. Baggett, 231 Ga. App. 289, 290, 498 S.E.2d 346 (1998).] a mistake in drafting as to either element is fatal.
Coming back to Figment Programming, it is not quite in the situation it found itself with non-compete law where it cannot craft a sufficient restriction because of the lack of a narrow geographic zone of operations. With non-disclosure provisions, drafting a proper and enforceable provision is usually (but not always) possible. The trick is that Figment has to write its provision with Georgia law in mind or else it will lose the protections altogether. This would be a particularly dangerous issue if Figment were a national employer with standard non-disclosure agreements used throughout the country.
The new statute removes this risk as to both elements. The statute permits employers to protect their confidential information so long as the information or material remains confidential.[15. O.C.G.A. § 13-8-53(e).] As mentioned, the statute also permits courts to modify restrictive covenants to cover an employer’s legitimate interests, but nothing more. Thus, Georgia law would be closer to the law in the majority of states, helping national companies with operations in Georgia.
The new law will also lead to better results. Right now, if Figment omitted a time-limit from a non-disclosure provision, then the entire provision would be rendered unenforceable, leaving the company with no protection, other than what is afforded under the Georgia Trade Secrets Act.[16. O.C.G.A. § 10-1-760, et seq.] Under the new statute, a trial court will be charged with making sure that the non-disclosure provision protects Figment’s legitimate interests. Thus, instead of an all-or-nothing proposition, Figment’s oversight can be addressed and Figment can still obtain the protections intended by the agreement.
3. The New Law Aims to Balance the Interests of Employers and Employees
Under current Georgia law, it is very difficult for employers to stop their employees from moving to competitors through restrictive covenants. However, there is a second side to the coin. Georgia employers can hire employees from unsuspecting competitors who may not have properly accounted for the quirks of Georgia law when crafting agreements. In an industry like software development that often entails cross-pollination between companies, this is a relevant consideration. Thus, Figment has a greater chance under the current law of poaching employees from competitors than it would under the statute. The new statute creates a clearer legal regime governing restrictive covenants. Employers and employees alike will have an easier time understanding the rules. They will have greater latitude to write and agree to restrictions that cover what is most important, thus providing an employer like Figment with confidence that when it exposes its programmers to cutting-edge, proprietary software concepts, that information is protected. Employers and employees will know that courts will be empowered to make enforceability determinations based on the facts of a given situation as opposed to one-size-fits-all rules, making sure that only reasonable restrictions are in place. Competitors will know that they will have a harder time poaching employees, customers and other key relationships, and confidential information from one another without serious legal consequences. This is the world that technology companies will be in if the Legislature and voters enable HB 173 in 2010, no longer wondering to themselves “what did that guy behind the glass mean when he said . . . .”