Georgia Referendum On Restrictive Covenants In Employment Agreements

By Mari L. Myer, The Myer Law Firm, Decatur, Georgia [1. Ms. Myer is the Principal of The Myer Law Firm, based in Decatur, Georgia.  A graduate of Boston University School of Law and Wellesley College (B.A. cum laude), she has over twenty years of experience litigating business and employment disputes, including matters involving restrictive covenants in employment agreements, trade secrets, intellectual property, employee separations, and business divorces.  She also negotiates and drafts employment agreements, separation agreements and related types of documents.  Her clients include small and medium sized businesses as well as individuals.  She is a long-time member of the Executive Committee of the Technology Law Section and chairs the Section’s Litigation Committee.] Georgia has long had a reputation for being very friendly to employers except in one area:  it is difficult to enforce a post-employment restriction against an employee either competing with the employer or soliciting business from the employer’s customers. These restrictions are commonly referred to as “restrictive covenants”.

Georgia’s reputation for being a difficult place to enforce restrictive covenants stems from a provision in its constitution that prohibits restrictions that restrain trade.  If a restrictive covenant runs afoul of this constitutional provision, the restriction can’t be enforced by a Georgia court.  The result is that Georgia’s courts will only enforce restrictive covenants that are very narrowly drawn and that will not prevent the employee from earning a living in his/her chosen field.

When deciding whether to enforce a restrictive covenant, a court will look at whether the covenant is reasonable as to its duration, scope and geographic territory.  The restriction cannot be revised - “blue-penciled” - by the court, which means that the exact language of the restriction must pass muster under Georgia law or it will be stricken altogether.

A. The Existing Caselaw Governing Restrictive Covenants is Clear Enough to Practitioners Familiar With it.

Although the rules governing whether a restrictive covenant will be enforced by a Georgia court can be confusing to one not familiar with this area of the law, the rules can be easy to understand and apply once the practitioner has studied them closely.  The result is that, although an enforceable restrictive covenant can be difficult for an inexperienced practitioner to draft under Georgia law, once a covenant has been drafted it is often easy to anticipate whether a court will enforce it.  This affords a level of certainty for both employer and employee that often enables the parties to negotiate a resolution of their dispute without resort to protracted litigation.

One consequence of Georgia’s constitutional prohibition against restrictions that restrain trade is that companies can and do hire employees away from their competitors and take advantage of the employees’ skills and contacts within the industry in situations where an employee hasn’t signed an enforceable restrictive covenant.  Although some employers are understandably troubled by this, others would argue that this behavior is classic free market competition that should be allowed to continue.

B. The Statutory Revision to the Law of Restrictive Covenants Will Create – Not Eliminate – Problems.

A change to the way Georgia’s courts interpret restrictive covenants may be coming if the Georgia Legislature has its way.  The Legislature has accepted critics’ arguments that the current state of Georgia caselaw governing restrictive covenants is both confusing and bad for business.  In 2009, a legislative act was passed and signed by the Governor, subject to approval by a majority of voters in an upcoming November 2010 constitutional referendum.  If the Act is approved in the  referendum, it will become effective immediately thereafter, and it will substantially rewrite the law governing restrictive covenants.  In a nutshell, O.C.G.A. §§13-8-51 et seq. (the “Act”) will allow employers and employees, and certain other types of entities, to agree in writing that, following termination of the parties’ relationship (employment or some other type of business relationship), the employee[2. This article uses the terms “employee” and “employer” loosely.  The Act sets rules governing a variety of relationships other than employment relationships, including by way of example those between independent contractors and principals and between distributors and manufacturers.] will refrain from competing with the employer or soliciting business from the employer’s customers.  The Act provides a handful of guidelines regarding what may be considered a reasonable restriction, and it authorizes courts to rewrite – “blue pencil” - restrictions that a court concludes are not reasonable.

Unfortunately, as is explained herein, what is being touted as a “silver bullet” to cure the perceived evils of the current caselaw governing restrictive covenants may turn out to be neither necessary nor the promised “cure”.

1. Expensive and Time-Consuming Litigation Will Be Necessary to Interpret the Act and to Determine Which of the Existing Caselaw May Still Apply.

First, if the Act becomes law the well-developed body of Georgia caselaw interpreting restrictive covenants will only provide guidance where it either (a) is not specifically rejected by the Act, or (b) addresses matters that are outside the coverage of the Act.  As is generally the case when comprehensive legislation is adopted, there will no doubt be quite a bit of litigation to (a) interpret the Act, and (b) establish which of the old caselaw will still apply and in what circumstances.  Such cases will take several years to wind their way through the trial and appellate courts in Georgia, with an uncertain outcome.  Until these cases are resolved by Georgia’s appellate courts, there likely will be differences in how individual judges interpret and apply the Act.  Thus, at least initially, the Act will create – rather than clear up - confusion in this area of the law.

2. The Act Has Gaps and Ambiguities That Must be Resolved By Expensive and Time-Consuming Litigation.

Second, the Act contains both gaps and ambiguities that also will have to be resolved by the courts.  Again, this will spark litigation that will likely take several years to wind its way through the courts, also with uncertain outcomes.

a. There is a Coverage Gap.

The most glaring gap comes from the categories of employees covered by the Act.  The Act’s coverage is limited to salespeople, members of management, key employees and professionals, as each of these terms is defined in the Act.  A threshold issue prior to application of the Act to a restrictive covenant will be whether the employee against whom the employer seeks to enforce the covenant falls within one of these four categories.  If the employee doesn’t fall within one of these four categories, the employee will not be covered by the Act.  While these four categories appear to encompass the types of employees that an employer is most likely to want to bind to a restrictive covenant, in some instances there will be a perceived need to bind employees who don’t fall within any of these four categories and thus are not covered by the Act.

b. The Act Suggests that the Categories of Employees Who Do Not Specifically Fall Within its Coverage Cannot Be Bound by Restrictive Covenants.

If the employee is not in one of the four categories covered by the Act, the court must determine whether the Legislature intended to preclude the enforcement of restrictive covenants against such an employee.  The language of O.C.G.A. §13-8-54(b) suggests that only restrictive covenants that fall within the Act can be enforced.  If the court concludes that this was the legislative intent, then some categories of employees who could have been subject to restrictive covenants under the existing caselaw will not be subject to restrictive covenants that are signed after the Act goes into effect.

Since the Act facially states that it only applies to restrictive covenants signed after the Act’s effective date, courts must decide whether to enforce restrictive covenants signed by employees who fall outside the scope of the Act, where the restrictive covenants were signed prior to the Act’s effective date.

If courts conclude that, notwithstanding O.C.G.A. §13-8-54(b), restrictive covenants can still be enforced against categories of employees who fall outside the scope of the Act, the restrictive covenants applicable to these other categories of employees will be governed by the existing caselaw and not by the Act.

Of course, different trial courts will likely reach different conclusions on these threshold issues – again creating uncertainty that must be resolved through years of litigation in the trial and appellate courts.

3. Blue Penciling Will Allow Judges to Rewrite Covenants from the Bench, With a Resulting Loss of Both Predictability and Control.

a. Blue Penciling Will Create Uncertainty as to How and When a Court Will Rewrite a Covenant.

An additional area of concern regarding the Act is the effect of the inclusion of a provision allowing courts to blue pencil otherwise unenforceable restrictive covenants in a way that renders them enforceable.  At least initially, courts are likely to use different criteria to determine when to rewrite a poorly drafted covenant and when to simply refuse to enforce it – again creating issues to be resolved by the appellate courts.  This initial outcome can be predicted from an analysis of how Georgia’s trial courts have interpreted their existing blue penciling powers with respect to restrictive covenants ancillary to a sale of business:  sometimes courts have enforced the restrictions as written; sometimes courts have rewritten the restrictions and then enforced the rewritten restrictions; and sometimes courts have concluded that the restrictions don’t hew closely enough to the law to be “saved” – in which case the courts have thrown out the covenants altogether.  It is difficult to discern from the caselaw in which blue penciling has been considered in the sale of business context when and how a court will interpret such a covenant.  This has had the effect of creating considerable uncertainty regarding what such a covenant can safely require of the business seller.  Under the Act, this uncertainty will likely play out in the context of employee restrictive covenants as well. This uncertainty is just the opposite of what the Legislature has stated it intended to accomplish with the Act.

b. Blue Penciling Will Authorize Trial Court Judges to Rewrite Covenants, Possibly With Little Regard for the Parties’ Actual Intent.

Voters who object to judges legislating from the bench should be concerned that the blue penciling power granted to judges under the Act will in some instances have the effect of allowing trial court judges to rewrite contracts from the bench.  This will, of course, remove from parties the power to negotiate their own agreement where a judge finds fault with the terms of the restrictive covenant.  Although it is reasonable to expect a judge to try to rewrite a covenant in a way that reflects the parties’ actual intent, the Act places very few limits on the judge’s discretion in this respect.  An unhappy party will be left to seek yet another re-write by an appellate court.  Thus, by allowing a trial level judge to blue pencil, the Legislature has forced parties to give up control over their own “deal”.

Conclusion:  The Act is Likely to Create Confusion and Deliver Greater Control Over Contract Terms to Trial Court Judges.

In contrast to the problems with the Act that are described above, under the current caselaw, the rules are sufficiently clear as to what a restrictive covenant can and cannot require in order to be enforced by a Georgia court.  A careful practitioner can draft an enforceable restrictive covenant simply by following these rules.  Similarly, counsel can determine the enforceability of a restrictive covenant with a fair degree of certainty without having to litigate over it.

Although the Act allows the employer and an employee covered by the Act to agree on a duration, scope and territory of a restriction on either competition or solicitation of customers, and even offers some guidance as to durations that will generally be considered reasonable for various types of agreements, the ability to have a court blue pencil a poorly drafted restrictive covenant after the fact is an “out” for a lazy practitioner.  The poorly drafted restriction still could be stricken by a court altogether, or it could be enforced as written, or it could be rewritten by a court in such a way as to be unrecognizable to the parties.  And the parties will not know which of these events will occur until a trial court reviews the restrictive covenant. As a result, this flexibility in the Act – which is touted by its supporters as one of its chief benefits - will inevitably lead to litigation over whether the restrictive covenant (a) is sufficiently specific to be understood and obeyed by the employee, (b) requires modification by the court before it will be enforced, or (c) is so poorly drafted that a court will simply strike it rather than rewrite it.  Relying on the Act, a lazy practitioner may in some instances be able to draft a post-employment restriction that will escape being thrown out altogether by a court (as would likely happen under the current caselaw), but the parties will wind up litigating over the specifics of an enforceable restriction.  The result will be to increase litigation costs at the back end without providing any certainty on the front end as to the ultimate outcome.   Surely this is not in the best interests of most clients.

Employees’ Online Endorsements Can Result In Employer Liability

By Chuck Rice, Kilpatrick Stockton, LLP, Atlanta[1] Employees’ blogs and social-networking websites raise a number of potential legal issues for employers, but recently issued Federal Trade Commission (“FTC”) guidelines on product endorsements reveal a largely unforeseen risk:  employer liability for false or misleading advertising stemming from employees’ online postings about their employers’ products or services.

The New FTC Guidelines

Section 5 of the FTC Act prohibits businesses from engaging in unfair or deceptive acts or practices affecting commerce, and the FTC has interpreted this prohibition as covering false or misleading advertising practices.  With respect to unlawful advertising practices, the FTC recently issued revised guidelines on endorsements of products and services, and these guidelines cover advertising achieved through “new media” such as blogs and social-networking sites.  These guidelines, which went into effect on December 1, 2009, define “endorsement” as an advertising message that consumers are likely to believe represents the opinions or experiences of a party other than the sponsoring advertiser.  Under the guidelines, a business that pays the party making the endorsement or that has an ongoing relationship with that party can be held liable for false or misleading statements made by the endorser about the business’s goods or services or for the endorser’s failure to disclose the relationship between the endorser and the business, even if the business has no control over the content of the endorser’s statements.

The new guidelines raise significant liability concerns for an employer when its employees promote the employer’s products or services on their personal blogs or social-networking pages.  If the employer is found to be “sponsoring” those employee endorsements, it can be held liable under the FTC Act for any false or misleading statements in the employee’s message, and a simple failure to disclose the employment relationship in the endorsement can render an otherwise true and honest statement unlawfully misleading.  In determining whether a business is sponsoring an individual’s internet-communicated endorsement, the FTC will consider a number of factors, including whether the individual receives compensation from the business, the length of the relationship between the individual and the business, and whether the business has provided the endorsed products or services to the individual free of charge.  In the case of an employer and an employee, compensation would be present in the form of wages, an employment relationship of significant duration will often exist, and, in some cases, the employee may receive the employer’s products or services free of charge or at reduced prices.  Thus, an employer could be found to be the sponsor of an employee’s online endorsement of the employer’s goods or services, even though it has not actively solicited the endorsement and has no direct control over the content of the endorsement.  Of course, when an employer directs or encourages its employees to promote the employer’s products or services on their personal internet sites, the FTC would have little difficulty in establishing that the employer is the sponsor of employee endorsements.

In comments published with the revised guidelines on endorsements, the FTC stated that it would consider the existence of an employer’s policies and procedures governing employee postings on blogs and social-networking sites in determining whether the employer should be held liable for misleading employee endorsements on such sites.  The FTC indicated that it would generally not pursue an enforcement action against an employer based on the actions of a single employee who violated a company policy that “adequately” covered the employee’s inappropriate endorsement.

Practical Implications

Even if an employer has not actively solicited employee endorsements of its products or services, the new FTC guidelines suggest that the mere existence of an employment relationship may support a presumption that the employer sponsored misleading endorsements on an employee’s personal blog or social-networking page.  To minimize the risk of liability for false or misleading advertising in this situation, an employer should be pro-active and adopt a policy addressing statements about the employer’s products or services on employees’ websites.  Such a policy should inform employees about what constitutes an employee endorsement, what disclosures must be made in connection with employee endorsements, and what statements would be inappropriate.  The policy should also require employees to submit proposed endorsements of the employer’s products or services to the employer’s marketing or legal staff for approval before they are posted on the internet.  Although employee endorsements on personal web pages can be a valuable marketing tool, exerting an appropriate level of control over such endorsements can mean the difference between a successful advertising strategy and a costly lawsuit under the FTC Act.


[1] Mr. Rice, who is resident in the Atlanta office of Kilpatrick Stockton, LLP, focuses his practice on a full range of labor and employment law matters across many industries.

“Lex Nokia” And Confidentiality In Electronic Communications In Finland

By Eija Warma, of Castren & Snellman, Helsinki, Finland[1]. In Finland, the Constitution[2] guarantees everyone a basic right of privacy, and specifically states that “The secrecy of correspondence, telephony and other confidential communication is inviolable”. Because of this fundamental right, a recent amendment to Finland’s Act on the Protection of Privacy in Electronic Communications (the “Act’) prompted a broad discussion about the essential rights of the country’s citizens and garnered the amendment several nicknames, including “Lex Nokia” and the “Snoop Act”.

Background

Privacy in electronic communications guarantees confidentiality for both the content of the message and any identification data. According to the Act, a “message” means a phone call, e-mail message, SMS message, voice message or any comparable message transmitted between parties or to unspecified recipients in a communications network through which such message and data is not meant to be commonly available. “Identification data” means data that can be associated with an individual subscriber or user and which is handled in a communications networks for the purpose of transmitting, distributing or providing messages.

In 1997, the European Parliament enacted a Directive that focused on protection of privacy in the telecommunications sector[3]. Its purpose was to supplement an earlier directive addressing the processing of personal data and the free movement of such data[4] and sets basic requirements for all type of processing of personal data. The 1997 Directive was amended in 2002[5] to correspond to more current technical developments and terminology and covered “electronic communications”. In the preamble of the 1997 Directive, the European Parliament stated that the purpose of the Directive is to guarantee confidentiality of communication in accordance with the international instruments relating to human rights. In addition, in the case of public communication networks specific legal, regulatory and technical provisions should be made in order to protect fundamental rights and freedoms of natural persons and legitimate interests of legal persons, in particular with regard to the increasing capacity for automated storage and processing of data relating to subscribers and users. The preamble also stated that equipment of users of electronic communications networks and any information stored on such equipment are included within the private sphere of the users requiring protection under the European Convention for Human Rights and Fundamental Freedoms. Spyware, web bugs, hidden identifiers and other similar devices have the ability to enter a user’s equipment without user knowledge in order to gain access to information, to store hidden information or to trace the activities of the user, all of which may seriously intrude upon the privacy of the user. Because of this, the use of such devices is only allowed for legitimate purposes with the knowledge of the applicable user.

The Finnish Electronic Communications Privacy Act

The 2002 directive was enacted in Finland in 2004 by the Act[6]. The purpose of the Act is to guarantee confidentiality in electronic communications and define specific circumstances when confidentiality is allowed to be breached. According to the Act, a breach is permissible in the following situations: 1) by  consent of a sender or recipient, 2) to facilitate handling of providing and using services, 3) to allow handling for billing purposes, 4) to allow handling for marketing purposes by the service provider, 5) handling for the purposes of technical development, 6) handling for the purpose of detecting a technical fault or error; and 7) handling in cases of misuse. In practice these exceptions proved to be very problematic. The content of the section of the Act dealing with these exceptions was so broad and ambiguous that telecommunication operators and corporate subscribers[7] had insufficient guidance to address several important business matters that involved email communications in their workplaces.  Among these concerns was how properly to investigate suspicions of unauthorized disclosures by employees of business secrets through use of email accounts. This was a particular concern for technology companies, whose businesses are largely dependent on innovations resulting from highly confidential research and development activities.  Chief among these was Nokia, which is based in Finland, and, thus, the at times critical references to the amendment as the “Lex Nokia”.

The “Lex Nokia” Amendment

To address various concerns raised by the initial form of the Act, a follow up legislative committee was established shortly after the Act was passed into Finnish law. The committee drafted an amendment specifically to address the problematic situation posed by the risk of employees making unauthorized information disclosures through use of email.  The amendment was enacted and it came into effect on June 1st 2009.  The amendment essentially provides that a corporate subscriber has the right to monitor identification data automatically within the network if certain prerequisites are satisfied but a corporate subscriber is not allowed to read or open the content of the actual message. Prior to its enactment, the amendment faced significant opposition among labour organizations, professors, many interest groups and individual citizens because there was a widespread belief that the proposed modifications to the Act would give a corporate subscriber a right to breach a user’s confidentiality, which, as already noted, is considered as a fundamental right in Finland.

According to the amendment before a corporate subscriber can undertake automatic monitoring, the corporate subscriber must  1) limit access to trade secrets and draft an adequate data security policy, 2) identify those  persons who have access to trade secrets, and it is only these people whose emails can be subject to suggested automatic monitoring, 3) handle the issue in a co-operation procedure, 4) notify the office of the Finnish Data Protection Ombudsman[8], and 5) give a yearly report to the employees and to the data protection ombudsman of the actions under the amendment that the corporate subscriber has actually undertaken.   Automatic monitoring can be based on the size, type, quantity or means of communications or the receiver of the relevant information. If any suspected unauthorized disclosures are found a corporate subscriber has the right to manually review the identification data of that specific message. However, this does not give a right to review the content of the message. Based on the information obtained by the company, the corporate subscriber must then decide whether it wants to take further actions in the matter. If it suspects that the elements of an offense are fulfilled, then a request for a police investigation has to be made. If a corporate subscriber violates this procedure the sanctions vary from fines to imprisonment of responsible agents for up to three years.

The Effect To Date

By the end of September 2009 the Finnish Data Protection Ombudsman had not received any notification from corporate subscribers for the adoption of allowed automatic monitoring. However, this is not surprising given that companies cannot start monitoring before drafting an adequate data security policy and it takes time to prepare the required documentation.  Both the data protection ombudsman and the representatives of the Confederation of Finnish Industries, EK[9], which is the leading business organisation in Finland, believe that there will be notifications in the course of time. The actual implementation by businesses is just going to take some time.

In other Scandinavian countries legislation does not prohibit business from monitoring identification data for legitimate purposes. Even in Germany, which has one of the strictest European privacy laws, legislation allows monitoring of identification data if it is necessary for preventing misuse. In general, many European countries allow a company to monitor its own communications networks so long as the company has informed employees in advance of this possibility. As a practical matter, this means that Finland has enacted one of the strictest laws with respect to privacy in electronic communications.


[1] Ms. Warama has studied at Tulane Univesrsity Law School and holds an LLM from the University of Minnesota Law School.  In 2009 she completed a six-months secondment with the Atlanta office of Smith, Gambrell & Russell, LLP.  Ms. Warma’s practice focuses on employment law and intellectual property, technology and life sciences matters.

[2] The Finnish Constitution (731/1999)

[3] Directive 97/66/EC of the European Parliament and of the Council of 15 December 1997 concerning the processing of personal data and the protection of privacy in the telecommunications sector

[4] Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data

[5] Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector

[6] The Act on the Protection of Privacy in Electronic Communications (516/2004)

[7] A “corporate subscriber” means a company or organization that subscribes to a communications service or a value added service and which handles users’ confidential messages, identification data or geographic information in its communications network. The term is unique to Finland and it has not been adopted in any other European country.

[8] http://www.tietosuoja.fi/1560.htm (September 25, 2009) The Data Protection Ombudsman guides and controls the processing of personal data and provides related consultation.

[9] http://www.ek.fi/www/en/index.php (September 25, 2009) EK was one of the biggest exponents of the amendment.