How Will the Georgia New Non-Compete Statutes Affect You?

The New Face of
Non-Compete Agreements
in Georgia

Generally, non-compete provisions are very difficult to enforce in Georgia. However, on November 2, 2010, Georgia voters made it a little easier to enforce restrictive covenants such as non-compete provisions and non-solicitation provisions.

At the last election, Amendment One to the Georgia Constitution was passed. Amendment One grants the State legislature greater authority to regulate the reasonableness of contracts containing restrictive covenants, such as non-competes. The hope behind the new law is to make it easier for Georgia employers to enforce non-competes and other restrictive covenants against former employees.

The passage of Amendment One means that the recently enacted law on non-competes, previously passed by Georgia's General Assembly, will finally go into effect. In an effort to provide predictability and enforceability of restrictive covenants, the Georgia General Assembly previously passed (and Governor Perdue signed) HB 173. HB 173 is codified in O.C.G.A. § 13-8-50 though O.C.G.A. § 13-8-59. However, due to a ruling of the Georgia Supreme Court, the law could not go into effect unless there was an amendment to the Georgia Constitution.

Now that recently enacted law concerning restrictive covenants is now in effect, what does it mean? The new law sets forth rules governing restrictive covenants, such as non-compete and non-solicitation provision, in contracts during and after an employee’s employment. Restrictive provisions in contracts are permitted during the course of employment. However, the employer must ensure that the provisions are reasonable as to:
(1) Time;
(2) Geographic Area; and
(3) Scope of Activities Barred.
The rules are slightly different once an employee leaves a company. After employment ends, the statute sets forth rules for the types of activities that can be restricted and the categories of employees who can be bound by such prohibitions.

Non-Compete Agreements

Whether or not a non-compete provision in a contract will be enforced against an employee after employment ends, depends largely on the employee’s activities and responsibilities during his or her employment. Specifically, during the course of employment, the employee must have:
(1) Customarily and regularly solicited customers or prospective customers for the employer;
(2) Customarily and regularly engaged in making sales or obtaining orders or contracts for products or services to be performed by others;
(3) Performed the following:
a. Primary duty of management;
b. Customarily and regularly directed the work of two or more
other employees; and
c. Had the authority to hire, fire or change the status of
other employees or had a significant voice in making such
decision; or
(4) Been a key employee.

Non-Solicitation Agreements

Non-solicitation provisions in a contract are treated in an entirely different manner. For a non-solicitation provision in a contract to be enforced against an employee after employment ends, the non-solicitation provision must cover a stated period of time following termination and must only apply to the employer’s customers and prospective customers with whom the employee had material contact during his or her employment.

The non-solicitation provision can prohibit such an employee from not only soliciting competing business from the former employer’s customers and prospective customers, but also from attempting to solicit such customers and prospective customers. Further, the non-solicitation provision can prohibit the former employee from directly engaging in such solicitation efforts and can also prohibit the former employee from helping others engage in such solicitation efforts.

Importantly, and for a nice change, the language required for the non-solicitation provision is minimal. For example, the contract does not need to have an express reference to a geographic area or even to the types of products or services that are considered to be competitive. Mere reference to a prohibition against soliciting or trying to solicit business from customers is sufficient and will apply to:
(1) The employer’s customers, and actively sought prospective customers, with whom the former employee had material contact; and
(2) Products and services that are competitive with those of the employer’s business.

The New Law is Not Retroactive

As described herein, the Georgia statutes finally provide guidance for employers desiring to include enforceable restrictive covenants, such as non-compete and non-solicitation provisions, in employment agreements. However, the statute passed by the Georgia legislature governing restrictive covenants did not become effective until November 2nd, the day Amendment One to the Georgia Constitution was passed by the voters. Therefore, the new restrictive covenant rules will apply only to agreements executed after November 2nd, 2010 The maze of current legal rules will remain relevant for employers for years to come.

Do You Have What it Takes to be the Next Tycoon?

The question is: Are you a gambler at heart?

As children, most people don’t day dream about rising to the level of middle management in a corporate conglomerate. No one really thinks, "I can’t wait to work 9-5 in a cubicle for someone who can't remember my name." Most people want to run their own show, be their own bosses, and become the next millionaire.
You can do it, but make sure you are prepared. Preparation is the key to success in the early stages of entrepreneurship. Now, let’s talk about three keys to preparing for the jump:

1) Family Buy-In

You and your family need to be ready to commit all resources to your dream. All of your time, energy, and, most importantly, money will disappear. Your spouse better be onboard and fully bought in to your dream because he or she is not going to see you or any money for a while. Set the expectations early and save your business and your marriage.

2) Be Realistic and Study the Terrain

There is no better way for you to discover new ideas or pitfalls for your business, than to write a plan. We’re not talking about a formal, $20,000 business plan, but a preliminary written analysis of your ideas. Perform intensive market research to determine if there is an unmet need for what you will offer. Is that unmet need a cheaper price or an untapped geographical market? Perhaps there’s an unmet need for products and services that are complimentary to those already on the market. Part of your research should also include analyzing the competition and determining where your company will have the edge. As you research and analyze the data, you can then determine if anyone will actually buy what you plan to offer.

3) The Money - How, When and Where

Once you have determined that you can offer something that people will want to buy, determine your funding strategy for the first five years. Try to avoid unnecessary overhead expenditures. Work out of your house, which is quickly becoming today’s trend even for large corporate employees. Also, hire only those who are critical to the success of your company and seek out creative compensation strategies. Your goal is to keep the cash in the business as much as possible.

As for funding your venture, contrary to popular folklore, friends and family don’t want to give you their savings. There will be lots of promises to help in the beginning, but getting people to actually sign that check will be a struggle; I guarantee it.

If at all possible, plan to self-fund your venture for the first couple of years through your own savings and through loans. Loans are tough to get right now, but they are still out there. Next, get firm commitments from your friends and family as to the amount they will give you and when. By firm, I mean in writing. As for their ROI, don’t give away your equity if you can help it. Be creative - consider performance based returns to offset equity. Be stingy with your equity and try to structure the investments as loans or, at worst, a loan/equity combination.

If you build it, they will not necessarily come. It makes for a great movie, but not always a great life. Most start-ups fail, not for the lack of passion but for the lack of preparation.