Georgians Vote Not to Compete

With the ratification of Amendment 1 to the Georgia Constitution in yesterday’s election, franchisees and employees in Georgia suffered a huge defeat. Blue Penciling is now the law: restrictive covenants will now be presumed valid, with judges rewriting the more egregious contracts, and enforcing them as rewritten.

However, there is a silver lining. The new law only applies to contracts entered into on or after November 3, 2010. So, if you are already under contract, even if your contract has 5-10 more years remaining, the law as announced in Atlanta Bread vs. Lupton-Smith 285 Ga. 587 (Ga. 2009) still governs the enforceability of your particular agreement.

Franchisors know this—this is the one aspect of the new law they do not like. So, many of them are planning to have you sign an amendment to your franchise agreement, making the effective date of your restrictive covenant after the effective date of the new law.

KNOW YOUR RIGHTS—before signing an amendment, have your lawyer review your current agreement, the new law, and what you are being offered as consideration for signing the amendment.

Chances are, your franchisor cannot force you to sign an amendment, and cannot (legally) retaliate against you if you refuse to do so.

William K Whitner of Georgia-based law firm Paul Hastings feels the Georgia electorate votes overhauling the law on employment and franchise non-compete agreements is a great thing, and offers this opinion.

For decades, franchisors and employers who have attempted to enforce non-compete agreements against their franchisees and employees have found Georgia to be an inhospitable forum for such actions, even in some cases where the departing franchisees/employees were in a position to pose a considerable competitive threat.

Unlike the law in other states, Georgia's public policy against non-compete agreements is enshrined in the state constitution, which has expressly prohibited the legislature from authorizing contracts that have the effect of defeating or lessening competition and provides that such contracts are "unlawful and void." 

Interpreting this constitutional provision, Georgia courts historically have permitted enforcement of only very limited post-term non-competition provisions and made the enforcement of in-term restrictions in franchise agreements nearly impossible.  Moreover, unlike the courts in the majority of other states, Georgia courts have not been permitted to "blue pencil" (modify) overbroad non-compete agreements to make them enforceable.

On November 2, 2010, Georgia voters called for change. Faced with the ballot referendum: "Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?" the Georgia electorate voted overwhelmingly "YES" by a 2-to-1 margin.

As a result, Statute H.B. 173, codified at O.C.G.A §§ 13-8-2, 13-8-2.1, and 13-8-50-59, now will take effect.  The statute provides for a host of revisions to the current status of Georgia law on restrictive covenants in the employment and franchise context. These revisions will bring Georgia more in line with the rest of the country and make the enforcement of non-compete agreements, post-term and in-term, easier.  Among other things, the revisions:

• permit Georgia courts to partially enforce restrictive covenants that are otherwise overbroad, thus reversing Georgia's strict and longstanding "no blue-penciling" rule;
• provide that in-term restrictive covenants will not be considered unreasonable because they lack specific limitations on the scope of activity, duration, or territory, as long as the covenants promote or protect the purpose or subject matter of the agreement or deter any potential conflict of interest;
• establish a presumption that post-employment non-compete agreements with a duration of two years or less are reasonable;
• permit the enforcement of post-term restrictions that lack an express reference to a geographic area.