Thursday, June 24, 2010
Non-compete law won't create indentured servitude
By Michael Elkon, Special to the Daily Report
A casual reader of the Daily Report who happened to digest Howard Johnston's June 10 attack on O.C.G.A. § 13-8-50 et seq., Georgia's new non-compete statute, might wonder why it is that the General Assembly passed a bill that will create "indentured servant[s]" in this state. A lawyer reading Mr. Johnston's letter might wonder how the statute will cause legal practice in Georgia to become similar to that of John Grisham's "The Firm," a novel about an attorney who learns that the firm that employs him is a front for the Mafia and has murdered a number of its lawyers. The reality is that the new statute will not lead to the grim future that Mr. Johnston suggests. Rather, the new non-compete statute will place Georgia in line with the majority of states in this country.
As an initial matter, Georgia law on restrictive covenants is not nearly as clear as Mr. Johnston claims. It is difficult to enforce a restrictive covenant in Georgia. However, Georgia accomplishes this result through a bevy of decisions from the Court of Appeals and Supreme Court. Unlike California, which has a statute prohibiting non-compete and non-solicitation covenants in the employment context, Georgia's anti-enforcement regime is the product of a thicket of case law. Thus, one advantage of the new non-compete statute will be that Georgia's rules on restrictive covenants will be clear and easily accessible to attorneys and laypeople who are not specialists in the area.
It is interesting that Mr. Johnston cites the 11th Circuit Court of Appeals' recent decision in H&R Block E. Enter. Inc. v. Morris, No. 09-11184, 2010 WL 1947011 (11th Cir. May 17, 2010), as that case disproves his contention that restrictive covenants are subject to "three simple rules" and that "most business attorneys" can easily tell whether a covenant is enforceable. In Morris, Judge Charles A. Pannell Jr. of the Northern District analyzed the agreement at issue and ruled it unenforceable. The Court of Appeals looked at the same agreement and reached the opposite conclusion. If experienced, highly qualified jurists disagree as to the enforceability of a covenant, then that is not evidence of clear rules.
In contrast, the new non-compete statute sets forth a basic framework for evaluating restrictive covenants. Mr. Johnston omits or misstates a number of pieces of that framework. For instance, the statute prohibits the use of non-compete provisions except for key employees, professionals and employees with sales or significant management functions. The statute sets forth that employer/employee restrictive covenants of more than two years duration are presumed to be unreasonable. Furthermore, the statute permits courts to take an employee's economic hardship into account. Mr. Johnston ignores all of these protections for employees. Most glaringly, Mr. Johnston claims that judges will be "required to intervene to save poorly drafted covenants not to compete." This is flatly untrue, as O.C.G.A. § 13-8-53(d) provides that modification of otherwise unenforceable provisions is permissive: "a court may modify a covenant that is otherwise void and unenforceable as long as the modification does not render the covenant more restrictive with regard to the employee than as originally drafted by the parties." Moreover, this particular provision brings Georgia in line with the significant majority of states, which permit blue penciling of restrictive covenants.
The reasonableness of the statute is evidenced by the margins with which the General Assembly enacted it. HB 173, the bill containing the new non-compete statute, passed the House of Representatives in 2009 by a margin of 137-22 and the Senate by 45-2. HR 178, the bill containing the enabling constitutional amendment, passed the House in 2010 by a margin of 158-12 and then the Senate by 48-1. Bills that are secret ploys by "corporate lobbying" and "Big Law" do not pass by those margins. This is especially true for the non-compete legislation because opponents of the statute like Mr. Johnston had a year between passage of HB 173 and its enabling amendment to rally opposition. The absence of significant opposition to the amendment is telling.
Having participated in the House Judiciary Committee hearings on HB 173, I can attest to the fact that the non-compete legislation was considered with care and vetted by a bipartisan collection of legislators. The statute strikes a balance between the rights of employees to move between jobs, the interests of Georgia businesses to protect their relationships and confidential information, and the ability of those same businesses to hire new talent. If I end up stuck working for Gene Hackman and Hal Holbrook at Bendini, Lambert & Locke, then I'll admit to being wrong about the statute. However, the more prosaic outcome will be that the new non-compete statute will simply normalize Georgia's law on the subject.