Time, territory and scope
How your company can avoid post-employment covenant killers
William C. Chip Collins, Jr. & Gregory F. Harley
February 1, 2007
It's a nightmare scenario for most businesses – your top salesperson suddenly resigns to work for a competitor and immediately starts contacting your customers. You rush to your lawyer's office to stop it, only to be told that your non-compete agreement with the ex-employee is unenforceable.
As many Georgia employers learn the hard way, this is not an uncommon experience. Despite the fact that a company's customer base may be its most valuable asset, Georgia courts will only enforce the most narrow, carefully tailored covenants restricting a former employee's ability to work in the marketplace. Even if only one clause in an employee restrictive covenant is overbroad, Georgia courts will refuse to enforce any part of it.
Regardless of whether a business uses a covenant that prohibits an employee from working for a competitor (a “non-compete”) or one that simply seeks to prohibit post-employment contact with the employer's customers (a “non-solicit”), Georgia law imposes a series of highly technical requirements that must be satisfied. These requirements, which border on being Draconian in their effect, caused one former Georgia Supreme Court Justice to opine that “[10] Philadelphia lawyers could not draft an employer-employee restrictive covenant agreement that would pass muster under the recent rulings of this court.”
Because of the judiciary's strict scrutiny of employment covenants, enforceability problems arise for a variety of reasons. Sometimes, employers are simply guilty of overreaching. More frequently, however, an employer uses a form agreement without taking into account the onerous requirements of Georgia law. Companies using boilerplate covenants that go beyond protecting the employer's legitimate business needs are likely to be disappointed when it becomes necessary to enforce the covenants in court.
The unenforceable covenant conundrum can be avoided, though. Georgia courts will enforce a reasonably drafted restrictive post-employment covenant that avoids the legal landmines that have developed in case law over the years. So the key is to make sure your employee restrictive covenants will pass judicial muster before your best salesperson leaves and takes away half your business.
Generally speaking, a traditional non-compete must be reasonable in terms of its duration, scope of restricted activity and territory in which the employee is restricted. While these requirements seem straightforward, there are numerous pitfalls that frequently lead to judicial invalidation of covenants that, at first glance, appear reasonable. Here are some of the most common drafting errors (we call them “covenant killers”) related to employment covenants and tips on how they can be avoided.
Covenant Killer No. 1:
Overbroad territorial restriction
A non-compete provision (as opposed to a non-solicit) must contain a territorial restriction, and the geographic scope of the restriction must be closely tied to the area where the employee actually works. For example, if an employee only works in one county, a covenant restricting his ability to work anywhere in Georgia will likely be unenforceable. Even if your covenant is only limited to a couple of counties, if the employer did not actually work in each one of those counties, it will likely be rejected.
Finally, if the territorial restriction is dependent upon where the employer does business, rather than the employee, the covenant will almost always be unenforceable. Because the territorial restriction will so frequently render a non-compete agreement unenforceable, it may be prudent for an employer to forego a non-compete altogether and simply rely on a non-solicitation of customer provision which, if crafted properly, does not require a territorial limitation.
Covenant Killer No. 2:
Vague description of restricted territory
A principle underlying many Georgia decisions is that an employee should be able to specifically determine where he will be restricted from competing at the time he executes his non-compete agreement. Thus, Georgia courts have refused to enforce vaguely defined territorial limitations like “metro Atlanta” or the “territory of Hospital X.”
Similarly, if the scope of the territory varies depending on where the employee actually ends up working (e.g., “the employee's territory as of the date of termination”), then a Georgia court will not enforce it.
The geographic scope of the restriction must be ascertainable at the time the covenant is signed. A Georgia court also will likely refuse to enforce a seemingly reasonable restriction that prohibits an employee from competing “within a 10-mile radius of employer's office.” Why? Because the “employer's office,” without a specific address, is subject to change and therefore cannot be determined on the date of the agreement.
Covenant Killer No. 3:
“In any capacity” restriction
A common covenant killer is the “in any capacity” restriction. This is a non-compete agreement that attempts to restrict an employee from working in any position for a competitor, without regard to what services the employee actually provided for the former employer. Such restrictions are held to be overbroad and therefore unenforceable.
Thus, the scope of restricted activities in a non-compete agreement should be limited to only those job duties that the employee will actually be performing for the employer. For example, a stockbroker can be prohibited from selling securities for a competitor, but not from performing accounting services.
Covenant Killer No. 4:
Lack of a reasonable durational limitation
Of the three requirements – territory, time and scope – the durational limitation is the least problematic for Georgia employers. Georgia courts routinely uphold restrictive covenants that are effective up to three years after employment ends and, in a few cases, have enforced durations of five years. We recommend one- or two-year durations. If your non-compete or non-solicit agreement lacks a durational limitation altogether, however, or is otherwise unreasonably long in duration under the circumstances, it will not be enforced. Finally, tolling provisions which seek to extend the duration of the covenant during any period of violation will render the entire covenant unenforceable.
Covenant Killer No. 5:
Prohibition against contacting any and all customers of the employer
The Georgia Supreme Court has held that an “employer has a protectable interest in the customer relationships its former employee established and/or nurtured while employed by the employer.” Thus, a non-solicit agreement does not have to have a territorial limitation if it prohibits the employee from contacting only those customers with whom the employee had material contact while working for his former employer, provided that the covenant does not prohibit solicitation of customers who had severed their relationship with the employer well before the employee resigns.
Conversely, if a non-solicit agreement lacks a reasonable territorial restriction (see Covenant Killers No. 1 – 3 above) and attempts to prohibit an employee from contacting any customer of the company, regardless of whether the employee had contact with that customer, the restriction will be unenforceable.
Covenant Killer No. 6:
Restriction from “accepting” business from a former customer
While non-solicit covenants can enforceably restrict affirmative conduct toward a customer, such as “soliciting,” “calling upon” or “diverting” customers, Georgia courts will typically not enforce non-solicit covenants that attempt to restrict an employee from simply “accepting” business from customers of the former employer. This is yet another example of how just one word or phrase can render an otherwise well-drafted employment covenant useless.
Now is the time to review your company's employment agreement forms to see if any “killers” are lurking in your restrictive covenants. If they are, or you are simply not sure, you should contact an attorney well versed in Georgia employment covenant law to help you make your covenants enforceable before you really need them.
Restrictive covenants in partnership agreements or ancillary to the sale of a business are subject to a lesser degree of scrutiny
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