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How to craft noncompete agreements that work under Georgia law

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in Employment Law,Human Resources

Georgia’s constitution prohibits contracts that have the effect of defeating or lessening competition. Anti-competition is considered anti-public policy in Georgia, so employers should craft their noncompete agreements with care.

Noncompete agreements balance employer and employee rights: the right of the employer to keep business it has cultivated, and the right of the employee to make a living after leaving the employer. To pass muster in Georgia state courts, noncompete agreements must be narrowly limited, either by geographic territory or customer list.

State supreme court clarifies

In 2006, the Georgia Supreme Court overturned an appeals court ruling that had invalidated a noncompete agreement written by the Palmer & Cay Insurance Agency. Palmer & Cay (P&C) made all of its agents sign an agreement stating that if they left the agency, they would be barred for two years from soliciting P&C clients with whom they had worked.

When three agents left to work for a rival insurance agency, they asked the courts to rule on the enforceability of the noncompete agreement. The trial court ruled that the agreement was unenforceable and the appeals court agreed.

The appeals court’s stated reason for the ruling was that the covenant “provides no time restriction” on the employees’ provision of services to P&C’s customers. The appeals court was concerned that the agents were barred from soliciting clients for two years after leaving, even if it had been many years since they themselves had worked with those clients.

But the Georgia Supreme Court saw it differently. It recognized the employer’s “protectable interest in the customer relationships its former employee established and/or nurtured while employed by the employer.” According to the High Court, the employer “is entitled to protect itself from the risk that a former employee might appropriate customers by taking unfair advantage of the contacts developed while working for the employer.”

Because the agreement was limited to P&C’s current clients and had no geographic restrictions, the state Supreme Court felt it did not hinder competitiveness and was drawn narrowly enough that it was enforceable. The court also noted that it was reluctant to interfere with freely negotiated contracts.

The state Supreme Court went on to clarify several aspects of noncompete agreements:

  • A noncompete agreement that refers to clients by definition means current clients unless expressly stated otherwise. In this case, it meant the former employees could contact P & C’s former clients.
  • An agreement that keeps former employees from contacting specific clients need not have a geographic limit as well.
  • The courts will give deference to agreements freely negotiated in the workplace.

What’s in a good agreement?

Employers should include a forum-selection clause indicating the employer’s choice of whose laws govern the contract. The forum-selection clause identifies whether the agreement would be decided under Georgia law, another state’s law or federal law. This is true even if you only operate in Georgia. If your employee is a resident of another state, he could get the dispute removed to federal court or have it tried under his state’s laws.

For Georgia employers, narrower is better. Ideally, employers would like to keep ex-employees from ever competing against them, but it is very easy to overplay your hand in Georgia. An agreement that is too restrictive can be ruled unenforceable and unravel before your eyes. Include a severability clause as a hedge against this. This clause states that if any part of the agreement is ruled to be unenforceable, it is severed from the agreement and the rest of the agreement remains in force.

Noncompete agreements should be enforceable by injunction, so that employers can immediately stop ex-employees from raiding clients or competing in violation of the agreement. Additionally, the agreements should protect the employer’s intellectual property.

Employers may raise eyebrows if they seek a noncompete agreement in an industry that traditionally doesn’t use them. Courts may look more closely at an employer that is out of step with its industry. Employers in this situation should have a sound reason to show the agreement is necessary to protect their rights.

Always consult your attorney when crafting a noncompete agreement.

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