United States: Employee Non-Recruitment Covenants In Georgia: An Important Update

In recent weeks, we have heard from many of you regarding the recent decision from the Georgia Court of Appeals on the enforceability of employee non-recruitment covenants. With this decision, there is a good chance that your employee non-recruitment covenants are impacted by the new ruling and may need to be revised.

We developed the FAQ below to help you understand this decision and what it means for your business. We hope you find this information helpful.

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WHAT DID THE COURT DECIDE?

The decision holds that non-recruitment and no-hire covenants must have a territory to be enforceable under Georgia law.

THIS DECISION SEEMS IMPORTANT TO MY BUSINESS/ORGANIZATION. HOW DID WE GET HERE?

In North American Senior Benefits, LLC v. Wimmer, two insurance agents left their employer and started a competing business. Their former employer then sued them for violating their restrictive covenants, including their employee non-recruitment covenants. Georgia's State-wide Business Court found that those covenants were invalid.

The Georgia Court of Appeals agreed, holding that non-recruitment and no-hire covenants must have a territory to be enforceable. Prior to this case, trial courts disagreed on whether a territory was required for this type of restrictive covenant. This is the first appellate decision on this issue.

SO, WHAT DOES THIS MEAN FOR MY COMPANY?

At BFV, we review agreements with restrictive covenants every day. In most agreements, employee non-recruitment covenants do not include a territorial limitation. Therefore, there is a good chance your employee non-recruitment covenants are impacted by the ruling and may need revisions.

WHAT SHOULD I DO NEXT?

You should review the restrictive covenant agreements that your organization has in use. You may need to have employees sign an amendment or a new agreement to be sure that the non-recruitment covenant is enforceable under Georgia law. We recommend you work with legal counsel to ensure that the geographic scope selected is reasonable and enforceable.

WILL WE NEED TO GIVE EMPLOYEES MONEY TO SIGN A NEW AGREEMENT?

No, not in Georgia. In Georgia, continued employment is still sufficient consideration to support a new or amended restrictive covenant agreement. If you have employees in other states, you may need to offer additional consideration for the new agreement.

THIS DECISION SEEMS UNUSUAL. IS THERE ANY CHANCE THAT IT WILL BE OVERTURNED?

The Georgia Court of Appeals ruling was a split ruling, meaning that one of the three judges dissented. The losing party has asked the Georgia Supreme Court to review and reverse the decision. It is possible it could be overturned but it is very difficult to predict the likelihood of that happening.

SHOULD I WAIT TO SEE WHAT HAPPENS?

We recommend employers act now, particularly if your organization is concerned about departing employees soliciting colleagues. The Georgia Supreme Court does not review every decision from the Court of Appeals. The Georgia Supreme Court may thus simply choose to let the Court of Appeals' decision stand.

WHAT ABOUT CUSTOMER NON-SOLICITS AND NONDISCLOSURE COVENANTS IN OUR AGREEMENTS? DO THEY NEED A GEOGRAPHIC SCOPE?

No. Georgia's statute expressly says that customer non-solicits and nondisclosure covenants are not required to have a geographic scope.

Based on those exceptions in the statute, the Court of Appeals concluded that other restrictive covenants that restrict competition after the term of employment, such as noncompetes and employee non-recruitment covenants, must have a geographic scope. Importantly, this could mean other restrictive covenants that are less frequently used, such as referral source, vendor, and supplier non-solicits, may require a territory to be enforceable. If your company uses these covenants, you should evaluate whether those covenants need to be revised.

IS THERE ANY ADDITIONAL INFORMATION THAT I SHOULD KNOW REGARDING THIS DECISION?

Yes. The Court of Appeals made one other important ruling. It held that courts can "blue-pencil" overbroad covenants by striking offending language. However, courts cannot write in terms where none exist. For example, courts cannot write in a territory where no territory is present in the agreement.

This is a key clarification of Georgia restrictive covenant law.

WHAT ABOUT THE FTC'S PROPOSED RULE? AREN'T ALL NONCOMPETE AGREEMENTS GOING TO BE BANNED ANYWAY?

The FTC's proposed rule is still pending. However, the proposed rule would not ban reasonable employee non-recruitment covenants, except perhaps in very limited circumstances. Non-recruitment covenants can be an important tool to protect against unfair competition. Thus, employers should not let the FTC's potential actions stand in the way of updating their agreements.

Georgia law and other relevant laws are constantly evolving. You can count on BFV to continue to keep you updated on decisions that can affect your business or organization.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.