Executive Summary:The Georgia Restrictive Covenants Act (O.C.G.A. § 13-8-50, et seq.) (“RCA”) governs restrictive covenant agreements in Georgia entered into after May 2011. The RCA expressly addresses non-compete, non-solicitation of customer and non-disclosure provisions, but it is silent on non-solicitation of employee a/k/a “no-hire” provisions.
In a March 2020 decision (Belt Power, LLC v. Reed), the Georgia Court of Appeals applied the RCA to interpret a no-hire provision. For the first time, the Court of Appeals also interpreted the RCA's provisions allowing – but not requiring – the court to modify an overbroad provision.
Belt Power is a company that is primarily engaged in making and distributing conveyer belts and components. Reed and Harrington were territory managers for Belt Power. They each purchased a small minority share in Belt Power. Then, in 2014, Reed and Harrington each separately sold their minority shares back to Belt Power and, at the same time, entered into a restrictive covenant agreement.
Among other restrictions, the agreement stated that Reed and Harrington would not recruit or hire, or attempt to recruit or hire, any of Belt Power's employees for a period of five years after the sale of their shares. Reed stopped working for Belt Power in 2015, and Harrington left the company in 2017. Together, they then created Sitka Belt, LLC, a business that competed with Belt Power.
Reed and Harrington preemptively sued Belt Bower, seeking, among other things, a declaratory judgment that the no-hire provisions were unenforceable. Belt Power counterclaimed for breach of the restrictive covenants, including the no-hire provision.
In its opinion, the Belt Power court reversed the lower court and held that the RCA applies to the no-hire provisions. It first reasoned that the RCA defines “restrictive covenant” as “an agreement . . . that exists to protect the first party's or parties' interest in . . . employees, or any other economic advantages that the second party has obtained for the benefit of the first party or parties . . . .” OCGA §13-8-51(15). It also looked to the RCA's judicial review provision, which broadly states, “In any action concerning enforcement of a restrictive covenant, a court shall not enforce a restrictive covenant unless it is in compliance with the provisions of §13-8-53 . . . .” OCGA §13-8-54(b). Taking these two provisions together, the court concluded that the no-hire provision was subject to the RCA.
The court did not address whether the agreement was ancillary to the sale of a business (which allows for a greater temporal restriction) or whether it should be addressed as a no-hire provision in the employment context. Instead, it addressed whether the lower court erred when it determined that the no-hire provision was unreasonable and unenforceable under the RCA and that it would not “blue pencil” a/k/a modify the provision.
The court first recognized that it had not yet interpreted the “modification” provision under the RCA (federal courts have). That provision states that, if a court finds a specific restrictive covenant to be overbroad, then the court “may modify the restraint provision . . . .” OCGA §13-8-54(b). The court noted that a court “may modify” implies some degree of discretion and, thus, “it is within a trial court's discretion whether or not to apply the Act's blue pencil provisions.”
Because of this discretion, it reviewed the lower court's decision not to modify the provision under the more lenient “abuse of discretion” standard. It recognized that, in its order, the trial court expressly considered Belt Power's legitimate business interests and concluded they did not warrant a modification of the covenants so as to make them enforceable. Accordingly, viewing the facts and circumstances in their totality, it concluded that the trial court did not abuse its discretion when it declined to use the RCA's blue-pencil provision to modify the covenants to make them enforceable.
Employers' Bottom Line
This decision is surprising, primarily because no-hire provisions reviewed under Georgia's prior common law were more liberally interpreted, particularly as compared to a non-compete provision or a non-solicitation of customers provision. It is also surprising because there is no clear discussion concerning the context of the no-hire provision, i.e., was it considered as part of a sale of a business (and, thus, more broadly construed) or as one between an employer and an employee.
This decision also is interesting because it appears that at least this lower court fell back on pre-existing common law to decline to modify the agreement. The modification provision of the RCA is the single biggest change to restrictive covenant law in Georgia and, yet, this court declined entirely to exercise its modification powers.
Originally published 19 June, 2020
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