Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Georgia
Georgia courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect a legitimate business interest of the employer. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Georgia courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it will not modify the agreement because the "overbreadth of one portion of the covenant so taints the entire covenant as to make it unenforceable."
Examples of non-compete agreements that Georgia courts have found to be reasonable include:
- A 2-year, 40-mile restriction against a physician from participating as a "principal, agent, proprietor, shareholder, director, creditor, subcontractor, administrator, physician director, medical director, officer, employee or otherwise, in any entity, trade or business other than" the employer if the other business provided dialysis.
- A 2-year restriction against employees of an insurance agency from taking business from any of the customers served by the employee or any prospective customer which the employee had solicited in the one year prior to termination.
- A 36-month, 8-mile radius restriction against a physician which specified the addresses and number of offices covered in the eight miles.
The courts have found the following restrictive covenants unreasonable:
- A 1-year non-solicitation restriction because it did not limit the purpose for which customers could be solicited and it would have prohibited the former employee from working in her chosen profession in almost any location in the country.
- A restriction against a former employee of a faux and decorative finishes painting company from not only painting but also from acting as a salesperson in the field because the employee had never acted in a sales capacity for the former employer.
- A 4-county territorial restriction where the former empoyee had only worked in 2 to 3 of the four counties.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.