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July 11, 2023
The Georgia Court of Appeals recently decided that an employee non-solicitation provision must contain a geographic limitation to be enforceable under the State’s Restrictive Covenant Act. See North American Senior Benefits, LLC v. Wimmer, et al., No. A23A0162 (June 13, 2023).
Case Background
North American Senior Benefits, LLC (NASB) is an independent marketing organization operating in the insurance industry. Alisha and Ryan Wimmer worked as insurance agents for NASB. Their independent contractor agreements contained restrictions that prevented them, during the terms of their contracts and for two years following the termination of those contracts, from employing any employees of NASB. The Wimmers terminated their contracts with NASB in June 2021 and formed Freedom & Faith, Inc., which also operates in the insurance industry.
NASB filed suit against the Wimmers and Freedom & Faith, alleging violations of the employee non-solicitation restriction. The Wimmers and Freedom & Faith asserted class action counterclaims, including seeking a declaration that the employee non-solicitation restriction was invalid and unenforceable.
After a hearing, Georgia’s state-wide business court found that the employee non-solicitation restriction in the NASB contract was void and unenforceable as applied to the Wimmer’s post-contract conduct because the restriction contained no territorial limitation. The court further refused to modify, or “blue-pencil,” the provision because doing so would materially alter the provision. Thus, the court refused to enforce the employee non-solicit, and the court permanently enjoined NASB from enforcing the restriction as to the post-contract or post-employment conduct of any NASB independent contractor or employee. NASB appealed.
Analysis of the Court of Appeals
Georgia’s Restrictive Covenant Act (Act) governs the employee non-solicitation restriction in the Wimmers’ contracts with NASB. Under the Act, no provision that restricts competition can be enforced unless it is “reasonable in time, geographic area, and scope of prohibited activities.” See OCGA § 13-8-53(a). The employee non-solicit in the NASB contracts does not contain a geographic restriction.[1]
No Geography, No Enforceability
Being mindful of its duty to afford statutory text its plain and ordinary meaning, and in light of prior precedent regarding non-competition restrictions, the Georgia Court of Appeals reasoned that a restriction that does not contain a geographic area limitation does not comply with the Act and is, therefore, void and unenforceable. Here, the Wimmers would be prohibited from hiring or soliciting any NASB employee anywhere in the world, and the court believed that such a result is clearly unreasonable under the Act.
No Blue-Penciling Under the Circumstances
Though the Act gives courts the authority to “modify” an overly broad restriction, “modify” is defined in the Act as “to make, to cause, or otherwise to bring about a modification.” See OCGA § 13-8-51(12). “Modification” is defined as the limitation of a restrictive covenant to render it reasonable in light of the circumstances in which it was made, including severing or removing that part of the restrictive covenant that would otherwise make the entire restrictive covenant unenforceable. See OCGA § 13-8-51(11)(A).
The court believed that the absence of the words “adding,” or “supplying,” or something similar in the definition of “modification” meant that the Legislature intended to limit a court’s ability to blue-pencil. Thus, the Court of Appeals held that the state-wide business court did not err in declining to add a geographic scope to the employee non-solicitation restriction in the NASB contract.
Employer Takeaways
Employers should have their Georgia employees or independent contractors sign new contracts where the prohibition on solicitation of employees contains a reasonable geographical limitation, in addition to limitations on duration and subject-matter scope. Fortunately, presenting new restrictions to employees in Georgia does not require new consideration. Continued employment is enough.[2]
*Special thanks to Brooke Palma, our Office Administrator, for her contributions to this article.
The author of this article, Patricia Tsipras, is a member of the Bar of Pennsylvania. This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in Georgia, Pennsylvania, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
[1] The restriction in the NASB contract reads as follows:
Non-Solicitation of Employees and Independent Contractors: During the term of the Licensed Agent’s contract with NASB and for a period of two (2) years following termination of said contract, Licensed Agent shall not, directly or indirectly: (a) solicit for the provision [of] services or employment any employee, agent or independent contractor of NASB, (b) advise or recommend to any other person that they employ or solicit for provision of services any employee or independent contractor for NASB, (c) encourage or advise such employees, agents or independent contractors to sever, discontinue or not renew any agreement or relationship to NASB, or (d) otherwise establish or seek to establish any business relationship with any such employee, agent or independent contractor related to the sale of insurance products.
[2] Though the Act does not address what constitutes adequate consideration for a restrictive covenant, Georgia common law provides that continued employment is a valuable consideration for a restrictive covenant entered into after commencement of employment. See Mouldings, Inc. v. Potter, 315 F. Supp. 704 (M.D. Ga. 1970) (explaining that “a mere agreement to continue to employ an employee furnishes a sufficient consideration for a non-competition covenant under Georgia law”).
