Remember “5/11”

Georgia’s new statutory law of restrictive covenants became effective more than three years ago, on May 11, 2011. The significance of the new law cannot be overstated. Prior to the new law, Georgia Courts were required to follow sometimes arcane rules of construction that frequently resulted in covenants being invalidated in their entirety based on what seemed to be trivial defects.

Within the first year or two following May 11, 2011, several court decisions established that the shelter offered to employers by the new law was available only for agreements that were executed on or after the effective date of the new statute. Older agreements remained subject to the “old” law, and were no easier to enforce than before the new law went into effect.

One of the many remaining unanswered questions was whether an amendment executed on or after 5/11/11 to a pre-5/11/11 agreement made the new, enforcement-friendly law applicable to the whole agreement. A decision by the U.S. District Court sitting in Macon earlier this month decided that the answer to that question was “no.” Lowe Electric Supply Co. and Edward Spell v. Rexel, Inc., (M.D. Ga. 2014).

Spell, a salesperson, signed a restrictive covenant agreement with his then-employer, Rexel, on January 12, 2011. The non-compete provision in this agreement was unenforceable on its face under the “old” Georgia law. Spell became dissatisfied with his employment and, in an effort to retain him, Rexel proposed a letter agreement modifying his compensation. The letter agreement expressly incorporated by reference Spell’s January 12, 2011 restrictive covenant agreement. Spell signed the letter agreement on May 14, 2014.

A few months later, Spell remained dissatisfied with his employment with Rexel and resigned to go to work for Lowe Electric Supply, a competitor of Rexel. Following threats by Rexel to enforce the restrictive covenants contained in the January 12, 2011 agreement, Lowe Electrical Supply and Spell sued Rexel to enjoin it from seeking to enforce the non-competition and non-solicitation covenants. The court granted the injunction, finding that the amendment of the 2011 agreement in 2014 did not save the restrictive covenants in the older agreement from being found invalid under the “old” Georgia law.

The message for Georgia employers (or any company with employees in Georgia) is clear – if you have any pre-5/11/11 agreements, have those affected employees execute comprehensive new contracts. A post-5/11/11 “amendment” will not solve the problem.