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Many recently hired producers and directors, graphic artists and designers, account representatives, and programmers enter into written employment agreements with their new employers. Increasingly, employment contracts in the entertainment and visual communication industries contain restrictive covenants or covenants not to compete. These provisions typically state that certain restrictions will be imposed upon an employee in the event of termination of the employment relationship. Employment agreements commonly state – in a clause entitled "Restrictions on Competition," "Covenant Not to Compete," or "Restrictive Covenant" – that the employer would be irreparably damaged if that employee were to compete against the employer, directly or indirectly, in any other similar business. In exchange for the employer hiring and/or training an employee, the employee usually agrees in the written contract that, following termination of employment, he or she will not, typically for a period of years, be employed by a competitor in a similar capacity within a specific territory defined by the employer. Employers who use these types of provisions in their agreements are generally seeking to protect the following types of information: customer relationships, financial data, employee relationships, proprietary or confidential information, and intellectual property.
For example, from 1962 until June 30, 1982, Johnny Beckman was employed by Cox Broadcasting Corporation as a meteorologist and "television personality" appearing primarily on Cox’s Atlanta, Georgia network affiliate, WSB-TV. In April of 1981, Beckman entered into a five year contract with WXIA-TV, a competitor of Cox, to begin working for WXIA-TV as a meteorologist and "television personality" as soon as his contract with Cox expired on July 1, 1982. Before leaving Cox, Beckman formally demanded to be released from the restrictive covenant provisions in his employment contract with Cox. When Cox refused, Beckman filed a lawsuit asking the court to determine whether the covenant was valid under Georgia law.
The contract’s restriction provided that the "employee shall not, for a period of one hundred eighty (180) days after the end of the term of employment, allow his voice or image to be broadcast ‘on air’ by any commercial television station whose broadcast transmission tower is located within a radius of thirty-five (35) miles from [Cox’s] office at 1601 W. Peachtree Street, N.E., Atlanta, Georgia, unless such broadcast is part of a nationally broadcast program." When the case went to court, the trial judge found that during the term of Beckman’s employment with Cox, Cox had spent in excess of $1 million promoting "Beckman’s name, voice and image as an individual television personality and as part of WSB-TV’s Action News Team, that Beckman is one of the most recognized ‘television personalities’ in the Atlanta area, that television viewers select a local newscast, to a certain degree, based on their ‘appreciation of the personalities appearing on the newscast,’ and that local television personalities are strongly identified in the minds of television viewers with the stations upon which they appear."
The trial court determined that Cox would be injured by allowing a competitor to take advantage of the popularity of Beckman, upon whom Cox had expended great sums to promote, before Cox had time to compensate for the loss of Beckman. While the trial court concluded that the damage to Cox would be great if Beckman were permitted to compete against it within the proscribed six (6) month period the court reasoned that Beckman would suffer little harm if the covenant were enforced against him. The trial court found that Beckman would still be employed by WXIA-TV, without loss of pay, and that, based on the testimony of expert witnesses at trial, Beckman would not suffer substantial damage or loss of recognition and popularity solely as the result of being off the air during the first 180 days of his five year contract with WXIA-TV. The trial court ruled, and the Supreme Court of Georgia ultimately agreed, that the restrictive covenant was valid under Georgia law, as it was both reasonable and definite with regard to time and territory considering Cox’s protected interests as opposed to the negligible impact on Beckman. As such, Beckman was kept off the air during the first six months of his employment with WXIA-TV.
Disputes between employer and ex-employee over post-employment restrictions are not limited to "celebrities" like Beckman. Recent cases in Georgia addressing this issue have involved a computer services company, an internet services company, a fireworks salesman, and a pizza box salesman. All of these cases involved claims that the ex-employee was competing improperly against their former employers in violation of a restrictive covenant.
As exemplified in Beckman’s case, Georgia courts will allow an employer to protect its interest in property, confidential information and relationships, goodwill, and economic advantage. An employer can prohibit any employee from pirating its customers for a reasonable period of time. In addition to restricting competition or employment within a specified area, a covenant not to compete can also prohibit a former employee from soliciting, either directly or indirectly, the business of the employer’s customers. Most restrictive covenants also attempt to prohibit the disclosure, use or copying of the employer’s records, trade secrets, and other confidential business information which the employer discloses to the employee during the employment relationship.
The law in many states provides that contracts or agreements in restraint of trade are prohibited by both constitutional and legislative provisions. Many state courts also hold that restraints which tend to lessen competition should be considered, in light of the "public policy," disfavoring agreements that restrain competition and limit the freedom to seek new employment. A restrictive covenant will usually be upheld, however, if the restraints imposed are deemed "reasonable," founded on valuable consideration (some form of compensating the employee for agreeing not to compete), reasonably necessary to protect the interests of the employer, and are not unduly prejudicial to the public interest of encouraging competition.
Although legal standards vary from state to state, courts in Georgia use a three-part "reasonableness" test to determine whether a restrictive covenant is enforceable. Courts will review a covenant’s (1) duration, (2) territory restrictions, and (3) the capacity in which the employee will be restricted. In other words, a restrictive covenant, to be enforceable in Georgia, must be reasonable as to time and place and must not be overly broad as to the activities prohibited. Further, and though sometimes an unwritten rule, courts will consider the inherently unequal bargaining power between the employer and job seeker. Similarly, a non-solicitation covenant will generally be held enforceable if it prohibits a former employee, for a reasonable time, from actively soliciting either customers with whom he had contact with while employed by the former employer, or the employer’s customers in the area where the former employee performed his job.
Georgia will not apply the "blue pencil theory of severability" to a covenant not to compete. In plain terms, this means the court will not edit the agreement if one part of it is unenforceable. Thus, if an employment agreement is unreasonable with respect to any one of the aforementioned limitations (time, territory, or capacity), the entire restrictive covenant is void. Georgia courts will also apply Georgia law to covenants involving Georgia residents, even if the agreement contains a choice of law provision that adopts another state’s laws as the law governing the contract.
Employees who attack the legal enforceability of restrictive covenant provisions in their employment agreements often argue that such clauses are unreasonable and unfairly restrict competition. An employee will argue that contractual restrictions upon their future ability and opportunity to earn a livelihood are unenforceable because the agreement prevents healthy competition. Finally, employees will appeal to a judge’s sensitivity to the unequal bargaining power between employers and job seekers.
When the nature of the business activities in which an employee is forbidden to engage is not specified with particularity, the covenant is arguably unreasonable. For example, if the restrictive covenant prohibits an employee from engaging "in any capacity whatsoever, in any business, activity, practice of any other related activity, in competition with the employer’s business," it will be found to be unreasonable because the employee would be prohibited from working in any capacity for a competitor, even those capacities in which he had not worked for his employer. In Beckman’s case, for example, he was free to work in an "off-the-air" capacity for WXIA-TV during the first six months of his employment because he had not worked in an "off-the-air" capacity for Cox. To be upheld in court, a restrictive covenant in an agreement must specify the nature and kind of business which is competitive with the employer, as well as the activities which the employee is prohibited from performing.
If a covenant attempts to prohibit the employee from participating in a long "laundry list" of broad categories of businesses regardless of whether they compete with the employer, or if the restrictive covenant has an unreasonably large territorial area, then the restrictions are probably greater than necessary to protect the employer’s legitimate business interest. By contrast, a court will probably find a restrictive covenant valid and enforceable when the employer’s covenant is narrowly drafted and restricts the employee from competing in a capacity which is identical with, or which corresponds to the capacity or capacities in which the employee had operated on behalf of the employer. The court would view such a narrow restriction as a legitimate protection of the employer’s investment in customer relations and goodwill.
If a covenant’s restricted post-employment territorial area is larger than the employee’s actual assigned territory during his/her employment, it is subject to attack as unreasonable, overbroad and unenforceable. The employee can argue that the restrictive covenant unfairly seeks to restrain competition in an area which is larger than the territory actually assigned him or her by the former employer. The resulting restraint on competition in the larger area is not necessary to protect the employer’s business interests because the employee has not formed any advantageous business relationships outside that territory as a result of working for the employer. The employee can attack the agreement by arguing that the larger territorial area affords the employer greater protection than is reasonably necessary to protect the employer’s recognized business interests. In Beckman’s case, for example, Beckman could not have been restricted from going to work in a television market outside the Atlanta area. If such a restriction had been attempted by Cox, it most likely would have been struck down by the court as overbroad.
As for time limitations, most courts have held that a duration of two years or less is reasonable. For example, the Georgia Supreme Court upheld a covenant in which a former salesman of a chemical company agreed not to seek any of the company’s business or customers in the territories to which the salesman had been assigned for a two year period after leaving the employer.
A Georgia restrictive covenant’s time, territory and capacity are the issues to address in evaluating its enforceability. Whether a particular covenant is enforceable in another state, however, is another matter. California law forbids an employer from requiring or even suggesting that an employee sign a restrictive covenant. By contrast, Tennessee is much more "pro-employer," as its courts will "blue-pencil" or re-write a non-competition clause in an employment agreement to make it more reasonable and, thus, enforceable, even if the employer was overreaching in the original draft. The employer and prospective employee should review and assess the enforceability of a proposed covenant not to compete before any such agreement is executed. Employers should be aware that Georgia courts consider the inherent unequal bargaining power between the employer and job seeker when evaluating whether to enforce a restrictive covenant. The covenant must be reasonable as to time and territory, and narrow as to scope in order to be enforced.