How Georgia's New Restrictive Covenants Laws May Impact Broker-Dealers

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On November 2, 2010, Georgia voters approved an amendment to the Constitution of Georgia ratifying new legislation that dramatically changes the state’s law on restrictive covenants. This new law may affect the ability of registered representatives to solicit clients when the representative departs one firm to join another firm, depending on whether the firms are signatories to the Protocol for Broker Recruiting (the “Protocol”). If a registered representative moves from one signatory firm to another signatory firm, the new Georgia law will have little or no effect on the restrictions and parameters set forth in the Protocol. If, however, a registered representative moves between non-signatory firms, or between one firm that is a signatory and another that is not a signatory, the new Georgia law could have a profound effect on the interpretation of any contract containing a restrictive covenant. Regardless of whether the firm is a signatory to the Protocol, firms and registered representatives must comply with privacy notices to customers, which may or may not allow sharing of information when a representative departs.

Georgia courts have traditionally applied strict scrutiny to restrictive covenants subject to Georgia law. Restrictive covenants have been voided based on minor technicalities or novel interpretations of the prior law. The new law was drafted with the stated intention of providing guidance to parties entering into such agreements on or after November 3, 2010.1 Most notably, the legislature has reduced the level of scrutiny generally applied to restrictive covenants, authorized courts to “blue-pencil” overly broad covenants, and provided several presumptions to guide courts in their analysis of what time, territory, and activity restrictions are reasonable. As a result, broker-dealers will be more likely to be able to enforce restrictive covenants.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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