Georgia’s Certificate of Need (“CON”) program,[i] administered by the Georgia Department of Community Health (“DCH”) Office of Health Planning, controls the creation and expansion of health facilities in Georgia.[ii] With the goals of measuring need, controlling costs, and guaranteeing access to healthcare, the CON program regulates most health care facilities in Georgia, including hospitals and long-term care facilities.[iii]

In recent years, states have begun enacting legislation repealing or limiting the applicability of CON laws.[iv] For example, in 2019, Florida amended its CON requirements for many types of health facilities to limit its regulation to nursing homes, hospices, and intermediate care facilities for the developmentally disabled.[v] Similarly, South Carolina repealed its CON requirements for most health facilities, notably excluding nursing homes.[vi]

Georgia followed suit with the Georgia General Assembly considering legislation to change the CON requirements during the 2023 legislative session.[vii] Critics of the CON program argued that it is outdated and stifles access to healthcare in rural areas.[viii] While no changes were made to the CON program during the 2023 legislative session, both the Senate and House created special study committees tasked with reviewing Georgia CON laws and recommending reform for the 2024 legislative session.[ix]

The Final Report of the Senate Certificate of Need Reform Study Committee recommended sweeping changes to Georgia’s CON program.[x] Finding that the CON laws prevented competition and limited advancement in health care delivery, particularly in rural communities, the Senate Committee proposed that the legislature fully repeal Georgia’s CON laws.[xi] And if not a full repeal, the Senate Committee recommended limiting the scope of the program by removing certain facility types and bed expansion from CON regulation and eliminating the cost thresholds.

Following the Senate Committee’s recommendation, the Senate will again consider legislation altering the CON requirements this legislative session. The Senate read and referred SB 442 on January 31, 2024, to the Senate Regulated Industries and Utilities committee.[xii] The bill repeals all existing CON requirements for any new or existing health care facilities in counties with a population of less than 35,000.[xiii] Also, on January 8, 2024, the Senate recommitted last year’s proposed legislation addressing CON reform, SB 162, to the same committee.[xiv] The current version of SB 162 limits the certificate of need program to a narrower set of health care facilities, including skilled nursing facilities, intermediate care facilities, personal care homes, and home health agencies.[xv]

FH2’s corporate team will continue to monitor proposed CON legislation and other Certificate of Need developments in Georgia and is available to assist healthcare providers with Certificate of Need questions and issues, including how these changes may impact both operations and asset transfers and sales for healthcare providers in Georgia. If you have questions regarding Georgia’s Certificate of Need reform and its potential impacts on your business, please contact Andrew Hazen (; 770-771-6818) or Anne Marie Simoneaux (; 770-771-6811) or visit to learn more about how the attorneys at Friend, Hudak & Harris, LLP can help.


[i] See O.C.G.A. § 31-6-40 to 31-6-50; Ga. Comp. R. & Regs. § 111-2-2.

[ii] Certificate of Need (CON), Ga. Dep’t of Cmty. Health, (last visited Jan. 31, 2024).

[iii] See Certificate of Need (CON), supra note ii; O.C.G.A.§ 31-6-2(17).

[iv] See, e.g., Certificate of Need State Laws, Nat’l Conference of State legislatures (Jan. 1, 2023),

[v] See Certificate of Need State Laws, supra note iv; Hedy Silver Rubinger & Charmain A. Mech, No Need for Certificate of Need: Florida Eliminates Certificate of Need Review for Specialty Hospitals, Arnall Golden Gregory (June 22, 2021),

[vi] Partial Repeal of Certificate of Need (CON) Program, S.C. Dep’t of Health and Envtl. Control (June 8, 2023),

[vii] See SB 162, Ga. Gen. Assembly, (last visited Feb. 7, 2024); SB 99, Ga. Gen. Assembly, (last visited Jan. 31, 2024).

[viii] See, e.g., Donovan J. Thomas, Georgia Laws for Opening or Expanding Hospitals Getting Review by State Senate, AJC (June 13, 2023),; Greg Bluestein, Ariel Hart & Zachary Hansen, A Burt Jones-backed Hospital Overhaul Draws Scrutiny, AJC (Mar. 20, 2023),

[ix] See SR 279, Ga. Gen. Assembly, (last visited Jan. 31, 2024); HR 603, Ga. Gen. Assembly, (last visited Jan. 31, 2024).

[x] Final Report of the Senate Certificate of Need Reform Study Committee (SR 279), Ga. State Senate Office of Policy & legislative Analysis, 14 (Nov. 29, 2023), [hereinafter Senate Committee Final Report]. Note that the House report did not specify any recommendations. See Final Report: House of Representatives Study Committee on Certificate of Need Modernization, House Budget & Research Office (Dec. 11, 2023),

[xi] Senate Committee Final Report, supra note x, at 14.

[xii] SB 442, Ga. Gen. Assembly, (last visited Feb. 7, 2024); Senate First Readers: Thirteenth Legislative Day, Ga. Gen. Assembly, 4 (Jan. 31, 2024),

[xiii] SB 442 (as introduced LC 33 9624), Ga. Gen. Assembly, 1–2, (select “Current Version”) (last visited Feb. 7, 2024).

[xiv] See also SB 162, supra note vii.

[xv] SB 162 (as introduced LC 33 9350), Ga. Gen. Assembly, 6, (select “Current Version”) (last visited Feb. 7, 2024)

Corporate Transparency Act


by Andrew Hazen, Matthew Haan and Anne Marie Simoneaux
FH2 Corporate Practice Team
Updated February 1, 2024

On January 1, 2024, the requirements of the Corporate Transparency Act (“CTA”) will take effect. Under the CTA, many small and mid-sized businesses will be required to file reports disclosing information about their business and its ownership. Pre-existing entities have until January 1, 2025, to file all necessary reports, while entities created during the 2024 calendar year must file the reports within 90 days from creation. Thereafter, entities created after January 1, 2025, will have 30 days to file their initial reports.

Compliance with the CTA requires an entity to determine whether it is required to file a report and what information it must disclose, including who qualifies as the “beneficial owners” of the entity. Notably, compliance also requires filing updated reports any time there is a change to any information previously reported pursuant to the CTA.

What is the Corporate Transparency Act?

The CTA is federal legislation requiring reporting of entity information to support national security and law enforcement activities to counter money laundering, the financing of terrorism, and other illicit activity.  The CTA introduces new requirements for certain businesses and other corporate entities, defined as “reporting companies”, to disclose information about the entity and its “beneficial owners” to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). 31 U.S.C. § 5336.

What is a reporting company?

Most small businesses will be required to report with FinCEN. The term reporting company is defined broadly in the CTA to include any corporation, limited liability company, or other entity that is created through filings with a secretary of state or similar office under the law of a state. It also includes entities that are formed under the laws of a foreign country and registered to do business with a state office.

What entities are exempt from reporting requirements (i.e., not a reporting company)?

There are 23 types of entities exempt from the reporting requirements. Notable exemptions include those for banks, insurance companies, tax-exempt entities, securities reporting issuers or certain other entities subject to regulatory oversight. Additionally, an entity that qualifies as a “large operating company” is exempt, meaning it (i) employs more than 20 full-time U.S. employees, (ii) filed a federal U.S. income tax return for the prior year showing more than $5 million of revenue, and (iii) operates in physical location in the U.S.

What must reporting companies disclose to FinCEN?

The report required by the CTA seeks information about the reporting company, including its full legal name, any trade or dba name, current U.S. address, jurisdiction of formation, and IRS TIN (EIN).

Additionally, for each beneficial owner, the reporting company must provide that person’s full legal name, date of birth, current address, a unique identifying number, and an image of an identifying document. Finally, for entities created on or after January 1, 2024, the report must also include this information about a reporting company’s company applicant.

Who are beneficial owners and company applicants? 

The term beneficial owner is defined to include an individual who, directly or indirectly, either (1) exercises substantial control over an entity, or (2) owns or controls twenty-five percent (25%) or more of the ownership interests of an entity.

Ownership interests can mean any of the following: equity, stock, or voting rights; capital or profit interests; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership. An individual exercises substantial control over a reporting company if the individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision-maker; or (4) the individual has any other form of substantial control over the reporting company. For example, this could include an entity’s President, CFO, CEO, COO, general counsel, or other offices with similar functions.

The term company applicant is any individual who directly filed (or directed or controlled the filing of) the application to form the reporting company under state law.

A reporting company can have multiple beneficial owners, and FinCEN expects each reporting company to have at least one beneficial owner. Each reporting company must have at least one company applicant and at most two.

When must a reporting company file its report?

For reporting companies existing as of January 1, 2024, reports must be filed within one year, by January 1, 2025. Reporting companies formed after January 1, 2025, have 30 days after formation to file their reports.  FinCEN extended the deadline for reporting companies formed in 2024.  Reporting companies formed on or after January 1, 2024, and before January 1, 2025, have 90 days after formation to file their reports.

If there is any change in the information reported to FinCEN, the reporting company must file an updated report no later than 30 days after the date on which the change occurred. This includes reporting a change in beneficial owners, such as a new CEO or a sale that changes who meets the ownership interest threshold of 25%, and changes to a beneficial owner’s information, such as an address change.

How to file the report?

Starting on January 1, 2024, reports must be filed electronically using FinCEN’s secure filing system, available here. There is no filing fee.

What are the penalties for non-compliance with the CTA?

Failure to comply with the reporting requirements can result in civil and criminal penalties. These penalties can include civil penalties of up to $500 for each day that the violation continues, as well as  criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

How does FinCEN use the report once filed?

FinCEN will store reports in a database with security measures and only share this information with authorized users for purposes specified by law. This includes access by certain government agencies who request the information for purposes related to national security, intelligence, and law enforcement. FinCEN also allows limited access for financial institutions will also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company.

Most prudent businesses today carry at least certain standard insurance coverages to protect against risks and liabilities arising out of the conduct of their business. These threshold coverages usually consist of a Commercial General Liability (CGL) policy, coupled with a workers’ compensation and employer’s liability policy and a commercial automobile liability policy. However, the provision of technology-related products and services entails certain unique risks not faced by the “ordinary” business, and a business engaged in providing those products and services (and their customers) run the risk of a very unpleasant surprise when a claim is made and the business discovers that these standard insurance products may not provide coverage. As such, businesses that provide technology-related products and services – from software development and licensing to IT professional services and data hosting – should be aware of additional insurance products that are available to insure against the risks that are unique to their business operations.

Compliance with the CTA requires a business to determine whether it is a “reporting company”, and if so, what information it must disclose, including who qualifies as the beneficial owners of the business. If you need assistance in assessing your business’s responsibilities under the CTA, please contact Andrew Hazen (; 770-771-6818), Matthew Haan (; 770-771-6835), or Anne Marie Simoneaux (; 770-771-6811) or visit to learn more about how the attorneys at Friend, Hudak & Harris, LLP can help.

Andrew K. Hazen, About the Author: Andrew Hazen
Partner, Corporate practice leader
Andrew focuses his practice on corporate, transactional, and real estate matters. Andrew also serves as outside general counsel to a number of closely-held businesses in a variety of industries, including healthcare, long-term care and senior living, manufacturing and distribution, construction, agriculture, and commercial real estate. For more information about Andrew click here.
Matthew D. Haan, About the Author: Matthew Haan
Matthew brings his large law firm experience to FH2’s diverse and expanding corporate and litigation practices. Matthew concentrates his practice on business litigation, business transactions, labor and employment, corporate and real estate matters. For more information about Matthew click here.
Anne Marie About the Author: Anne Marie Simoneaux
Anne Marie represents clients in all aspects of general commercial litigation and business transactions. She regularly assists clients in the healthcare, insurance, manufacturing, commercial real estate, and telecommunications industries with contract drafting, asset purchases and divestitures, and other corporate and outside general counsel matters. For more information about Anne Marie click here.

Contact us for additional information:

Friend, Hudak & Harris, LLP
Attorneys at Law
Three Ravinia Drive, Suite 1700
Atlanta, Georgia 30346
Tel: 770.399.9500 | Fax: 770.395.0000

Congratulations to Laura Arredondo-Santisteban, CIPP/US

We are pleased to announce that Laura Arredondo-Santisteban has become a Certified Information Privacy Professional/United States (CIPP/US) through the International Association of Privacy Professionals (IAPP).

The IAPP developed the first ever privacy certification for professionals.  It is the largest and most comprehensive global information privacy community and resource.  A CIPP/US certification indicates that the professional knows U.S. privacy laws and regulations and how to apply them. The CIPP credential means the professional has gained a foundational understanding of broad global concepts of privacy and data protection law and practice, including: jurisdictional laws, regulations, and enforcement models; essential privacy concepts and principles; legal requirements for handling and transferring data; and more.

Laura practices in the areas of telecommunications and technology, advertising/marketing, and privacy. Laura’s experience includes representing clients before the Federal Communications Commission,  Federal Trade Commission, state utility commissions and attorneys general, and assisting clients in matters involving legislation, regulations, and contracts, including developing and reviewing customer terms and conditions, privacy policies, advertising, labeling, and marketing materials.  Laura is fluent in Spanish and has assisted clients on these matters in both English and Spanish.

Laura may be reached at or at 770-399-9500. For more information on Laura, please click here .

Disability Lawsuits Are On The Rise. Is Your Business In Compliance?

One Atlanta resident has filed over a hundred lawsuits against businesses in Georgia and Florida in the past 10 years. Another has sued 120 different Atlanta-area businesses just since 2015. What do these lawsuits have in common? In each case, the plaintiff suffers from a physical disability and claims that the business has violated the Americans with Disabilities Act (“ADA”) by preventing the plaintiff access to the business establishment.

These plaintiffs are not alone. Hundreds of plaintiffs have filed similar accessibility-based suits across the country. Experts say these suits already number in the thousands, and will only become more prevalent as time goes on. So how does the ADA apply to your business, and what can you do to protect your business against an ADA claim?

What is the ADA, and to whom does it apply?

In 1990, Congress passed the ADA in an attempt to eliminate a variety of barriers, both literal and figurative, that people with disabilities face every day. One section of the ADA, Title III, requires businesses that operate “public accommodations” to not discriminate against the disabled. In particular, the ADA requires the proprietors of such businesses to remove “architectural barriers” and “communication carriers” that prevent the disabled from equally enjoying the accommodations, if the removal of the those barriers is “readily achievable.”

So what is a “public accommodation”? A public accommodation is any private business that provides goods or services to the public. It includes restaurants, theaters, hotels, and any type of shopping center. But the statute is not limited just to retail-type establishments. It also includes professional offices, such as law offices and medical practices, as well as any other “service establishment.”  Even a publicly-accessible website may be a public accommodation to which the ADA applies (more on that below).  In short, if members of the public are coming to your property (or website) to transact any sort of business, you should expect to be subject to the ADA.

Importantly, there is no exception for accommodations that were built before the ADA became law. All public accommodations must comply with the ADA (though the requirements for compliance may differ based on various factors discussed below).

What does the ADA require?

Again, the ADA requires businesses to remove any barriers that would prevent a person with disabilities from enjoying a public accommodation if removal of the barrier is “readily achievable.” The United States Department of Justice (DOJ), which is charged with enforcing the ADA, publishes a set of standards called the “ADA Standards for Accessible Design” (the “Standards”) which provide, in minute detail, guidance for the design of public accommodations. The Standards cover everything from the size and location of wheelchair-accessible parking spaces to the height of toilet-paper dispensers.

Newly constructed facilities, first occupied on or after January 26, 1993, must meet or exceed the minimum requirements of the DOJ’s Standards. If any part of an existing facility has been altered or renovated since January 1992, it too must comply with the Standards.

For older facilities, the law is trickier. If the public accommodation pre-dates the ADA, the DOJ Standards still act as a guide, but a property owner does not have to meet those Standards unless doing so is “readily achievable.” Whether meeting a given Standard is readily achievable depends both on the cost of the alteration and the resources of the property owner. Bigger, wealthier property owners will be expected to make changes that smaller property owners are not. In the end, whether a change is “readily achievable” can only be decided on a case-by-case basis, and this fact gives rise to much litigation.

We noted above that the ADA’s definition of a “barrier” includes “communication barriers” as well as “architectural barriers.” Because of this, a new generation of ADA plaintiffs claim that a business’s website is also a public accommodation and must comply with the ADA. In particular, these plaintiffs claim that a business’s website be reasonably accessible to the blind, such as by providing means to navigate the site through sound instead of by sight. Neither the ADA nor the DOJ Standards addresses websites expressly, and the federal courts are divided on the questions of whether, and how, the ADA should apply. (In the absence of express federal guidance some courts assess website accessibility by reference to the independently-developed Web Content Accessibility Guidelines 2.0 (WCAG)). Nevertheless, more than a thousand such suits were filed in 2018 alone.

What if I am merely a tenant in a building owned by someone else?

By its own terms, the ADA applies to “any person who owns, leases (or leases to), or operates a place of public accommodation.” So when a business owner leases space for its business, both the business and the business’s landlord are liable for violations of the ADA inside the space leased by the tenant-business. In contrast, when a violation is in a common area of a multi-tenant commercial building, such as a parking lot or an elevator, the courts generally agree that any ADA violations are the responsibility of the landlord alone.

How do these lawsuits work?

The ADA authorizes any person who has been discriminated against as a result of a violation of Title III to sue the business responsible for the violation in federal court to have the barrier removed. The ADA primarily allows the plaintiff to obtain an injunction – that is, a court order – requiring the offending property owner to remove any barrier that violates the ADA. Business owners are often shocked to discover that they have been sued for a laundry list of alleged violations. While these violations may seem minor, if a public accommodation does not meet the ADA, the law is clear that a patron may seek an injunction to bring the premises into compliance.

The statute does not provide for the plaintiff to receive monetary damages to compensate for the alleged discrimination itself, but it does allow the plaintiff, if successful, to recoup any reasonable legal fees and expenses that he incurred in the process of bringing the suit. And that, as they say, is the rub. The ADA does not require a potential plaintiff to give a business owner any prior notice before filing suit. So by the time the alleged offender is aware that anyone is claiming there is a problem, the plaintiff has already incurred legal fees, court costs, and possibly hired an expert in ADA compliance. All of these expenses are recoverable from the business owner if the plaintiff is successful in court.

None of this is to say that there is no defense to an ADA complaint. For example, it is not uncommon for a plaintiff to complain about a condition that is not, in fact, a barrier to entry. And even if a given condition would be a violation of the current Standards, it may be that the building pre-dates the ADA and removing the offending condition is not “readily achievable.”  On rare occasions, a plaintiff’s claims are downright fraudulent. For example, the plaintiff may have never set foot in the defendant’s establishment and, even if he did, he may have no plans to ever return. In short, it is possible to defeat an ADA claim on its merits.

But for every hour a business spends litigating the merits of a claim, the plaintiff’s expenses accumulate and increase the potential liability to the defendant.  For this reason, many business owners who are sued under the ADA seek to negotiate a quick settlement with the plaintiff rather than fight it out in court. In practice, very few of these claims go all the way to a trial.

If this process does not strike you as being especially fair to the accused business owner, you are not alone. The recent surge in ADA accessibility suits has caused some rumblings for reform in Congress. While at least one bill has been introduced to amend Title III, no such bill has passed and the statute will stay the same for the foreseeable future.

What can a business owner do?

Some industry observers suggest that if you maintain a “public accommodation” it is just a matter of time before you are the target of an ADA suit. Given that, what can a diligent business owner do now, before she is sued, to put her business in the best position to prevent or defend against a future claim?

  • First, check your insurance coverage. Many liability policies cover ADA claims, but just as many don’t. If you are not sure whether your policy covers ADA claims, talk with your insurance broker.
  • Second, hire a consultant knowledgeable in the ADA and disability issues to audit your business now, before you are the target of a lawsuit, to help identify any areas that might give rise to a claim later on and, if feasible, remedy them before a claim is brought.  If you are sued, you will likely have to hire one of these professionals to evaluate the plaintiff’s claims and advise you about where you may have compliance issues, at a time when you are also incurring liability to the plaintiff for his or her legal expenses, court costs and expert fees – so hiring a compliance consultant before you are sued may ultimately be more economical for your business in the long run.

In the end, if you are sued, always contact your lawyer immediately. Accessibility claims are technical by their very nature, so seeking professional guidance as early as possible is essential.

If you need assistance in assessing your business’s responsibilities under the ADA or responding to a claim that you have violated the ADA, please contact Ben Byrd at or (770) 399-9500 to discuss further.

The FCC Establishes a Database Aimed at Reducing Robocalls: New Safe Harbor for Businesses, Additional Obligations for Telecom Providers

“Robocalling” – a term that broadly describes automatically-dialed calls, caller ID spoofing, recorded calls, and telemarketing – has become one of the biggest challenges for both callers and consumers.  According to robocall blocking service provider YouMail, 47.8 billion robocalls were placed in 2018.  Atlanta was once again the city in the U.S. receiving the most robocalls, with about 2.1 billion annually.  Rounding out the top five, were Dallas, New York, Los Angeles, and Chicago.

The Telephone Consumer Protection Act (“TCPA”) and its implementing rules restrict the making of telemarketing calls, the use of automatic telephone dialing systems, and the use of artificial or prerecorded voice messages, without the express consent of the dialed party.  A telemarketing call is also defined broadly to include text messages sent to wireless subscribers.  The requirements under the TCPA apply to all telemarketers, as well as all businesses that use automated phone equipment to interact with consumers, for example, to provide appointment reminders, account notifications, or other general business communications.

The North American Numbering Plan Administrator estimates that about 35 million numbers are disconnected and made available for reassignment to new customers each year.  This reassignment process means that a caller who previously obtained the express consent to call a given number may call that number without realizing that the number has been reassigned to a new party who has not given express consent to receive the call – which could lead to legal liability for the caller under the TCPA.

The Federal Communications Commission (“FCC”) has said that unwanted calls to reassigned numbers are a major problem.  Despite that there are existing tools available to address this issue, the FCC has determined that none are comprehensive.  Further, none appear to have adequately curbed the problem of making unwanted calls to reassigned numbers.

As a result, in December 2018, the FCC ordered the creation of a database that will enable callers to verify whether a telephone number has been reassigned before calling that number.  Those callers that rely on the reassigned numbers database will be provided a safe harbor from TCPA liability where the caller has prior express consent to make the call to the number that the database erroneously reported as not having been disconnected.  In addition, the FCC’s new rules will impose new reporting obligations on telecommunications service providers.

Businesses should look to use the reassigned numbers database because it will likely reduce both their potential liability for making unlawful calls to reassigned telephone numbers and operational costs as a result of targeted calling.  Telecommunications service providers should ensure that they are prepared to comply with the new recording and reporting obligations.

Permanent disconnection and aging. The FCC ordered the creation of a comprehensive database of numbers that have been permanently disconnected so businesses like banks and pharmacies that call customers frequently may avoid calling reassigned numbers.  Callers will be able to query the database before making a call to determine whether the number has been permanently disconnected.

“Permanent disconnection” means that a subscriber has permanently relinquished a number, or the provider has permanently reversed its assignment of the number to the subscriber so that the number is no longer associated with the subscriber for active service in the service provider’s records.  Permanent disconnection does not include instances where the phone number remains associated with the subscriber such as, for example, temporary disconnections for non-payment or when a consumer ports a number to another provider.

In the order, the FCC also adopted a minimum telephone number aging period of forty-five (45) days, establishing a minimum period of time a number must remain out of use before reassignment to a new customer.  Before this change, telecom providers could reassign telephone numbers to another consumer almost immediately.  The FCC reasoned that the more quickly a number is reassigned from one consumer to another, the less likely callers are to learn of the reassignment and the more likely a caller is to misdirect a call to the reassigned number.

Contents and use of the database.  The FCC will limit the contents of the database to the date of the most recent permanent disconnection for the affected telephone number.  The data made available to callers in response to a query will be limited to either “yes”, meaning the number has been reported as disconnected since the date the caller provides; “no”, meaning the number has not been reported as disconnected since the date the caller provides; or “no data”, meaning there is no information available for the number requested.

To ensure that the database is available to the widest number of users and accessible to any size caller, it will have the ability to process low volume queries, for example, via a website interface, or high-volume queries through a batch process or standardized application interface.  This means that a small dental office that texts their patients appointment reminders and a large outbound call center making thousands of calls each day can each use the database in a manner that works best for their respective operations. However, users of the database will be required to certify that they are using it solely to determine whether a number is permanently disconnected.

Safe harbor for users of the database.  Callers that use the database are granted a safe harbor from TCPA liability for calls made to numbers for which they had obtained prior express consent but, at the time of the call, relied on the database to determine that the number had not been reassigned.  The safe harbor shields the caller from liability if the database returned an inaccurate result.

Projected costs for users of the database.  Use of the database is voluntary, and those that choose to use it will be assessed a user fee.  In addition to the user fee, the FCC estimates the startup cost for callers to be one day of development and three days of testing for a single full-time engineer, resulting in about $2,160 for larger companies that would invest in the information technology resources to integrate with the reassigned numbers database.  Smaller companies are expected to have lower startup costs as a result of using an internet/web-based interface.

Service provider obligations and administration of the database. The order also requires all service providers that use the North American Numbering Plan to provide to the database administrator information about telephone number disconnections.  Those providers that do not receive their numbers directly from the North American Numbering Plan Administrator or the Pooling Administrator (for example, resellers and most VoIP providers) may delegate their reporting obligation to the service providers through which they obtain numbers.  The database administrator will be selected by the FCC through a competitive bidding process at a later time.

Similarly, toll free numbers, which are administered by the Toll Free Numbering Administrator, will also be included in the database.  The obligation to report the permanent disconnection status of toll free numbers will fall to the Toll Free Numbering Administrator.

Beginning 30 days after the rules are approved by the Office of Management and Budget, providers will be required to keep records of their permanent disconnections on a going-forward basis.   In addition, providers will be required to report their permanent disconnections to the database administrator on the 15th day of each month, with the exact start date to be announced by the FCC once the database is operational.   However, small providers (those providers with 100,000 or fewer domestic retail subscriber lines) will be granted a limited extension of six months from both the recordkeeping and reporting requirements.

While the timeframe for implementing the database and the foregoing changes is uncertain, this looks to be beneficial to all stakeholders once operational.

If you have any questions about how these recent developments may affect your liability under the TCPA or reporting obligations, please contact Joel Thomas at or (770) 399-9500.

FH2 Litigators Again Recognized by Super Lawyers®

Both of our litigators, Mike Reeves and Ben Byrd, have again been recognized as Georgia Super Lawyers for 2019.  Their primary area of practice is Business Litigation. Mike has received this recognition many times.  This year marks the third time Ben Byrd has been included in the list of Super Lawyers.  He was included among Georgia Rising Stars in 2014.

For more information on Mike, his practice and his accomplishments, Click Here.        For more information on Ben, his practice and his accomplishments, Click Here.

1031 LIKE-KIND EXCHANGES: A Way to Defer Liability for Capital Gains Taxes In a Real Estate Transaction

Generally speaking, when the owner of real property sells or otherwise disposes of that property and makes a profit, he or she will be liable for capital gains taxes on those capital gains.  The amount of capital gains to be taxed is calculated as the amount realized on the transfer minus the owner’s “basis” in the property (with the “basis” being the original cost of the property to the owner, adjusted for various factors set out in the Internal Revenue Code).

Section 1031 of the Internal Revenue Code (“Section 1031”) affords owners of appreciated business or investment real estate property the ability to leverage 100% of the property’s value by deferring tax liability for the capital gains at the time the property is disposed of – so long as another like-kind property is acquired per the requirements set forth in Section 1031.

It’s important to keep the following in mind regarding a Section 1031 “like-kind exchange”.   In a Section 1031 transaction, the tax on the gain from the sale is only deferred to a later date, not eliminated entirely.  Furthermore, after the Tax Cuts and Jobs Act of 2017 became effective on January 1, 2018, the tax-deferral benefits of Section 1031 are limited to exchanges of real estate property held for use in a trade or business, or for investment, and are no longer available for the exchange of personal property such as stock or corporate membership interests.  Finally, the availability of Section 1031 is dependent on satisfying all of its specific requirements (discussed further below).

Nonetheless, Section 1031 remains a potent mechanism for deferring taxes on capital gains. There is no limit on how many times or how frequently an owner can use Section 1031 to roll over gain from one given property to another property and then another.  Although there may be a profit on each transaction, payment of capital gains tax is deferred until the owner sells the property in a non-Section 1031 transaction at a later time.  In some instances, there will be no tax at all when the owner’s heirs inherit the property at the time of his death, because they will receive a stepped-up basis equal to the property’s fair market value as of the date of the owner’s death (effectively making any appreciation of the property during the decedent’s life tax-free).  When the property is subsequently sold by the heirs, they will pay capital gains tax on only the increase in value over the stepped-up basis.

I.  What Property Qualifies as Like-Kind Property?

Both the transferred property (“Relinquished Property”) and the property received in exchange (“Replacement Property”) must be held for use in a trade or business, or for investment, and must be similar enough to qualify as “like-kind.”  The meaning of “like-kind” property is very broad and only requires that the properties be of the same nature, class, or character.  Dissimilarities in grade or quality between the two properties does not matter.  Virtually all real estate is like-kind to other real estate. For example, an office building will be like-kind to farm land or other unimproved property to be held for investment.

However, the exchanged properties must be of similar value for the like-kind exchange to defer all taxes.  If there is cash or other non-qualifying property left over after the Replacement Property is acquired (so-called “boot”), the owner will owe taxes on the boot.  Furthermore, debt on both the Relinquished Property and the Replacement Property must also be considered when evaluating the exchange.  If the purchase price plus any new loans on the Replacement Property is less than that of the sale price of the Relinquished Property, gain will be recognized to the extent of the difference.  Thus, for example, if an owner (the “Exchangor”) sells a Relinquished Property for a sales price of $1,000,000 that carries a $600,000 mortgage, the purchase price of the Replacement Property would need to be at least $1,000,000 with $600,000 or more in loans in order to maximize the benefits of Section 1031.

II.  Who Qualifies for the Benefits of Section 1031?

Individuals, C corporations, S corporations, partnerships, limited liability companies, trusts, and any other tax-paying entity may set up an exchange under Section 1031.  It is important to note that the name of the Exchangor on its tax return and its deed to the Relinquished Property must be the same as the name on the tax return of the acquiring entity and in the deed to the Replacement Property.  However, there is an exception for single member limited liability companies.  In that case, the Relinquished Property may be sold by the entity, but title to the Replacement Property may be in the name of the single member of the limited liability company because the single member entity is disregarded for tax purposes.

III.  What is the Process for Conducting a 1031 Exchange?

To qualify for Section 1031 treatment, the exchange must be distinguished from a situation where an owner sells a property and then uses the cash proceeds to buy another property.  Section 1031 offers four types of exchanges to choose from (to be discussed in more detail below).  The simplest form involves the direct exchange of one property for another on the same day.  The exchange must occur simultaneously and any delay, such as wiring funds to an escrow company, could result in disqualification of the exchange.  However, it is unlikely that an Exchangor will find a buyer for the Relinquished Property and a seller of a Replacement Property at the same time.  Therefore, most exchanges are deferred three-party exchanges that require the use of a “qualified intermediary” to successfully complete a Section 1031 tax deferred exchange.

A.  Qualified Intermediaries. There are many companies that can be selected to act as a qualified intermediary to facilitate a Section 1031 exchange.  However, the qualified intermediary may not be the taxpayer or a disqualified person (i.e., anyone who is related to the taxpayer, or who has had a financial relationship with the taxpayer).

The qualified intermediary will enter into a written exchange agreement with the Exchangor under which the intermediary will agree to transfer the Relinquished Property and acquire the Replacement Property.  The exchange agreement must expressly limit the Exchangor’s rights to receive, pledge, borrow, or otherwise obtain benefits of money or other property received in the sale of the Replacement Property.  If the Exchangor takes any control of cash or other proceeds before the exchange is completed, it may disqualify the entire transaction from tax deferred treatment.  The use of an experienced qualified intermediary can significantly reduce the complexity of an exchange by assuring the proper execution and processing of required documentation. However, since the qualified intermediary industry is not regulated, the careful selection of the qualified intermediary is essential to ensure the highest level of expertise and security for funds.

B.  Time Limits. There are certain time limits that must be met for an exchange to qualify for Section 1031 tax deferred treatment.  First, the Exchangor of the Relinquished Property must clearly identify possible Replacement Properties to the qualified intermediary in writing within 45 days of the sale of the Relinquished Property.  Second, the Replacement Property must be purchased and the exchange completed no later than 180 days after such sale.  More than one property may be identified as a possible Replacement Property and it is not necessary to purchase all the potential Replacement Properties identified, but at least one must be purchased within this timeframe to qualify as a Section 1031 exchange.

  1. Types of Deferred Exchanges: Delayed, Reverse, and Construction Exchanges.  As discussed above, a “simple” Section 1031 exchange involves a same-day sale and purchase of two like-kind real properties.  Deferred exchanges are more common and require that the sale of a Relinquished Property and the purchase of a Replacement Property be dependent parts of an integrated transaction.  There are three types of deferred exchanges, which are often referred to as delayed, reverse, and construction exchanges.

a.  In a delayed exchange, which is the most common form of deferred exchange, the Exchangor must (i) market, (ii) find a buyer for, and (iii) enter into a sales agreement for, the Relinquished Property.

  • Once this has occurred, the Exchangor enters into a written exchange agreement with a qualified intermediary and assigns the existing sales agreement to the qualified intermediary prior to the closing of the sale.
  • Once the closing of the sale occurs, the qualified intermediary receives the proceeds (the Exchangor cannot receive the proceeds without disqualifying the exchange).
  • After the sale, the proceeds must be held in a trust by the qualified intermediary during which time the proceeds must be used for the purchase of a Replacement Property for the Exchangor.
  • The Replacement Property must be specifically identified by the Exchangor to the qualified intermediary within 45 days of the Relinquished Property’s sale. The property identification must be in writing, must describe the Replacement Property with a legal description, street address, or other distinguishable name, and must be delivered to the qualified intermediary or the seller of the Replacement Property.  Identification of the Replacement Property to the Exchangor’s real estate agent, CPA, or lawyer is not sufficient.
  • The Replacement Property must be acquired by the Exchangor, and the exchange completed within 180 days after the Relinquished Property was sold or by the due date (including any extensions) of the income tax return of the Exchangor for the year in which the Relinquished Property was sold.

b.  In a reverse or forward exchange, the Replacement Property selected by the Exchangor will be acquired first and “parked” with the qualified intermediary until it is transferred in a simultaneous exchange for the Relinquished Property. The qualified intermediary will obtain the funds to purchase the Replacement Property by borrowing it from the Exchangor or a lender.

  • The qualified intermediary can hold the parked property for no more than 180 days from the date of purchase during which time the Relinquished Property must be identified, sold, and the Replacement Property transferred to the Exchangor.
  • Such identification must occur within 45 days after the purchase of the Replacement Property.
  • After the initial 45 day identification period, the Exchangor has an additional 135 days to complete the sale of the Relinquished Property through the qualified intermediary.
  • The failure to identify the Relinquished Property within such 45 days and to close on its sale during the 180 day period will result in the exchange failing to qualify for Section 1031 tax deferred treatment.
  • Proceeds from the sale of the Relinquished Property will go to the qualified intermediary and will be used to repay loans incurred to purchase the Replacement Property.

c.  The construction/improvement exchanges are the most complex of the deferred exchanges but allow the Exchangor to make improvements to the Replacement Property before it is transferred to the Exchangor using the funds received from the sale of the Relinquished Property.

  • In this type of exchange, the Exchangor and the qualified intermediary will, in addition to the exchange accommodation agreement, enter into a construction management agreement pursuant to which the Exchangor is granted the right to make improvements to the Replacement Property on behalf of the qualified intermediary, and is made fully responsible for the supervision and performance of all of the work and the payment of all expenses related to the design and construction of such improvements.
  • If there will be any third-party occupancy of the Replacement Property prior to the date that ownership will be transferred to the Exchangor, the parties will also enter into a lease (ending no later than the 180th day) under which the third-party may occupy the Replacement Property during construction of the improvements.
  • To qualify the construction exchange for the benefits of Section 1031, all of the funds from the sale of the Relinquished Property must be used to pay for the Replacement Property and improvements, and such improvements and the exchange must be completed within 180 days of the Relinquished Property’s sale.
  • The Exchangor must receive substantially the same Replacement Property as it identified to the qualified intermediary, and the improved Replacement Property must be of equal or greater value than the Relinquished Property in order to defer 100% of the tax.

IV.  How is the Basis of the Replacement Property Calculated?

As noted previously, in a Section 1031 transaction the tax on the gain from the sale is merely deferred, not eliminated.  Therefore, the basis of the Replacement Property must be calculated to preserve the deferred gain for taxation in the future.  The basis of the Replacement Property is the basis of the Relinquished Property, decreased by the amount of any money and non-like-kind property received from the sale of the Relinquished Property, and increased by the amount of any gain (or decreased by the amount of any loss) recognized in the exchange.  If boot is also received in the exchange transaction, the basis of the Relinquished Property must be allocated between the Replacement Property and the boot, assigning to the boot an amount equal to its fair market value on the date of the exchange.

It is clear that a Section 1031 exchange provides the Exchangor with a significant tax deferral benefit.  However, there are two potential downsides to the exchange.  First, in most instances, the basis for depreciation of the Replacement Property will be less than the value of the Relinquished Property at the time of exchange, and second, when the Replacement Property is sold, even at a loss, capital gains tax will be owed on all amounts received in excess of the basis of the Replacement Property.  For example, if the Relinquished Property had a basis of $1,000,000 and a value of $2,000,000 at the time of exchange, the basis of the Replacement Property for depreciation will only be $1,000,000 not $2,000,000, thus preserving the $1,000,000 in deferred capital gain.  If the Replacement Property is later sold for $1,800,000, there will be capital gains taxes owed on $1,000,000, even though the Replacement Property was sold for $200,000 less than the value of the Relinquished Property.  Any decision by a property owner to utilize the Section 1031 process should be discussed thoroughly with a qualified tax consultant.

If you have any questions regarding Section 1031 exchanges or other commercial real estate matters, contact Chip Gerry at  or (770) 399-9500 for more guidance.

Announcing our New Partner, Ben Byrd

We are pleased to announce that Ben Byrd has been named a Partner.

Ben focuses his practice on assisting businesses through litigation and regulatory advocacy compliance.  As a litigator, Ben represents his clients vigorously and professionally, and he has represented businesses in nearly every forum, from small-claims court all the way to the Georgia Supreme Court. As a regulatory attorney, he represents clients before state and federal regulatory bodies, including the Federal Communications Commission, state utility commissions and state legislatures. A substantial portion of his regulatory practice is devoted to advocating for his clients’ interests in the face of proposed telecommunications regulations or legislation. Regardless of the matter, Ben never forgets that the ultimate goal is to advance his clients’ business interests.

Ben is a graduate of the University of Georgia School of Law, cum laude, and received his undergraduate degree from the University of Georgia, summa cum laude.  He is admitted to practice in Georgia, and has been recognized as a Georgia Super Lawyer for 2017 and 2018 and chosen as a Georgia Rising Star in 2014.

Please join us in congratulating Ben!

Ben may be reached at or at 770-399-9500. For more information on Ben, please click here

Beyond the Non-Compete: Things to Consider when Hiring a Competitor’s Employees

When engineer Anthony Levandowski announced in January 2016 that he was leaving Google for Uber, his employer was not happy. Levandowski was not just any engineer. As the head of Google’s efforts to develop a self-driving car, he was a Silicon Valley superstar, and now he was taking his considerable talents to Google’s chief rival in the race to develop a truly autonomous automobile.

Google was not going to take the defection lying down. Not long after Levandowski departed, Google sued Uber seeking $1.85 billion in damages and an injunction that would severely limit the work Levandowski would be able to do for Uber. Although the case eventually settled (during trial) for just a fraction of what Google originally sought, the wreckage was widespread: Levandowski was left unemployed, Google received $250 million worth of Uber stock, and both parties owed their attorneys tens of millions of dollars in legal fees.

The remarkable thing about Levandowski’s case is that Google never alleged that Levandowski had breached a non-compete agreement. They couldn’t, because he never had one. Non-competes are completely unenforceable in California.

The Levandowski case serves as a reminder that an employee and his future employers are bound by a web of legal obligations even when the employee is otherwise free to leave his current employment and go to another employer of his choosing.

The Duty of Loyalty and Other Limits on the Privilege to Compete

Most businesses are familiar with the doctrine of at-will employment. It provides that, generally, an employer can terminate an employee at almost any time and for almost any reason. (There are notable exceptions, such as terminating for an illegal or discriminatory reason.) The principle goes both ways. Employees are generally free to leave for greener pastures wherever they can find them. On top of that is the “privilege to compete,” which allows a company to compete against others in the open market for scarce customers, resources, and even talented employees. These doctrines are reinforced by states’ longstanding public policies against non-compete agreements and other “restrictive covenants.” This animosity toward limiting competition often renders any attempt to contractually bind an employee from jumping ship substantially – or even completely – unenforceable. Together, these doctrines help create an economy where the competition among companies for good employees is just as stiff as the competition for good customers.

But even against that background, neither the at-will employment doctrine nor the privilege to compete are unlimited. Both are restricted in ways that create potential risks for employers and the talent they seek to recruit.

As an initial matter, all workers – even the rank and file – have a “duty of loyalty” to their employers. The duty of loyalty is not as restrictive as the “fiduciary duty” that binds officers, directors, and other essential personnel, but it has “teeth” nonetheless. At its core, the duty of loyalty means an employee cannot compete against her employer or otherwise actively work against her employer’s interests. In practice, this typically means that an employee can plan to compete against her employer, but she cannot in fact compete against her employer while she is still employed.

To illustrate: George works for an advertising agency, but he dreams of having his own agency one day. While he is still working for his current agency, can he form an LLC, rent office space, and print business cards in anticipation of the day he finally strikes out on his own? He can. But can he take his clients out to lunch to discreetly inform them of his plans and solicit their business for his future agency? He cannot. The former is merely planning to compete against his current employer. The latter is actually competing against his current employer, and that is forbidden by the duty of loyalty.

Hiring a Competitor’s Employees – “Wrongful Means” and Employee Raiding

In addition to the duty of loyalty, the law recognizes that a business has a legally-protectible interest in an existing relationship between it and its employee, even when the relationship is at will, and the law will punish a third party’s attempts to induce a breach of loyalty or wrongfully interfere with that relationship. As a result, these obligations create some risk for the prospective employer, who must take care not to contribute to an employee’s breach of his duty of loyalty or otherwise interfere with the current employer’s rights.

So what can you do to hire away employees from another business? In Georgia and many other states, a prospective employer (Employer B) will be protected from liability when recruiting from a competitor (Employer A) if the following conditions are met:

  • The relationship between the employee and Employer A concerns a matter involved in the competition between Employer A and Employer B;
  • Employer B does not use any “wrongful means” to recruit the employee;
  • Employer B’s actions don’t create or continue an “unlawful restraint of trade” (that is, they are not intended to help Employer B create a monopoly for its goods or services); and
  • Employer B’s purpose is at least in part to advance its own interest in competing with Employer A.

It’s the second prong – the use of “wrongful means” – that most commonly causes issues. What exactly are wrongful means? They are often described as actions that are wrong on their own, even outside the context of recruiting – such as using fraud or defamation. But cases involving such obviously wrongful means are not particularly common. The following scenario is both more common and less obvious.

Imagine that our adman George has decided he would rather not go out on his own after all. What he really wants to do is join a better agency, and his valuable book of business has landed him an offer with his current agency’s biggest rival. Of course, both George and the new agency expect George to bring his clients with him when he leaves. But George can’t serve those clients all on his own, and he would like to bring some additional talent with him to the new agency. So after putting in his two weeks’ notice – but before he actually leaves his employment with the company – he sets about recruiting some key members of his team to come with him and, with the new agency’s permission, extends formal offers of employment.

Is this allowed? Usually not. George is still an employee of the first agency, and by recruiting the first agency’s talent he is benefitting the new agency at the expense of his own employer. In short, George is violating his duty of loyalty to the first agency. But the new agency’s hands are not clean either. It has knowingly used George as a double agent to recruit talent from a competitor. This is the kind of “wrongful means” that the law forbids.

A special situation arises when one company “raids” another by hiring away a large portion of its employees at one time. As in a case where only one employee is hired, the central question is usually whether the hiring company used any wrongful means in its efforts to recruit. The problem in a case of mass hiring comes when the hiring party’s efforts are so successful that the mass defection leaves the competitor unable to function. In these cases, some courts have found that the crippling of the competitor is itself wrongful and therefore prevents the hiring company from claiming the protection of the privilege to compete.

It is often remarked that this is especially true if “other circumstances are present.” Unfortunately, few courts explain what those other circumstances may be, creating a zone of uncertainty for companies that aggressively recruit from their competitors. In the end, special care must be taken before recruiting a group of employees to leave a competitor en masse.

The Trade Secrets Trap

The special knowledge that makes a recruit highly desirable often includes special knowledge about his employer. For this reason, claims that a company used wrongful means to hire from a competitor are often accompanied by accusations that the competitor’s trade secrets have been stolen. These claims often directly implicate the hiring company as a co-conspirator. Google’s lawsuit against Uber, for example, turned largely on allegations that Uber used Levandowski to steal Google’s trade secrets.

A trade secret is generally defined as having four qualities: One, it must be information. Two, the information must derive economic value from the fact it is secret. Three, the information must not be generally known. And four, the information must be the subject of reasonable efforts to maintain its secrecy.

The subject of what is and is not a trade secret could never be adequately covered in a single article. But for the purposes of hiring from a competitor, one characteristic should always be remembered: Trade secrets may or may not be the subject of a confidentiality agreement. Trade secrets are protected by state and federal law, so the fact that a new hire is not bound by a confidentiality agreement with her former employer does not, by itself, mean she does not possess any trade secrets that could create liability for the new employer.

Furthermore, liability for the theft (or misappropriation) of trade secrets is not limited just to the individual who actually pilfered the information. It also extends to any person who acquires or uses the information knowing that it was wrongfully obtained in the first place – or even simply having reason to know that the source of the information (i.e., the new hire) had a duty to a third party (i.e., the former employer) to keep it secret. This principle creates some measure of risk when hiring an employee who may possess sensitive information.

Difficult problems arise when a departing employee does not actively “take” his former employer’s trade secrets but, rather, simply possesses his former employer’s trade secrets only in his memory. It’s fair to say, though, that the typical suit over trade secrets involves much more concrete claims. The jilted employer often alleges that the former employee left with copies of his former employer’s files. These days, it is not uncommon to read allegations that, prior to his departure, the employee downloaded valuable files to a thumb-drive, sent them as attachments to a personal email account, or even photographed files with a smart phone.

Not all files contain trade secrets, of course. Nevertheless, an employer should never encourage or facilitate a new hire’s removal of files from his former employer.


Non-compete agreements and other restrictive covenants are often a concern when hiring new employees, especially those with specialized skills and abilities. Even in the absence of a restrictive covenant, however, employees and their suitors are still bound by rules that arise solely from the law. Employers must be mindful of these non-contractual restrictions when recruiting potential employees.  If you have any questions about this article or need assistance in assessing your business’s rights with respect to a prospective employee or a departing employee, please contact Ben Byrd at or (770) 399-9500 to discuss further.

Inquire Before You Hire: Prospective Employees and Restrictive Covenant Agreements

You have finally found a prospective employee who meets all of your search criteria and is a superstar (or prospective superstar) in the field.  You want to move forward with the hiring process on an expedited basis.  You extend a generous offer, which is promptly accepted.  And then you discover, one way or another, that this individual has a restrictive covenant agreement (a “Covenant Agreement”) with a prior employer.  What should you do?  What if you don’t find out about the Covenant Agreement until after you have hired the individual?

Covenant Agreements are becoming ever more common and they come in many forms.  This article will familiarize you with Covenant Agreements generally and will provide you with guidance regarding what you can do to protect yourself from legal liability and business disruption.


A.  What is a Covenant Agreement? Let’s be clear about what we are talking about.  For purposes of this article, a Covenant Agreement is a contract between your (prospective) employee and a current or prior employer that restricts the activities of the employee after the employment relationship terminates.  The restrictions can take many forms and the terms vary significantly from one Covenant Agreement to another.

Covenant Agreements are often referred to as “non-competes” or NDAs (short for “non-disclosure agreement”) and some are indeed just that.  Non-competes include terms that restrict an employee from engaging in activities that compete with the prior employer.  NDAs restrict the use of the former employer’s confidential information and trade secrets.  In most cases, however, Covenant Agreements include a number of different restrictive covenants so, if a prospective employee tells you he or she has an NDA with a prior employer, do not assume the document is indeed “just” a non-disclosure agreement.

Indeed, the majority of Covenant Agreements include at least two and often several different post-employment restrictions on conduct, such as provisions restricting the employee from:

  • contacting customers, suppliers, and/or employees of the prior employer;
  • saying or otherwise communicating damaging or negative information about the prior employer;
  • using materials that the employee developed with the prior employer;
  • keeping information or documents acquired in connection with the prior employment; and
  • using information acquired in connection with the prior employment.

Also, Covenant Agreements are not necessarily separate, stand-alone agreements.  They may be included in the terms of another, broader agreement, such as an employment agreement or a separation agreement.  Covenant Agreements may also be embedded in equity and bonus award agreements, transaction agreements, and deferred compensation agreements.  In short:  when assessing whether a prospective new hire is bound by a Covenant Agreement—and, if so, what restrictions apply to the new hire—do not depend on the “label”; review the document itself.

B.  Why Do I Need to be Concerned? I’m Not a Party to the Covenant Agreement.  It is basic contract law that a party to a contract can pursue its remedies against the other party to the contract in the event the other party breaches the agreement.  Clearly, a former employee who breaches a Covenant Agreement is liable for whatever damages are imposed by law or contract.  But how can a Covenant Agreement impact a subsequent employer who isn’t a party to the Covenant Agreement?  The answer is:  it depends on a number of factors, but the following is a brief summary of the possible ways a Covenant Agreement can disrupt the business of—or even create legal liability for—the subsequent employer.

Injunctions Against the Employee.  Practically without exception, Covenant Agreements permit the former employer to seek an injunction.  An injunction is a court order preventing the former employee from engaging—either temporarily or permanently—in the conduct that the former employer alleges is a breach of the Covenant Agreement at issue.  For example, if the employee has allegedly breached the Covenant Agreement by working for his or her current employer, the injunction can bar the employee from continuing such employment.  If an employer is relying on the skills and contribution of that employee, an injunction can be very disruptive.

Legal Claims Against the Current Employer.  A former employer that is a party to a Covenant Agreement has many causes of action that it might allege against the current or future employers even though there is no contract between the two employers.  These include: tortious interference with a contractual relationship; intentional interference with business relations; inducement to breach; civil conspiracy; misappropriation of trade secrets and proprietary information; conversion; and unfair competition.

It is important to note that, in some instances a candidate’s behavior may be actionable even in the absence of any Covenant Agreement. In most jurisdictions, employees have a common law duty of loyalty (and often a fiduciary duty) to act in the best interest of their current employer, even after tendering a notice of resignation. Violation of this duty of loyalty can result in substantial damages against the employee and, to the extent a subsequent employer is found to have assisted the employee in breaching his duty of loyalty, there is potential exposure to the new employer for aiding and abetting the employee’s breach.

C.  What Can an Employer Do? Whether the hiring employer will be directly liable to the former employer is largely predicated on the hiring employer’s intent and good faith, and whether it actually benefitted from the new hire’s unlawful conduct. Being able to show the following can provide a powerful defense for the hiring employer against this liability:

  • The hiring employer took diligent steps to determine at the pre-hire stage whether the employee was subject to post-employment restrictions.
  • The hiring employer was advised by legal counsel that, by hiring the employee, it would not interfere with an existing contractual restriction.
  • The hiring employer instructed the new hire that he or she was not expected or permitted to (1) use or disclose any trade secrets or confidential information belonging to his or her former employer, (2) improperly divert business opportunities belonging to the former employer, or (3) engage in any other conduct that would breach his or her Covenant Agreement.
  • The hiring employer instituted internal protocols to ensure against the inadvertent use or disclosure of the former employer’s trade secrets or confidential information.
  • The hiring employer continued to monitor the new hire’s conduct to ensure continued compliance with any post-employment restrictions that the former employer imposed.
  • The hiring employer used due diligence to ensure that it did not benefit from the new hire’s use or disclosure of the former employer’s trade secrets or confidential information.


Ask the Candidate If He or She Is Subject to Any Covenant Agreements.  The first thing an employer should do is ask a prospective employee whether he or she is subject to any Covenant Agreement.  This should be thoroughly vetted well before a decision is made regarding hiring the individual.  If the employer engages in adequate due diligence before it hires a candidate who is subject to a Covenant Agreement and makes a reasonable hiring decision based upon such due diligence, it would be very difficult for the former employer to assert any of the causes of action indicated above against the new employer.  (This, however, would not allay the possibility that the candidate would be enjoined from working for the new employer, in whole or in part, temporarily or permanently.)

Keep in mind that, as a general rule, restrictions imposed by Covenant Agreements may extend for a period of two years after employment terminates and in certain cases even longer.  Therefore, you should inquire not only about a candidate’s current or immediately prior employer, but also about earlier employers. The take away here is that when you endeavor to determine whether a candidate is a party to a Covenant Agreement, be sure to ask the right questions and review all agreements between the candidate and its prior employers.

If the Answer is “No” – “I Don’t Have A Covenant Agreement” and Other Tall Tales.

Going back to the facts described in the first paragraph of the introduction above, let’s assume that you asked the prospective superstar-employee whether he or she is subject to a Covenant Agreement and he or she says, “no.”  That should not be the end of your inquiry for a number of reasons.  First, strange as it may seem, employees often forget that they have signed Covenant Agreements.  Second, if the Covenant Agreement is embedded in another agreement, they might not realize that they are subject to one.  Third, the employee may unilaterally decide that although he or she has a Covenant Agreement, employment with you would not breach it and that therefore not disclosing it to you would do no harm.  Fourth, the prospective employee may want the job you are offering badly enough or believe the risk of enforcement is low enough that he or she decides to not disclose the fact that he or she is a party to a Covenant Agreement with a prior employer.

If the candidate affirms that he or she is not subject to any Covenant Agreement and you decide to hire him or her, then, as a pre-requisite to employment, require him or her to sign a notarized statement verifying that he or she is not subject to any Covenant Agreement with any current or former employer and stating that this verification is a pre-condition to the hiring decision, and that if the foregoing proves to be false for any reason, he or she would be subject to immediate termination of employment and be solely liable for any costs and expenses you incur if any action is brought against you because of it.

If the Answer is “Yes.”

Ask for a copy of the Covenant Agreement and have it reviewed by legal counsel who is knowledgeable about Covenant Agreements and the law implicated by them.  Your legal counsel should provide you with an assessment of whether the Covenant Agreement is enforceable, along with a plain English translation of what the Covenant Agreement prohibits, including the time limits, geographic scope, and the precise activities prohibited if the Covenant Agreement is enforceable and enforced.  Be sure to give your attorney enough specific information about what activities the prospective employee would perform for your company, if hired by you, so your attorney can advise you as to whether the prospective employee would violate the Covenant Agreement by working for you.

If you and your attorney determine that a candidate would be in breach of a Covenant Agreement by working for you and that the former employer is likely to sue, you can avoid that liability completely by not hiring the individual.  However, the issues are most often not so black-and-white.  In this case, you would need to consult with your attorney to weigh various factors to arrive at the decision as to whether to hire the candidate, including, for example: (i) the risk (and potential cost) of litigation and the potential disruption to your business (including the risk that your new hire will be enjoined from working for you, either temporarily or permanently); (ii) the likelihood that the former employer will be successful in enforcing the Covenant Agreement and your business’s potential liability for money damages; and (iii) any steps you can take to minimize or avoid a claim that the new hire is violating the Covenant Agreement.


Because Covenant Agreements are so common these days, there is a high likelihood that any new hire will be subject to a Covenant Agreement.  Even if you have determined that the anticipated scope of duties the candidate will perform for your business isn’t likely to violate a Covenant Agreement, you should still implement policies—whether in your standard employee manuals, offer letters, and/or employment agreements—to demonstrate your expectation that your employees will comply with their obligations to prior employers, such as a prohibition on the unauthorized use or distribution of property, confidential information, or trade secrets of a third party.

However, if you and your legal counsel determine that a candidate is subject to an enforceable Covenant Agreement, and that the position for which the candidate is being considered might be construed as requiring the candidate to violate the terms of that Covenant Agreement, there are a number of things you can do to minimize the risk of litigation if you decide to proceed with hiring the individual.  Possibilities include: (i) if feasible, restructuring the position so that the duties and responsibilities do not run afoul of the Covenant Agreement (or at a minimum), placing the new hire in a temporary position that does not violate the Covenant Agreement for the duration of any contractual restriction period; (ii) asking the former employer to waive the restrictions or negotiate restrictions that both of you can live with; or (iii) structuring the new hire’s work to insulate him or her from departments or projects involving confidential information or clients for which the new hire might possess competitively valuable information belonging to his or her former employer.  Also, the hiring employer should consider whether it should leave itself an “out” by requiring the candidate to acknowledge and agree that if litigation is threatened or arises over any Covenant Agreement, it reserves the right to terminate the candidate or alter the candidate’s job requirements.

Lastly—and regardless of the steps you may have taken to avoid or minimize the risk that your new hire is violating a Covenant Agreement—there is always a risk that the prior employer will nonetheless suspect a violation or threaten legal action against you.  As such, there are actions you should take after hiring an employee who is subject to a Covenant Agreement if you receive a “cease and desist” letter or any other communication regarding the terms of the Covenant Agreement from the former employer.  Proper management of this situation can reduce, limit, or eliminate your potential liability in connection with an employee’s Covenant Agreement with a prior employer.  You should contact your attorney immediately, both to formulate a strategy for responding to the prior employer and to ensure that you are taking the proper internal steps to preserve evidence that may become important if the matter proceeds to litigation.

If you have any questions or would like additional guidance regarding restrictive covenant agreements or other employment law issues, please contact Suzanne Arpin at or (770) 399-9500.