Source: https://www.bfvlaw.com/the-enforceability-of-choice-of-law-provisions-in-employment-agreements-in-light-of-georgias-new-restrictive-covenants-act/
Timestamp: 2019-04-20 18:43:31+00:00

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The following article was featured in the Winter 2011-2012 Special Edition of The Atlanta Bar Association’s Labor & Employment Law Section Newsletter.
Why Are You Still Ignoring Me? Will Georgia Courts Still Disregard Choice-of-Law Provisions in Employment Agreements Containing Restrictive Covenants in Light of Georgia’s New Non-Compete Law?
It has been a little over a year since the passage of the referendum on the November 2010 election ballot that resulted in the new Georgia restrictive covenant act (the Act). Because the Act only applies to agreements entered into after it was enacted, most current non-compete cases still involve agreements governed by the old law. Thus, the Georgia courts have not had many occasions to provide guidance with respect to the Act itself, and many questions remain unanswered. Nevertheless, the courts have provided some guidance on one important issue arising from the Act’s passage, namely, whether the shift in Georgia public policy that the Act represents has an impact on analyzing whether a choice-of-law provision in an employment agreement executed before the Act—and that calls for another state’s law to govern the enforceability of the agreement and the restrictive covenants in it—is enforceable.
Before the Act, the Georgia courts regularly made clear that they would not enforce provisions choosing the law of another state in restrictive covenant agreements when doing so would contravene the public policy of the State of Georgia. But with the General Assembly’s passing the Act and the electorate’s approving the referendum enabling the Act, there is now a question of whether these courts should continue to disregard such choice-of-law provisions when determining the enforceability of covenants in contracts entered into before the passage of the Act.
Several recent federal court decisions have addressed this issue. This article explains the historical background and recent statutory and constitutional changes in Georgia that are at the heart of this question, and it also surveys those decisions.
the law of the jurisdiction chosen by the parties the contract to govern their contractual rights will not be applied by Georgia courts where application of the chosen law would contravene the policy of, or would be prejudicial to the interest of the state. [Restrictive] Covenants . . . affect the interest of this state . . . and hence their validity is governed by the public policy of this state.
In 2003, the Georgia Supreme Court resoundingly reaffirmed the rationale of Nasco in Convergys Corp. v. Keener. The U.S. Court of Appeals for the Eleventh Circuit had certified this question to the Georgia Supreme Court: “Whether a Court applying Georgia conflict of laws rules follows the language of Restatement (Second) Conflict of Laws § 187(2) and, therefore, first must ascertain whether Georgia has a ‘materially greater interest’ in applying Georgia law, rather than the contractually selected forum’s law before it elects to apply Georgia law to invalidate a non-compete agreement as contrary to Georgia public policy?” However unsettling to the Eleventh Circuit, in Convergys, the Georgia Supreme Court answered this question in the negative.
Thus, under the law as it existed before the Act passed, to the extent the parties’ chosen foreign law would permit enforcement of restrictive covenants that were considered overbroad under Georgia law, honoring the choice-of-law provision was considered repugnant to the State’s public policy. It was well settled that in these circumstances courts should disregard the choice-of-law provision and instead apply Georgia law. For example, in Hostetler v. Answerthink, Inc., the employee’s non-solicitation agreement had a choice-of-law provision requiring the application of Florida law. The employee brought an action in Georgia seeking a declaratory judgment that the non-solicitation provision in his agreement was invalid under Georgia law. The trial court disregarded the Florida choice-of-law provision, found the covenant unenforceable under Georgia law, and enjoined the former employer from seeking to enforce the covenant. Following Nasco and Convergys, the Georgia Court of Appeals affirmed the trial court’s ruling.
The rationale in Nasco with respect to choice-of-law provisions was rooted in the Georgia courts’ historic hostility to restrictive covenants in employment agreements. With the passage of the Act and the referendum, however, Georgia law has drastically changed such that enforcement of restrictive covenants is now favored.
During the 2009 legislative session, the Georgia House of Representatives and Senate overwhelmingly passed House Bill 173, legislation that would drastically change the law concerning restrictive covenants in Georgia. The bill was signed by the Governor on April 29, 2009. Given that the hostility to restrictive covenants was rooted in the Georgia Constitution, however, before the law could become effective, an amendment to the Georgia Constitution had to be approved. Absent such an amendment, the legislation would likely suffer the same fate as the Restrictive Covenant Act of 1990, which the Georgia Supreme Court declared unconstitutional.
A resolution proposing to amend the Constitution to authorize the General Assembly to legislate in the area of restrictive covenants was voted on and passed in the 2010 legislative session. As a result, on November 2, 2010, Georgia voters were asked to answer the following question: “Shall the Constitution of Georgia be amended so as to make Georgia more economically competitive by authorizing legislation to uphold reasonable competitive agreements?” An overwhelming majority of Georgia voters answered this question “yes,” and the proposed amendment passed.
As a result of uncertainty as to the effective date of the new law (and potential constitutional infirmities as a result of this uncertainty), House Bill 30 was introduced in the 2011 session of the Georgia House of Representatives. This bill essentially reenacted House Bill 173 and was intended to cure any issue with respect to the effective date of the new law. House Bill 30 was passed by the General Assembly and took effect when it was signed by the Governor on May 11, 2011.
Together, the passage of the referendum and the Act represent a landmark shift in Georgia public policy with respect to restrictive covenants, particularly in the employment context.
The text of the Act explicitly provides that it only applies to contracts entered into on and after its effective date and does not apply in actions determining the enforceability of restrictive covenants entered into before that date. The Georgia Court of Appeals and several federal district courts have held that the Act does not apply retroactively.
But a significant question is how the change in public policy affects the analysis of choice-of-law provisions requiring courts to apply another state’s law which are contained in agreements entered into before the effective date of the Act. Although the Act itself does not apply retroactively, the issue is whether public policy has changed such that choice-of-law provisions in agreements containing restrictive covenants that were entered into prior to the new law going into effect should now be honored—even if they would not have been under the prior common law.
The Argument for Applying Georgia’s “New” Public Policy When Deciding Whether to Honor a Choice-of-Law Provision.
The argument in favor of applying Georgia’s “new” public policy with respect to restrictive covenants is straightforward. Georgia’s public policy with respect to restrictive covenants has fundamentally changed. The Act took effect after an amendment to the Georgia Constitution authorizing the General Assembly to legislate about restrictive covenants. The amendment was ratified in the November 2010 election. Therefore, because of the passage of both the amendment and the Act, arguably, Georgia public policy concerning restrictive covenants has changed, and enforcement of restrictive covenants in Georgia is now favored. Thus, with respect to agreements signed before the effective date of the Act, the question that the courts have and will continue to be asked is not what substantive law to apply (i.e., the Act or the Georgia common law in place prior to the Act), but rather whether they should honor the parties’ agreed-upon choice-of-law given Georgia public policy.
“Expressions of the legislature through statutes are conclusive on the question of public policy . . .” Given the amendment’s passage and the Act, not only do we have an expression of the legislature which is arguably conclusive on the question of public policy, but we also have a constitutional amendment that was ratified by more than two-thirds of Georgia voters in the November 2010 election. Thus, one can argue that, because Georgia’s public policy now favors the enforcement of restrictive covenants, a finding that the restrictive covenants in the parties’ contract are enforceable under the chosen foreign law is consistent with, rather than contrary to, Georgia public policy. Accordingly, arguably, Nasco and its progeny no longer support the argument that the courts should disregard the parties’ choice of foreign law.
[t]he threshold question is not whether the New Act applies in this case, but whether this Court in determining the enforceability of restrictive covenants in the Non-Compete will apply the Delaware choice-of-law provision contained therein. The answer to this question depends on whether Georgia’s public policy is in conflict with the application of Delaware law. The New Act expresses the current public policy of Georgia in relation to restrictive covenants in employment agreements.
Delaware law is in accord with Georgia’s new public policy position on restrictive covenants in employment agreements. Therefore, the Court applying Georgia’s choice-of-law rules would honor the parties’ selection of Delaware law in determining the enforceability of the restrictive covenants in the Non–Compete.
Thus, relying upon the Act as evidence of a shift in Georgia’s public policy, Judge Story found that applying Delaware law to the restrictive covenants in the employment agreements would not violate Georgia’s public policy. According to him, Georgia public policy has changed such that choice-of-law provisions in agreements signed before the effective date of the Act need to be looked at differently than before. Despite this, Judge Story subsequently reversed himself when he granted a motion for reconsideration.
In reversing his prior decision, Judge Story found that he had disregarded several decisions from the Georgia Court of Appeals that had been decided following the passage of the referendum. One of the decisions is Bunker Hill Int’l, Ltd. v. NationsBuilder Ins. Servs., Inc, which the Georgia Court of Appeals decided on May 5, 2011. There, an employee and his new employer brought an action seeking a declaration that the restrictive covenants the employee had entered into with his previous employer were unenforceable under Georgia law. That employment agreement was executed before the effective date of the Act. The employee and his new employer also sought to invalidate a mandatory forum-selection clause in the agreement, which required that any dispute about the parties’ rights under the agreement be litigated in Illinois. The Georgia Court of Appeals held that the forum-selection provision was void because applying it would result in an Illinois court’s enforcing at least one covenant in violation of Georgia public policy.
Judge Story found that the Georgia Court of Appeals’ decision in Bunker Hill relied upon Georgia’s public policy at the time the agreement was signed to hold that the non-compete and non-solicitation provisions of the agreements were unenforceable in Georgia. Therefore, he concluded, he had erred in Boone I in applying Georgia’s current public policy to the choice-of-law analysis. He went on to find that the Court of Appeals had recently reached the same conclusion in two other cases—Gordon Document Products, Inc. v. Serv. Techs, Inc., and Cox v. Altus Healthcare and Hospice, Inc. Having examined Bunker Hill, Gordon Document Products and Cox, he determined that he had made a clear error of law in his first order when he concluded that the public policy embodied in the Act should control whether the Delaware choice-of-law provision was enforceable. Instead, he needed to apply Georgia’s public policy as it existed at the time Boone entered into the agreement. Therefore, applying Georgia’s old public policy required that the Delaware choice-of-law provision be disregarded.
Although Judge Story’s rationale in reaching the conclusion he reached is plain, it is unclear whether the Bunker Hill, Gordon Document Products, or Cox cases actually require the result that he reached. First, although the Bunker Hill case was decided after the referendum and after the original version of the Act was supposed to go into effect, it was decided before the newest version of the Act was signed into law by Governor Deal. Second, in the Bunker Hill case, neither party argued that the change in public policy in Georgia, as evidenced by the referendum or the Act, required the court to analyze the enforceability of the forum-selection provision differently. This may have been the case because the appeal in Bunker Hill was docketed before the constitutional amendment had even taken effect. Third, the portion of the Bunker Hill decision cited by Judge Story to support his conclusion simply says that the law of restrictive covenants as it existed before the November 2010 ratification of the Act should be applied. Yet there is no dispute that the Act is not retroactive. The issue is whether public policy has changed such that courts should continue to disregard choice-of-law provisions. While the Bunker Hill case certainly provided the opportunity for the Court of Appeals to address whether public policy in Georgia has changed, reviewing the briefs in that case as well as the decision demonstrates that this argument was not made, and the Court of Appeals did not specifically address the issue.
As for the Gordon Document Products and Cox cases, those cases involved only applying the law to determine whether restrictive covenants were enforceable. They did not involve choice-of-law, forum-selection, or any similar issues that would implicate public policy either at the time the agreements were signed or at the time the decisions were made. Moreover, House Bill 30, which amended the Act, was not signed into law by Governor Deal until May 11, 2011, after the Court of Appeals’ January 24, 2011 ruling in Cox. Therefore, it was unclear in Boone II why Judge Story relied on those decisions in coming to the conclusion he reached.
Judge Story’s August 3, 2011 opinion appears to have been the first to tackle this issue. A little more than a month after Boone II, however, Judge Treadwell of the Middle District of Georgia issued an opinion addressing the same question in Becham. Becham involved employment agreements containing restrictive covenants that were executed in 2000. One of the agreements contained a choice-of-law provision stating that the agreement was governed by Pennsylvania law. On December 1, 2010, the employee notified his employer that he would be resigning effective December 31. The same day, his manager sent him an e-mail with proposed separation terms, one of which was that he would continue to honor his obligations under the restrictive covenants in the agreement, which was to be governed by Pennsylvania law. The employee responded to the e-mail accepting the separation terms on the same day.
Shortly before the employee began working for a competitor the following February, he filed an action seeking a declaratory judgment that his restrictive covenants were unenforceable. He quickly sought summary judgment. In response, his former employer argued that the restrictive covenants were valid under Pennsylvania law and that the application of Pennsylvania law would not offend Georgia’s new public policy favoring restrictive covenants. The former employer also argued that he had reaffirmed the restrictive covenants at a time when Georgia’s new public policy was in effect: both when he accepted the severance terms on December 1, 2010—which was after the successful ballot referendum—and when he accepted a severance payment in January 2011—which was after the constitutional amendment had taken effect.
Judge Treadwell thus disregarded the Pennsylvania choice-of-law provision, found that the covenants were unenforceable under old Georgia law, and granted summary judgment in the employee’s favor on his declaratory judgment counterclaim.
While employees with older agreements containing restrictive covenants and choice-of-law provisions may take some comfort in Judge Story and Judge Treadwell’s decisions and may well believe that a judge would likely invalidate their choice-of-law provisions and apply Georgia’s old law to assess the enforceability of their restrictive covenants, this issue is by no means settled. Certainly, other federal judges may take a different view. Ultimately, the Georgia Court of Appeals and the Georgia Supreme Court will have to answer this question directly.
Accepting the argument that Georgia’s old public policy should apply to agreements signed before the effective date of the Act will result in ignoring the parties’ bargained-for agreement that a foreign state’s law would govern their obligations—all in order to avoid contravening Georgia public policy considerations that no longer exist. An argument can be made that such an approach makes no sense as a practical matter.
That said, a perhaps equally compelling argument can be made that employees who knew that a Georgia court would disregard their choice-of-law provision calling for the application of another state’s law, based on Georgia public policy in place at the time they entered into their employment agreements, should not be penalized by retroactive application of an unforeseen change in public policy. Further, given the historic hostility of the Georgia courts to restrictive covenants in the employment context as well as the General Assembly’s clear intent that the new law does not apply retroactively, it would not be unreasonable to expect the Georgia Court of Appeals and the Georgia Supreme Court to agree with the latter argument that the new public policy should also not be applied retroactively. Such an approach would arguably be consistent with Georgia case law addressing whether retroactive application of a new law is appropriate.
As with many questions relating to the application of the Act, this issue is yet another one where attorneys must counsel their clients as best as they can until the Georgia appellate courts provide more guidance.
Benjamin I. Fink and Neal F. Weinrich are with the Atlanta law firm Berman Fink Van Horn P.C. where they focus their practices on trade secret, non-compete and other competition-related disputes.
 O.C.G.A. section 13-8-50 et. seq.
 See H.B. 30, 151th Gen. Assemb., Reg. Sess. (Ga. 2011), at § 5 (“This Act … shall apply to contracts entered into on and after such date and shall not apply in actions determining the enforceability of restrictive covenants entered into before such date”); see also H.B. 173, 150th Leg., Reg. Sess. (Ga. 2009), at § 4 (same).
 See Gordon Document Prods., Inc. v. Serv. Techs., Inc., 308 Ga. App. 445, 448 n. 5, 708 S.E.2d 48 (2011) (applying old law to 2003 and 2007 agreements); Cox v. Altus Healthcare and Hospice, Inc., 308 Ga. App. 28, 30, 706 S.E.2d 660, 664 (2011) (applying old law to 2009 agreement); see also Becham v. Synthes (U.S.A.), 2011 WL 4102816, at *6 (M.D. Ga. Sept. 14, 2011) (applying old law to covenants agreed to on December 1, 2010 – i.e., after H.B. 173 went into effect but before the necessary constitutional amendment took effect on January 1, 2011); Boone v. Corestaff Support Servs., Inc., 2011 WL 3418382 (N.D. Ga. Aug. 3, 2011) (applying old law to 2008 agreement).
 As of the date of this article, the authors are aware of only one published opinion in which a Georgia court has scrutinized covenants under the new law. See PointeNorth Ins. Group v. Zander, Civil Action No. 1:11-CV-3262-RWS, 2011 WL 4601028 (N.D. Ga. Sept. 30, 2011) (blue-penciling overly broad customer non-solicitation covenant in May 11, 2011 employment agreement to apply only to customers that the former employee contacted or assisted with insurance) (Story, J.).
 Convergys Corp. v. Keener, 276 Ga. 808, 582 S.E.2d 84 (2003) (answering certified question from the Eleventh Circuit regarding enforcement of choice-of-law provisions in restrictive covenant context); Nasco, Inc. v. Gimbert, 239 Ga. 675, 676, 238 S.E.2d 368, 369 (1977); see also Enron Capital & Trade Resources Corp. v. Pokalsky, 227 Ga. App. 727, 730, 490 S.E.2d 136, 139 (1997) (holding that although the parties may have chosen the law of a foreign jurisdiction to govern, a Georgia court will not enforce a restrictive covenant “particularly distasteful” to Georgia public policy and law).
 239 Ga. at 676, 238 S.E.2d at 369.
 276 Ga. 808, 582 S.E.2d 841 (rejecting “materially greater interest” test set forth in Restatement (Second) of Conflicts, § 187(2) and finding that Bryan v. Hall Chemical Co., 993 F.2d 831 (11th Cir. 1993), and Nordson Corp. v. Plasschaert, 674 F.2d 1371 (11th Cir. 1982), were “erroneous”); see also Manuel v. Convergys Corp., 430 F.3d 1132 (11th Cir. 2005); Hostetler v. Answerthink, Inc., 267 Ga. App. 325, 328-29, 599 S.E.2d 271, 274-75 (2004); Hulcher Services, Inc. v. R.J. Corman R.R. Co., LLC, 247 Ga. App. 486, 543 S.E.2d 461 (2000); Wolff v. Protégé Systems, Inc., 234 Ga. App. 251, 506 S.E.2d 429 (1998).
 Keener v. Convergys Corp., 312 F.3d 1236 (11th Cir. 2002).
 276 Ga. 808, 582 S.E.2d 84.
 267 Ga. App. 325, 599 S.E.2d 271.
 This statute was declared unconstitutional by the Georgia Supreme Court. Jackson & Coker, Inc. v. Hart, 261 Ga. 371, 405 S.E.2d 253 (1991).
 For a discussion of whether the language used in the ballot referendum was constitutional, see David Pardue’s article in this newsletter.
 The uncertainty surrounding when the law took effect was an oft-discussed topic in the blogosphere and other arenas. See, e.g., Legislation Introduced Which Would Re-enact Georgia’s New Restrictive Covenants Legislation (Jan. 28, 2011). Indeed, H.B. 30 acknowledged as such. See H.B. 30, 151th Gen. Assemb., Reg. Sess., (Ga. 2011), at § 1 (“It has been suggested by certain parties that because of the effective date provisions of HB 173 …, there may be some question about the validity of that legislation”).
 See generally Becham, 2011 WL 4102816, at *4 (“In sum, the 2009 law become effective November 3, 2010, but without the necessary constitutional foundation in place. The constitutional amendment changing Georgia’s public policy became effective January 1, 2011. The legislation curing any constitutional defect became effective May 11, 2011”).
 Integon Indem. Corp. v. Canal Ins. Co., 256 Ga. 692, 693, 353 S.E.2d 186, 187 (1987) (citing Greenwood Cemetery Inc. v. The Travelers Indem. Co., 238 Ga. 313, 316-17, 232 S.E.2d 910, 913-14 (1977). See also Board of Lights and Waterworks v. Dobbs, 151 Ga. 53, 105 S.E. 611 (1921) (“the expression of the legislature is conclusive on the question of public policy”).
 See Georgia Secretary of State Official Results of the Tuesday, November 2, 2010 General Election, http://sos.georgia.gov/elections/election_results/2010_1102/swqa.htm (last visited January 13, 2012).
 2011 WL 2358666 (N.D. Ga. June 9, 2011) (“Boone I”).
 Id., at *5-6 (citations omitted) (emphasis added).
 2011 WL 3418382 (N.D. Ga. Aug. 3, 2011) (“Boone II”).
 309 Ga. App. 503, 710 S.E.2d 662 (May 5, 2011).
 Id., at 503, 710 S.E.2d at 664.
 Id., at 504, 710 S.E.2d at 664.
 Id., at 505, 710 S.E.2d at 665.
 Id., at 507-8, 710 S.E.2d at 666. Compare Iero v. Mohawk Finishing Products, Inc., 243 Ga. App. 670, 534 S.E.2d 136 (2000) (finding that New York choice-of-venue provision is enforceable and affirming trial court’s order granting motion to dismiss based on forum-selection provision).
 Boone II, 2011 WL 3418382, at *2.
 308 Ga. App. 445, 708 S.E.2d 48 (March 16, 2011).
 308 Ga. App. 28, 706 S.E.2d 660 (Jan. 24, 2011).
 Boone II, 2011 WL 3418382, at *3.
 See Docket/Case Inquiry System: Results,http://www.gaappeals.us/docket/results_one_record.php? docr_case_num=A11A0749 (last visited January 13, 2012).
 See, e.g., Park-Ohio Indus., Inc. v. Carter, No. 06-15652, 2007 WL 470405, at *9 (E.D. Mich. Feb. 8, 2007) (analyzing the implications on a choice-of-law analysis of the repeal in 1985 of Michigan’s anti-restrictive covenant act and stating that “… a state’s law and its public policy are not always synonymous, and …they do not have to be for choice-of-law purposes”); Shipley Co. v. Clark, 728 F.Supp. 818, 826 (D. Mass. 1990) (analyzing implications of the repeal of the Michigan statute on the enforceability of a Massachusetts choice-of-law provision and stating that “[e]nforcement of the choice-of-law provision… would violate Michigan law, but not Michigan policy”) (emphasis in original).
 In an October 17, 2011 Order which denied a request that he certify to the Supreme Court of Georgia the question of whether a Georgia court should consider the State’s current public policy or the public policy in effect at the time a contract was entered into when evaluating a choice-of-law provision, Judge Story emphatically found that Bunker Hill did address this issue: “… theCourt finds [based on Bunker Hill] that the Georgia Court of Appeals has definitively settled the issue …”. Case 1:11-cv-01175-RWS, Document 51, at p. 10, Filed 10/17/11 (“Boone III”). Judge Story also rejected some of the arguments identified in this article regarding why Bunker Hill, Gordon Document Products, and Cox did not necessarily require him to come to the conclusion he reached. Id., at pp. 10-14.
 In Hix v. Aon Risk Services South, Inc., Civil Action No. 11-CV-3141-RWS, 2011 WL 5870059 (N.D. Ga. Nov. 22, 2011), Judge Story applied Georgia law to analyze the enforceability of covenants in an agreement containing a choice-of-law provision that called for the application of Illinois law. The parties in Hix, however, do not appear to have re-argued the issues decided in Boone I and Boone II andinstead appear to have agreed that Georgia law governed the enforceability of the covenants. Id., at *3.
 As discussed above, Judge Story concluded in Boone III that the Georgia Court of Appeals has already answered this question. See supra note 38. However, this issue will undoubtedly come before the Georgia Court of Appeals again and in a more direct fashion.
 Judge Story rejected this argument in denying the request by the defendants in Boone that hecertify a question to the Supreme Court of Georgia: “… the Court finds it incongruous that a Georgia court would apply old Georgia law, which disfavors restrictive covenants, in deciding whether to enforce a restrictive covenant entered into before passage of the new law, but would consult new public policy, which favors restrictive covenants, in deciding whether to enforce a choice-of-law provision governing the same restrictive covenant and that would give effect to that covenant.” Boone III, at p. 13.
 See generally Donaldson v. Dept. of Transp., 262 Ga. 49, 53, 414 S.E.2d 638, 641 (1992) (“It is a well settled principle of law that acts of the legislature are ordinarily given prospective effect unless the language of the act imperatively requires retroactive application…(cits. omitted)… The amendment at issue here is silent on the issue of retroactive application. We conclude therefore that the legislature intended prospective application only”).

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