Court Opinion

ID: 8986492
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:52:21.687873+00
Date Added: 2024-06-11T17:10:49.160550
License: Public Domain

JOHNSON, Circuit Judge:
This case arises on an expedited appeal from an interlocutory order granting a preliminary injunction.
I. STATEMENT OF THE CASE
A. Background Facts
In January of 1976, Terrence Lee Ferre-ro, the plaintiff below, was hired as a building products salesman by the defendant, Associated Materials, Inc. During his orientation, he signed an employment contract which included a covenant not to compete.
Initially, Ferrero worked in the Greater Atlanta area. In 1978, Ferrero was transferred to Knoxville, Tennessee, where he spent seven years as a salesman. In 1985, he was transferred back to Atlanta and given sales territory # 838 (northern Georgia, and parts of South Carolina and Florida).
Ferrero evidently was a very successful salesman. He serviced 136 accounts and accounted for $4.8 million in sales in 1989, which was 75% of the activity in Associated Materials’ Atlanta warehouse. Ten of Ferrero’s accounts were his most important, accounting for more than half of his total sales and 40% of the warehouse’s total activity.
Essentially, Associated Materials’ products are indistinguishable from the products of Associated Materials’ competitors. Associated Materials, however, attempts to distinguish itself by cultivating customer good will through various incentives and quality service. Associated Materials’ sales strategy is to create a close relationship between its salesforce and its customers. To this end, Associated Materials spent nearly $336,000 over the last five years to enable Ferrero to take various buyers on trips to Europe and the Caribbean. In addition, Associated Materials spent $96,099 in order to enable Ferrero to entertain various buyers through meals, sporting events, and other forms of entertainment. With the money spent on building Associated Materials’ goodwill, Ferrero grew to be close friends with the buyers for his ten largest accounts. Ferrero also eventually learned about various trade secrets.
On April 15, 1990, Ferrero resigned from Associated Materials. Associated Materials then transferred Ron Williams from a territory in North Carolina to replace Ferrero. Associated Materials claims that it takes at least two years for Williams to become completely familiar with Ferrero’s former territory.
On July 5, 1990, Associated Materials wrote Ferrero to clarify the existing covenant not to compete. Associated Materials informed Ferrero that the previous covenant was superseded by a new covenant.
On August 23, 1990, Ferrero wrote Associated Materials that he intended to form a corporation called American Wholesale Building Supply Company and he intended to compete with Associated Materials in the greater Atlanta area.
B. Procedural History
On April 18, 1990, Ferrero filed a complaint in Georgia state court seeking declaratory and injunctive relief from Associated Materials’ intentions to enforce the covenant not to compete. The next day *1444Associated Materials removed the action to federal district court on the basis of diversity of citizenship. The parties at the time agreed to observe the status quo until the district court ruled on the preliminary injunction. On May 3, 1990, Ferrero moved for a preliminary injunction. On June 18, 1990, the district court denied Ferrero’s motion for a preliminary injunction because Ga.Code Ann. § 13-8-2.1 (Supp.1990) was soon to become effective and would probably permit the retroactive reformation of covenants not to compete.
On June 4, 1990, Associated Materials filed a counterclaim asking for reformation of the 1976 covenant. On August 28, 1990, Associated Materials sought a temporary restraining order against Ferrero because of Ferrero’s announced intention to compete. The district court, with the approval of the parties, treated the temporary restraining order as a request for a preliminary injunction. On October 11, 1990, the district court granted the preliminary injunction. Ferrero then brought this appeal.
On November 29, 1990, pursuant to Ga. Code Ann. § 13-8-2.1(g)(1), the district court “blue pencilled” the reformed covenant. The statute permits courts to narrow covenants, striking down any overreaching portion. The district court did so by restricting Ferrero from competing in Cobb and Fulton counties for eighteen months. Therefore, Ferrero may currently compete for forty-three percent of his 1989 sales volume and he may compete for the rest of his volume on October 15, 1991.
II. STANDARD OF REVIEW
This Court reverses a district court’s grant of a preliminary injunction only when the district court abuses its discretion. United States v. Alabama, 791 F.2d 1450 (11th Cir.1986). Findings of fact made in connection with a grant of a preliminary injunction are set aside only if clearly erroneous. Id. While findings of law are ordinarily reviewable de novo, this Court will defer to a district court’s interpretation of unsettled questions of the law of the state where the court sits. Shipes v. Hanover Ins. Co., 884 F.2d 1357 (11th Cir.1989).
III. ANALYSIS
A. Georgia Common Law and Covenants Not to Compete
A federal court sitting in diversity applies the substantive law of the state in which it sits, including that state’s choice of law. See Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Therefore, the district court correctly applied the Georgia conflict of laws rule for contracts which is lex loci contractus. Residential Industrial Loan Co. v. Brown, 559 F.2d 438 (5th Cir.1977).1 Because the last act required for contract formation occurred in Georgia, we conclude that Georgia’s contract law governs this employment contract. See Nasco, Inc. v. Gimbert, 239 Ga. 675, 238 S.E.2d 368 (1977).
The original covenant not to compete signed by Ferrero stated that he promised not to “engage in the manufacture, sale, distribution or promotion of the sale of ... any ... products manufactured or sold by the employer ... in any area or territory in which the employee shall have been located, employed or worked....” Under Georgia common law, this covenant not to compete could be struck down for two reasons: first, because one cannot create a covenant not to compete that applies to employment in a given trade “in any capacity,” Fields v. Rainbow International Carpet Dyeing & Cleaning Co., 259 Ga. 375, 380 S.E.2d 693, 693 (1989); and second, because one cannot create a covenant not to compete that “allow[s] the employer to assign the employee to any territory it desires with the restrictive covenant following the employee.” Orkin Exterminating Company, Inc. v. Pelfrey, 237 Ga. 284, 227 S.E.2d 251, 252 (1976).
When covenants not to compete are too broad, Georgia common law deems them unenforceable. The courts in such a case *1445refuse to issue injunctions or award damages. See, e.g., Nasco, Inc. v. Gimbert, 239 Ga. 675, 238 S.E.2d 368 (1977). Moreover, the Georgia courts have refused to adopt a “blue-pencil theory” to reform overbroad contracts. Rita Personnel Services v. Kot, 229 Ga. 314, 191 S.E.2d 79 (1972). Unless the contract is severable on its face, see Horne v. Drachman, 247 Ga. 802, 280 S.E.2d 338 (1981), the contract is normally struck down in its entirety. See Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977). Therefore, it seems that the 1976 covenant not to compete was completely unenforceable under Georgia common law, prior to the passage of the statute.
B. The New Georgia Statute Permitting Contracts in Partial Restraint of Trade
Associated Materials argues that a new Georgia statute permitting contracts in partial restraint of trade changes the common law and saves this covenant not to compete. The new Georgia statute, codified at Ga.Code Ann. § 13-8-2.1 (Supp. 1990), does four things relevant to this dispute. First, it permits an employer to unilaterally reformulate a covenant not to compete to eliminate “unclear or over-broad” language “so long as [the reformation] is no broader than the terms of the original restraint.” Id. at § 13-8-2.1(f)(3). Second, it creates a presumption that sufficiently narrow covenants are acceptable. Id. at § 13-8-2.1(c)(3). Third, it presumes that injunctions are appropriate remedies to a violation of such a covenant. Id. at § 13-8-2.1(g)(l). And, fourth, it instructs the courts to reformulate covenants so they are not overreaching or unconscionable. Id. at § 13-8-2.1(g)(1).
Pursuant to this new statute, Associated Materials unilaterally reformulated the contract.2 There is no dispute that if this new statute applies, the statute would save this covenant not to compete from being void under Georgia common law. However, the following questions are in dispute: (1) should this statute be applied to this case; (2) does such an application violate the Georgia statute and constitutional provision forbidding retroactive applications of statutes; (3) does the new statute violate the Georgia Constitution; (4) is an injunction an appropriate remedy; and (5) should this covenant be “blue pencilled”?

(1) Should this Statute be Applied to this Case?

The district court applied the statute to the case at hand. Ferrero alleges that this application is a retroactive application since the original contract was signed in 1976 and he quit working for Associated Materials on April 15, 1990, while the statute’s effective date was July 1, 1990.
Ferrero argues that the district court erred in applying the statute because of a Georgia rule of statutory construction which disfavors retroactive applications. Georgia actually has two rules of statutory construction governing retroactivity, each designed to apply to separate types of statutes. The first rule prohibits á “statute [from being] given a retroactive operation unless such construction is absolutely demanded.” J. Scott Rentals, Inc. v. Bryant, 239 Ga. 585, 238 S.E.2d 385, 386 (1977). The second rule carves out an exception to the first rule for both procedural statutes and statutes that affect only a litigant’s remedy. These statutes are deemed retroactive “absent an expressed contrary intention.” Polito v. Holland, 258 Ga. 54, 365 S.E.2d 273, 273 (1988). The Georgia courts, as a matter of convenience, refer to the statutes covered by the first rule as “substantive” and the statutes covered by the second rule as “procedural.” See id. 365 S.E.2d at 273-74.
There is a considerable body of case law in Georgia which attempts to distinguish between substantive and procedural statutes. The major difference between substantive law and procedural law is: “[s]ubstantive law is that law which creates rights, duties, and obligations^ while] procedural law is that law which prescribes *1446the methods of enforcement of rights, duties and obligations.” Id. at 274. The Georgia Supreme Court has restated this proposition in a number of ways, for example, the court has described procedural laws as those “laws [which] cur[es] defects in the remedy, or [which] confirm[s] rights already existing, or [which] add[s] to the means of securing and enforcing the same.” Pritchard v. Savannah St. & R.R.R., Co., 87 Ga. 294, 13 S.E. 493, 494 (1891). However, laws which would normally be considered procedural may be deemed substantive for the purpose of determining retroactivity if the laws enact changes which affect “vested right[s].” Bullard v. Holman, 184 Ga. 788, 193 S.E. 586, 588 (1937); see also Canton Textile Mills v. Lathem, 253 Ga. 102, 317 S.E.2d 189 (1984). While the concept of vested rights is not completely clear, the Georgia courts have identified several dimensions of the concept. It is clear that a vested right cannot be contingent. See Pritchard, 13 S.E. at 495. The Georgia Supreme Court has also held that while a vested ground of defense is protected from retroactive changes in the law, see Bullard, 193 S.E. at 589, one cannot have “a vested right in a state of the law which left the injured party without, or with only a defective, remedy.” Pritchard, 13 S.E. at 495; see also Bullard, 193 S.E. at 589 (one cannot have a vested right in a statute creating a defense to a breach of contract action since it is a “ ‘naked legal right.’ ” (quoting Ewell v. Daggs, 108 U.S. 143, 151, 2 S.Ct. 408, 414, 27 L.Ed. 682 (1883))).
The statute is both procedural and substantive. It is procedural when it encourages the courts to issue injunctions and reform the contract as well as when it permits employers to reformulate covenants so that they are narrower and clearer. These three aspects of the statute are procedural because they merely “pre-scriben the methods of enforcement of rights, duties and obligations.” Polito, 365 S.E.2d at 274. Moreover, these three changes do not affect any vested rights. The statute, however, is substantive when it instructs the courts to presume that sufficiently narrow covenants are acceptable. Cf. Seaboard Airline Ry. Co. v. Benton, 175 Ga. 491, 165 S.E. 593 (1932) (A statute which instructs courts to presume negligence in certain circumstances is substantive.) However, while this provision is substantive, it is merely a codification of existing common law, see Merrill Lynch, Pierce, Fenner & Smith v. Stidham, 658 F.2d 1098 (5th Cir. Unit B 1981) (applying Ga. law), and therefore not a retroactive provision. See Lathan & Sons Co. v. City of Rome, 136 Ga. 398, 71 S.E. 770 (1911) (holding codifications not to be retroactive).
Therefore, since the statute is procedural, it is to be deemed retroactive absent a showing of a contrary legislative intent. See Polito, 365 S.E.2d at 273. Ferrero claims that the legislature did not intend the statute to have a retroactive application and, in the alternative, he claims that if the legislature intended the statute to apply to contracts signed before the effective date, it did not intend the statute to apply to situations where the employment relationship ended prior to the effective date of the statute.
We note that there is no support for either of Ferrero’s claims about the legislative intent. Uncodified section two of the statute strongly implies that the legislature wanted a retroactive application of the statute. Section two states that “[t]his Act shall further apply to all remedies sought or granted after the effective date.” 1990 Ga.Law at 1676, § 2. The language of section two leaves us no room to pick and choose among the various possible covenants and apply the common law to some and the statutory scheme to others.
Finally, Ferrero argues that the legislature intended the statute to be retroactively applied only to those contracts which would be valid under the common law. Ferrero notes language throughout the statute which supports his position. For example, in the section permitting employers to clarify covenants, the statute states, in part, that: “persons or entities that benefit from any existing restraint may provide the persons or entities bound by such restraint with a clarification.” Ga.Code Ann. § 13-8-2.1(f)(3) (emphasis added). By examining this section alone, without view*1447ing the overall statute, one could easily draw a few conclusions. The word “bound” is in the past tense. One could conclude from this fact that the legislature intended this statute to apply only to those who were legally bound under the common law. We, however, decline to narrowly read the statute section by section without examining how the sections relate to the entire statute. See Canton Textile Mills, 317 S.E.2d at 191. By examining the statute in its entirety, it is clear that Ferrero’s position is without merit. First, uncodified section two does not draw distinctions on the basis of whether the covenant was binding under the common law. Second, such a reading is contrary to the legislative intent. When one recalls that the Georgia courts have been traditionally hostile towards these covenants not to compete and one notes both the broadness of uncodified section two and the language in section 13-8-2.1(a), which states that Georgia’s new policy is to be in favor of enforcing these covenants, it becomes clear that the legislature intended to save the covenants that would previously have been unenforceable. As already noted, under the common law covenants which were too broad were struck down in their entirety. See Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977). Thus, if we were to adopt Ferrero’s position and hold the statute partially retroactive by applying the statute only to those covenants which would be enforceable under the common law, we would be effectively gutting the statute and preventing it from remedying those situations that the legislature sought to reach.
We therefore hold that the new statute applies to the case at hand. Under this statute, it is undisputed that the covenant not to compete is valid.

(2) Does Such an Application Violate the Georgia Statute and Constitutional Provision Prohibiting Retroactive Applications of Statutes?

Ferrero next argues that the retroactive application of the statute violates a Georgia statute which prohibits the retroactive applications of other statutes. The Georgia statute states that
Laws prescribe only for the future; they cannot impair the obligation of contracts nor, ordinarily, have a retrospective operation. Laws looking only to the remedy or mode of trial may apply to contracts ... entered into ... prior to [the law’s] passage ...
Ga.Code Ann. § i-3-5.
This statute does not bar the application of the new statute regulating contracts in partial restraint of trade to this, case. First, the statute has an exception for statutes which affect only the remedies that one may seek. As discussed above, this statute mostly affects the remedies available in this case. And, second, the statute expresses only a preference against retroactive applications. It does not absolutely forbid retroactive applications.
Ferrero also argues that the retroactive application of the statute violates the Georgia constitutional provision which states that “no ... retroactive law ... shall be passed.” Ga. Const. Art. I, § 1, ¶ 10. This provision, however, has been interpreted as not to apply to remedial or procedural statutes. See State Hwy. Dep’t v. Bass, 197 Ga. 356, 29 S.E.2d 161 (1944). Therefore, we find Ferrero’s argument without merit.

(3) Does the New Statute Violate the Georgia Constitutional Provision Which Forbids the Legislature from Authorizing any Contract Which Lessens Competition?

Ferrero claims that the statute violates Art. 3, § 6, ¶ 5 of the Georgia Constitution which forbids the legislature from authorizing “any contract ... which may have the effect of ... defeating or lessening competition.”
The broad language of this constitutional provision has been narrowed by the application of a court created “rule of reason.” See Durham v. Stand-By Labor of Georgia, Inc., 230 Ga. 558, 198 S.E.2d 145 (1973). The rule of reason protects those contracts which are reasonable in light of the interests of the parties and the interest of the public. Id. Thus, the legislature may encourage narrowly tailored contracts, which do not unreasonably chill *1448competition, based upon the legislature’s evaluation of the public interest.
Ferrero claims blue pencilling is unreasonable because it encourages employers to act in bad faith by writing unreasonably broad contracts knowing that few are litigated and knowing that when they are litigated the courts will reform the contract, thus binding all employees by some version of the covenant. Ferrero’s argument can succeed only if he can prove that the Georgia courts’ historical aversion to blue pencilling created a strong deterrent to employers’ acting in bad faith. Under the old system, if few employees litigated overreaching covenants, then those employers who wrote overbroad covenants could be confident that the vast majority would succeed while a few would be struck down. Blue pencilling is unreasonable only if Ferrero can prove that the fear held by employers of having the courts strike down an occasional covenant in its entirety is sufficient to deter bad faith actions in the majority of cases which are never litigated. Ferrero provides this Court with insufficient proof of the unreasonableness of the statute.
The standard of review is that a Georgia statute will be struck down only when the act “plainly and palpably violates some provision of the ... State constitution.” City of Atlanta v. Associated Builders, 240 Ga. 655, 242 S.E.2d 139, 141 (1978). It does not appear that the statute is in clear conflict with Art. 3, § 6, ¶ 5. There may be a conflict, but it is debatable and Ferrero has not sustained his high burden of proof.

(4) Is an Induction an Appropriate Remedy1

Ferrero next argues that an injunction would not be appropriate in the case at hand. Before deciding whether the district court was correct in issuing the preliminary injunction, we note that we must first confront the threshold question of whether, under Erie, the court should have applied federal or state law to determine the appropriateness of issuing the preliminary injunction. Georgia law presumes that injunctions are appropriate remedies and that they should issue except in limited cases. Ga.Code Ann. § 13-8-2.1(g)(1) (Supp.1990). Federal law, however, would allow preliminary injunctions to issue only when the moving party can establish:
(1) There is a substantial likelihood that he [or she] ultimately will prevail on the merits of the claim; (2) he [or she] will suffer irreparable injury unless the injunction issues; (3) the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) the public interest will not be harmed if the injunction should issue.
Cate v. Oldham, 707 F.2d 1176, 1185 (11th Cir.1983).
It is clear that the outcome of this threshold choice of law question could lead to an outcome determinative result. Before performing the choice of law analysis, we pause to note that the federal procedural standards have been codified by reference in Rule 65 of the Federal Rules of Civil Procedure. See generally Wright & Miller, Federal Practice and Procedure: Civil § 2943 (1973).
The Supreme Court in Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965), held that outcome determination analysis is not the sole approach to be followed in a choice of law context. Instead, “choices between state and federal law are to be made not by application of any automatic ‘litmus paper’ criterion, but rather by reference to the policies underlying the Erie rule.” Id. at 467, 85 S.Ct. at 1141. The Hanna court held that by examining the policies intrinsic in the Erie rule, federal courts are required to apply the federal rules of civil procedure to the exclusion of any contrary state procedure as long as the rule is both constitutional and within the scope of the rules’ enabling act. Id. at 470-71, 85 S.Ct. at 1143-44. As previously noted, Federal Rule of Civil Procedure 65 incorporates traditional federal equity practice. We hold that rule 65 meets the criteria of Hanna, and therefore we apply federal procedure to determine whether the preliminary injunction was properly issued.
Turning to federal procedure, then, Ferrero claims that Associated Materials is *1449not entitled to a preliminary injunction because it failed to show a substantial likelihood of success on the merits. Ferrero makes this argument on the basis of the grounds already discussed: the statute should not be applied to this case; such a retroactive application violates Georgia Code section 1-3-5; and the statute is unconstitutional. For the reasons explained above, Associated Materials prevailed on each of these arguments.
Ferrero next claims that Associated Materials failed to show that it will suffer irreparable harm without the injunction. “An injury is ‘irreparable’ only if it cannot be undone through monetary remedies.” Id. at 1189. The district court found that should Ferrero be permitted to compete against Associated Materials, Associated Materials will lose its investment in good will and will lose its long-time customers. The district court concluded that this injury is “difficult, if not impossible, to determine monetarily.” The former Fifth Circuit held that the loss of customers and goodwill is an “irreparable” injury. Spiegel v. City of Houston, 636 F.2d 997 (5th Cir., Unit A, 1981).
Ferrero also claims that he is damaged by the injunction more than Associated Materials would be damaged had the court not issued the injunction. Ferrero notes that his income has dropped by 50% since he quit working for Associated Materials. Ferrero claims that Associated Materials’ loss estimates are speculative and even if Associated Materials lost all of Ferrero’s former accounts, it’s loss would amount to only 2.3% of Associated Materials’ national sales. We disagree. First, we note that Associated Materials posted a $100,000 injunction bond to cover any of Ferrero’s unwarranted losses. Second, we note the problem of the lost goodwill and long-time customers as well as the likelihood of layoffs should Associated Materials lose substantial business in Atlanta. Finally, this Court has held “specious” an argument suggesting that, in deciding this element of the preliminary injunction calculus, the court ought to compare the actual losses sustained to the size of the company. Merrill Lynch, Pierce, Fenner & Smith, 658 F.2d at 1102 n. 8.
Finally, Ferrero claims that Associated Materials failed to prove the impact of the injunction on the public interest. Ferrero argues that the public is best served by free competition and that this injunction injures competition. This balancing of the public interest has already been performed by the Georgia legislature when it presumed that injunctive relief is the appropriate remedy for a violation of this type of covenant. Ga.Code Ann. § 13 — 8—2.1(g)(1). We adopt the Georgia legislature’s determination.

(5) Should the District Court have Blue Pencilled the Contract?

Ferrero, in his briefs, complains that the district court did not blue pencil this contract. After the filing of the briefs, but before oral argument, the district court amended its judgment to blue pencil the agreement. Ferrero’s argument is therefore moot.3
IV. CONCLUSION
We therefore AFFIRM the court below.

. In Bonner v. Prichard, 661 F.2d 1206 (11th Cir.1981), this Court adopted as binding precedent all Fifth Circuit cases decided before October 1, 1981.

. The reformation was narrower than the original covenant, thus complying with section 13-8-2.1(f)(3).

. Ferrero would also like this Court to review the summary judgment entered against him in the district court. Since we affirmed the granting of the preliminary injunction, we do not need to reach this question.