By Bob Stevens

As we have written on this blog before, Georgia reissued its new Restrictive Covenant Act("New Act") on May 11, 2011. The New Act is intended to resolve concerns regarding the constitutionality and effectiveness of the New Act based on the November 2010 ratification of the amendment to the Constitution of Georgia adopting the law and reflects a fundamental change in Georgia’s law regarding non-compete, non-solicit and non-disclosure agreements. Perhaps the most dramatic change is permitting courts to "blue pencil" overbroad agreements. These changes likewise reflect a significant and fundamental change in the public policy of Georgia regarding the enforcement of restrictive covenants. The New Act is clear, however, that it is not retroactive and does not apply to contracts entered into before its enactment. Given that, the New Act does not apply to agreements entered into before May 11, 2011.

Despite that, a significant and substantial question has arisen regarding what law applies to Agreements entered before May 11, 2011 when the agreement contains a choice of law provision for a state other than Georgia. In a recent case, Boone, et al. v. Correstaff Support Services, Inc., et al., 2011 U.S. Dist. LEXIS 61666 (N.D. Ga. June 9, 2011), the Court held that it would honor the parties’ choice of Delaware law in an agreement entered into in 2008 because Georgia’s public policy had changed. The Court determined that, although the New Act does not apply retroactively, in determining whether to honor the parties’ agreement to apply Delaware law, the Court should look to Georgia’s public policy at the time it reviews the agreement and not at the time the parties executed the agreement. Based on that assumption and concluding that Georgia’s current public policy (which has dramatically shifted) is no longer in contravention to Delaware law on restrictive covenants, the Court held that it would apply Delaware law to the 2008 agreement.

Assuming the Court’s ruling is correct, if you have an Agreement executed before the New Act with a choice of law provision electing another state’s law, it is quite possible that the previously overbroad and once unenforceable provisions in Georgia have just gained new life. Indeed, parties should be very careful running to Georgia seeking a declaratory judgment that an agreement entered into before the New Act is overbroad and unenforceable when that agreement contains a choice of law provision electing another state’s law.

Of course, this debate is not over and it is not likely to go away quickly. The Georgia Court of Appeals in Bunker Hill Int’l, Ltd v. Nationsbuilder Ins. Svcs, Inc., 2011 Ga. App. LEXIS 376 (Ga. Ct. App. May 5, 2011) applied Georgia’s old public policy when interpreting the application of a choice of law provision (albeit it did so without a detailed analysis of the very issue addressed in Boone). Moreover, on June 17, 2011, plaintiffs in Boone filed a Motion to Alter or Amend Judgment, or in the alternative, for Reconsideration, arguing that "it would be a clear error of law and a manifest injustice to Plaintiffs to retroactively apply a shift in Georgia public policy to the restrictive covenants Correstaff and Boone signed in Georgia in 2008." That issue is now pending before the Court. This issue, like numerous other issues regarding Georgia’s New Act, will be decided by the Courts.