By Dan Hart
As we have written on this blog before, on May 11, 2011 Georgia reissued its new Restrictive Covenant Act (“New Act”) in order to resolve concerns about the constitutionality and effectiveness of a nearly identical statute that the state’s legislature had previously enacted in 2009. The 2009 version of the statute was contingent on voters’ approval of a ballot referendum to amend the Georgia Constitution, which voters overwhelmingly approved on November 2, 2010. The 2009 statute was clear that it was not retroactive and did not apply to contracts entered into before the purported effective date of the statute (November 3, 2010). Following the same approach, the New Act is also clear that it is not retroactive and does not apply to agreements entered into before May 11, 2011.
Despite the clear inapplicability of the New Act to agreements entered into before May 11, 2011, a question has emerged about whether courts must nonetheless apply Georgia’s current public policy when deciding whether to honor choice of law provisions in agreements that predate the New Act.
We previously reported about the recent decision of a federal district judge in the Northern District of Georgia in Boone v. Correstaff Support Servs., Inc., 2011 WL 2358666 (N.D. Ga. June 9, 2011). In that case, the court held that, when deciding whether to honor a choice of law provision in an agreement with restrictive covenants, a court should look to Georgia’s current public policy rather than the public policy that existed at the time that the agreement was signed. The court has now reversed course and held that it must apply Georgia’s public policy as it existed at the time that the agreement was signed, even though the state’s public policy has now changed. Boone v. Correstaff Support Servs., Inc., 2011 WL 3418382 (N.D. Ga. Aug. 3, 2011).
In the Boone case, a former employee and his current employer sought a declaratory judgment and injunctive relief prohibiting the employee’s former employer from enforcing a non-compete agreement. Although the employee resided in Georgia, the agreement in question contained a Delaware choice-of-law provision. Before the plaintiffs filed their declaratory judgment action in Georgia, the defendants had filed their own lawsuit in Delaware seeking to enforce the agreement. The defendants, therefore, moved the Georgia court to dismiss the declaratory judgment action so that the Delaware could rule on the enforceability of the agreement under Delaware law.
The Georgia federal district court initially granted the defendants’ motion, reasoning that, although Georgia’s public policy at the time the agreement was signed was hostile to restrictive covenants, Georgia’s public policy has now shifted such that Georgia law is no longer inconsistent with Delaware law (which is more lenient toward restrictive covenants than was prior Georgia law). The court thus reasoned that application of Delaware law to the dispute would not violate Georgia’s public policy and that a court in Delaware would be in a better position to apply Delaware law than a court in Georgia.
After the plaintiffs filed a motion for reconsideration, the court reversed its own earlier judgment and denied the motion. In reversing course, the court cited the Georgia Court of Appeals’ recent decision in Bunker Hill Int’l, Ltd. v. Nationsbuilder Ins. Servs., Inc., 710 S.E.2d 662 (Ga. Ct. App. 2011). In that case, the Georgia Court of Appeals had refused to honor an Illinois choice of law provision in a restrictive covenant agreement between a Georgia employee and his former employer. Although the Court of Appeals recognized that Georgia law changed in November 2010 with Georgia voters’ adoption of a constitutional amendment permitting broader enforcement of restrictive covenants, the agreement at issue was entered into in 2008. Thus, the Court of Appeals applied the law that existed in Georgia prior to the constitutional amendment.
The federal court in Boone interpreted the Bunker Hill decision as requiring it to apply Georgia’s public policy as it existed at the time that the agreement at issue was entered into – and not the state’s current public policy – when determining whether to enforce the Delaware choice-of-law provision. The court also cited two other opinions of the Georgia Court of Appeals that, at least in the federal court’s view, had reached the same conclusion. See Gordon Document Products, Inc. v. Serv. Techs., Inc., 708 S.E.2d 48, 52 n.5 (Ga. Ct. App. 2011) (“Our analysis in this case is unaffected by any recent legislative proposals or changes.”); Cox v. Altus & Hospice, Inc., 706 S.E.2d 660, 663-64 (Ga. Ct. App. 2011) (“We therefore apply the law of restrictive covenants as it existed before [ratification of the constitutional amendment in November, 2010].”). Because the federal court previously had applied Georgia’s current public policy to the case, the court reasoned that it had made a clear error of law in its prior order and, accordingly, reversed its prior decision.
At first glance, the federal court’s newest decision in Boone may seem to suggest conclusively that courts may never consider Georgia’s current public policy on restrictive covenants when interpreting agreements entered into before the effective date of the New Act and/or the related constitutional amendment. On closer inspection, however, that answer appears less conclusive because the Boone court did not consider one important procedural nuance. The Boone court noted that the Georgia Court of Appeals’ decision in Bunker Hill came “after the effective date of the New Act.” Although that is a correct observation, the Boone court neglected to note that the lower court judgment that was on appeal in Bunker Hill was entered on October 6, 2010 – long before the effective date of the New Act and nearly a month before voters approved the constitutional amendment ballot referendum on November 2, 2010. The lower court judgments that were on appeal in the other two cases cited by the Boone court likewise were entered prior to the effective date of either the New Act or the constitutional amendment – specifically, the Cox judgment was entered on March 3, 2010, while the Gordon judgment was entered on December 17, 2009.
This fact is significant because, at the time that the lower courts entered their judgments in those cases, Georgia’s current public policy was not yet in effect. Since the Georgia Court of Appeals’ jurisdiction on appeal was limited to determining whether the lower courts had committed reversible error, the Court was required to consider the public policy that existed at the time that the lower courts issued their opinions and not the public policy that existed at the time that the Court of Appeals issued its decisions in those cases. A far different scenario exists where a trial court is tasked with making a de novo determination about whether enforcement of a contractual choice of law provision would contravene Georgia’s public policy regarding restrictive covenants. In such situations, a trial court arguably is required to apply the public policy of Georgia as it currently exists, even if that public policy contravenes the public policy that existed in Georgia at the time that the agreement in question was entered into. Only time will tell whether Georgia courts follow this approach or the approach followed by the Boone court.