This blog post is the author’s opinion and is for educational and informational purposes only. It provides general information and a general understanding of the law, but does not provide specific legal advice. Please feel free to reach out to a Seyfarth Trade Secrets attorney if you’d like to discuss your particular situation.
Before Georgia enacted a constitutional amendment in 2011 to allow the enforcement of reasonable restrictive covenants, Georgia was a popular venue for companies and individuals to avoid non-competes and non-solicits. A recent personal jurisdiction decision in which the Georgia Supreme Court affirmed that a foreign corporation’s registration to do business in Georgia amounts to an implicit consent to general personal jurisdiction raises the question of whether Georgia will once again become a popular forum to try to void restrictive covenant agreements—at least for agreements executed before May 11, 2011.
To understand why, we’ll begin with a brief overview of Georgia’s history as a hostile venue to restrictive covenants and trends in personal jurisdiction decisions before returning to Cooper Tire’s facts and potential impact on restrictive covenants.
Georgia: A One-Stop State to Void Restrictive Covenants
On May 11, 2011, Georgia adopted a constitutional amendment that modified its public policy and enacted the Georgia Restrictive Covenant Act (“GRCA”), which is far more accommodating to wholly or partially enforcing restrictive covenants for agreements executed on or after May 11, 2011. For agreements executed before May 11, 2011, however, Georgia courts routinely voided restrictive covenants between employers and employees. Over decades of common law decisions, courts created numerous traps and pitfalls where an agreement could be found to be overbroad. And before the GRCA, any overbreadth would be fatal to enforcement, as Georgia courts would not “blue pencil” or reform restrictive covenant agreements into a less restrictive but enforceable form. Georgia courts also previously refused to honor forum-selection and choice-of-law provisions selecting another jurisdiction with friendlier rules on restrictive covenants, reasoning that doing so would violate Georgia’s public policy disfavoring restrictive covenants. As a result, Georgia’s reported decisions regarding restrictive covenants entered into prior to the GRCA’s enactment are chock full of declaratory judgments voiding restrictive covenants, often involving a race to the courthouse between the former employer and the employee.
A (Very) Brief Overview of Personal Jurisdiction
Even with Georgia’s historical antipathy against enforcement of restrictive covenants, one key limitation still existed on an employee’s ability to ask a Georgia court to invalidate such an agreement: the former employer had to be subject to personal jurisdiction in Georgia. Consistent with constitutional due process, Georgia courts would not hear a claim by an employee to invalidate a restrictive covenant agreement unless the employer had sufficient forum-related contacts to permit Georgia’s exercise of jurisdiction.
Personal jurisdiction primarily takes one of two forms: general or specific. General personal jurisdiction exists when the defendant’s contacts with the forum state are so continuous and extensive that the defendant is “at home” in the forum state. If general personal jurisdiction exists, then the state may exercise personal jurisdiction over a defendant even when the claims are not related to the forum state or the corporation’s activity in the forum state. Historically, for corporations, courts have found general personal jurisdiction exists only in the states where a corporation has its principal place of business or in the state where the corporation is incorporated. Specific personal jurisdiction, by contrast, permits a state to exercise personal jurisdiction over a defendant only to the extent that the facts giving rise to the asserted claims arise out of a defendant corporation’s forum-related contacts.
Over the last decade, the Supreme Court has kept a tight hold on general personal jurisdiction, and the Roberts Court has, on balance, restricted general and specific personal jurisdiction. But one issue the Court has not yet squarely addressed is whether a defendant can consent to a state’s exercise of general personal jurisdiction over it. Well before any of the recent Supreme Court decisions on personal jurisdiction, Georgia’s Supreme Court found that Georgia’s corporate code and long-arm statute created an implicit consent to general jurisdiction when a corporation registered to do business in Georgia. Allstate Ins. Co. v. Klein, 262 Ga. 599, 422 S.E.2d 863 (1992).
Cooper Tire Takes an Outlier Position on Personal Jurisdiction
In Cooper Tire & Rubber Company v. McCall, a tire manufacturer asked Georgia’s Supreme Court to overrule or abrogate its decision in Klein. The facts underlying Cooper Tire are straightforward. A passenger traveling by car suffered injuries when a tire failed in an accident in Florida. The passenger filed a lawsuit in Georgia against the car driver, a Georgia resident, the Georgia car dealership who sold the car, and the tire manufacturer, a non-resident corporation. The tire manufacturer moved to dismiss for lack of personal jurisdiction based on the lack of any defendant-created forum-related contacts giving rise to the passenger’s claim (a tire failure occurring in Florida).
The trial court granted the tire manufacturer’s motion, but the Georgia Court of Appeals reversed. Relying on Klein, the court of appeals held that the tire manufacturer consented to general personal jurisdiction in Georgia when it registered to do business in Georgia. After granting certiorari, the Georgia Supreme Court affirmed that, despite its “tension with the trajectory of recent United States Supreme Court decisions,” Klein remained good law, and the tire manufacturer was subject to general jurisdiction in Georgia because Georgia’s Business Corporation Code provided that any registered nonresident corporation could sue or be sued to the same extent as a domestic corporation.
Cooper Tire May Provide a Jurisdictional Hook to Void Restrictive Covenant Agreements
While Cooper Tire didn’t involve restrictive covenants, the question remains: will this decision offer a path to potentially invalidate restrictive covenant agreements entered into before May 11, 2011? Suppose that a competitor wants to hire from a corporation a high-level executive with a restrictive covenant agreement executed before May 11, 2011. Even if that covenant were iron-clad under the contractually selected non-Georgia choice of law, and even if the agreement contained a mandatory non-Georgia forum-selection clause, an intrepid attorney might attempt to void the agreement by (1) filing a declaratory judgment action in Georgia, (2) arguing that the corporation was registered to do business in Georgia and thus subject to jurisdiction in Georgia, even if the executive’s activities and employment are otherwise completely unrelated to Georgia, and (3) attempting to void the covenants under Georgia’s old law.
This scenario is theoretically feasible, but to be successful, parties seeking to avoid restrictive covenants would have some significant hurdles to clear. Procedurally complicated tactics like this have more moving parts and, therefore, more possible points of failure. These “race to the courthouse” disputes over restrictive covenants also routinely result in pending parallel proceedings—often with expedited or emergency motions—and they can get very expensive very quick. Moreover, the Cooper Tire decision is something of an outlier decision in personal jurisdiction; it could be abrogated or undermined by either a Supreme Court decision or legislative amendments to Georgia’s Business Corporation Code. And finally, it’s unclear whether a judge in 2022 (or beyond) would entertain an argument that Georgia law should apply notwithstanding a contractual provision to the contrary. While historically, Georgia courts were opposed to applying a contractual choice of law given Georgia’s then-public policy disfavoring restrictive covenants, that policy has of course softened considerably. Thus, even as to pre-2011 agreements, a present-day judge may turn a cold eye to counsel’s attempts to avail themselves of procedural loopholes. Nonetheless, we may see some companies or executives attempt to use the Cooper Tire decision to escape an otherwise enforceable restrictive covenant.
Please feel free to reach out if you are interested in learning more about this decision or its impact on restrictive covenants in Georgia or litigation more generally.