Before Georgia enacted a constitutional amendment in 2011 to allow enforcement of reasonable restrictive covenants, Georgia was a popular place for businesses and individuals to avoid non-compete and non-solicitation laws. A recent personal jurisdiction decision in which the Georgia Supreme Court upheld that the registration of a foreign corporation to do business in Georgia amounts to implied consent general personal jurisdiction raises the question of whether Georgia will again become a popular forum for trying to lift restrictive agreements – at least for agreements concluded before May 11, 2011.
To understand why, let’s begin with a brief overview of Georgia’s history as a hostile place for restrictive covenants and trends in personal jurisdiction decisions before returning to the facts of Cooper Tire and the potential impact on restrictive covenants.
Georgia: A one-stop state to lift restrictive agreements
On May 11, 2011, Georgia adopted a constitutional amendment that altered its public policy and enacted the Georgia Restrictive Covenant Act (“GRCA”), which is far more accommodating, restrictive covenants for covenants made in whole or in part on or after May 11 to be enforced, to be enforced. 2011. However, for agreements concluded before May 11, 2011, Georgian courts have routinely annulled restrictive agreements between employers and employees. In decades of common law decisions, courts have created numerous traps and pitfalls where an agreement could be deemed too broad. And before the GRCA, any overstatement would be fatal to enforcement, as Georgia courts would not “bluepen” or reform restrictive agreements into a less restrictive but enforceable form. Georgian courts also previously refused to comply with the choice of forum and choice of law provisions, choosing another jurisdiction with friendlier rules for restrictive agreements, on the grounds that it would violate public policy in Georgia, which rejects restrictive agreements. As a result, Georgia’s reported decisions on restrictive agreements entered into prior to the passage of the GRCA are replete with declaratory judgments voiding restrictive agreements, often involving a race between the former employer and the employee in court.
A (very) brief overview of personal responsibility
Despite Georgia’s historical antipathy to enforcing restrictive agreements, there was still a significant limitation on an employee’s ability to seek a Georgia court to invalidate such an agreement: the former employer had to be subject to Georgia personal jurisdiction. In accordance with constitutional due process, the Georgia courts would not hear an employee’s claim for rescission of a restrictive covenant unless the employer had sufficient forum contacts to enable Georgia’s exercise of jurisdiction.
Personal jurisdiction takes one of two main forms: general or specific. General personal jurisdiction exists when the defendant’s contacts with the jurisdiction are so continuous and extensive that the defendant is “at home” in the jurisdiction. When general personal jurisdiction exists, the State may exercise personal jurisdiction over a defendant even if the claims are not related to the jurisdiction or the activities of the corporation in the jurisdiction. Historically, corporate courts have held that general personal jurisdiction exists only in the states in which a corporation has its principal place of business or in the state in which the corporation is incorporated. In contrast, special personal jurisdiction permits a State to exercise personal jurisdiction over a respondent only to the extent that the facts giving rise to the asserted claims are apparent from a respondent company’s forum-related contacts.
For the past decade, the Supreme Court has had a firm grip on general personal jurisdiction and the Roberts Court has restricted general and specific personal jurisdiction overall. But one question the Court has not yet addressed directly is whether an accused can consent to the exercise of general personal jurisdiction by a state. Long before one of the most recent Supreme Court decisions on personal jurisdiction, the Georgia Supreme Court held that the Georgia Corporations Code and long-armed statute created an implicit consent to common jurisdiction when a corporation was registered to conduct business in Georgia. Allstate Ins. Co. v. Klein, 262 Ga. 599, 422 SE2d 863 (1992).
Cooper Tire occupies an outlier position in terms of personal responsibility
In Cooper Tire & Rubber Company v. McCall, a tire manufacturer asked the Georgia Supreme Court to overturn or set aside its decision in Klein. The facts behind Cooper Tire are simple. A driver was injured in an accident in Florida with a punctured tire. The passenger filed a lawsuit in Georgia against the motorist, who was a Georgia resident, the Georgia dealership that sold the car, and the tire manufacturer, a non-Georgia resident. The tire manufacturer sought termination for lack of personal jurisdiction due to the lack of any forum-related contacts made by the defendant that substantiated the passenger’s claim (a tire failure in Florida).
The trial court granted the tire manufacturer’s motion, but the Georgia Court of Appeals overturned it. Citing Klein, the appeals court ruled that the tire manufacturer consented to general Georgia personal jurisdiction when it registered to conduct business in Georgia. After the Georgia Supreme Court issued certiorari, it affirmed that despite his “tension over the course of the recent United States Supreme Court decisions,” Klein remained well justified and the tire manufacturer was subject to general jurisdiction in Georgia because the Business Corporation Georgia Code provided that any registered foreign corporation could sue or be sued to the same extent as a domestic corporation.
Cooper Tire can provide a court hook for the waiver of restrictive covenant agreements
While Cooper Tire did not include any restrictive covenants, the question remains: will this decision provide a way to potentially void restrictive covenant agreements entered into prior to May 11, 2011? Suppose a competitor wants to hire a senior executive from a company with a restrictive agreement in place before May 11, 2011. Even if that agreement were ironclad outside of Georgia by contractual choice of law, and even if the agreement included a mandatory clause selecting a forum outside of Georgia, an intrepid attorney could attempt to nullify the agreement by (1) filing a declaratory judgment in Georgia and (2) arguing that the corporation is registered for Georgia business and subject to jurisdiction in Georgia even though the officer’s activities and employment are otherwise unrelated to Georgia, and (3) attempting to Annul agreements under the old Georgian law.
This scenario is theoretically feasible, but to be successful, parties wishing to avoid restrictive agreements would have to overcome some significant hurdles. Procedurally complicated tactics like this have more moving parts and therefore more potential for error. These “race to the courthouse” disputes over restrictive covenants also routinely result in pending parallel lawsuits – often with expedited or rushed motions – and they can quickly become very expensive. Furthermore, Cooper Tire’s decision is something of a runaway decision in personal jurisdiction; it could be overridden or undermined either by a Supreme Court decision or by legislative amendments to the Georgian Business Corporation Code. Finally, it is unclear whether a judge in 2022 (or beyond) would argue that Georgian law should apply notwithstanding any contractual provision to the contrary. While courts in Georgia have historically opposed the use of a contractual choice of law, as Georgia’s public policy at the time was opposed to restrictive covenants, this policy has, of course, eased considerably. Therefore, even with pre-2011 agreements, a modern-day judge can remain coldly aware of attempts by lawyers to take advantage of procedural loopholes. Nonetheless, we can see some companies or executives attempting to use Cooper Tire’s decision to evade an otherwise enforceable restrictive agreement.
