background
Facts
Decision
comment
background
Historically, Georgia courts have declined to apply the law of another state to determine whether to enforce restrictive covenants against a Georgia employee, regardless of whether the agreement stated that the law of another state would govern is (choice of law clause). Georgian law has also long distinguished between restrictive covenants that are reasonable (in terms of scope, duration and geographical scope) and those that are unreasonable; The former are enforceable, while the latter are considered a “general restraint of trade.” Contracts that constitute a “general restraint of trade” are considered “a violation of public policy” in Georgia and “cannot be enforced.”(1)
Facts
In Motorsports of Conyers, LLC v. Burbach, the Georgia Supreme Court clarified how a court must decide whether to enforce the parties’ foreign choice of law clause in a non-compete agreement. Burbach, the chief operating officer of two Harley-Davidson dealers, has signed non-compete agreements. Burbach worked in Georgia, but those agreements contained a choice of law clause for Florida. The agreements prohibited him, among other things, from accepting employment in any capacity with a competitor within 120 miles of one of the dealers. When Burbach quit, he started working for another Harley-Davidson dealer within 120 miles. Motorsports sued Burbach in Georgia, arguing that the choice of law clause provided that Florida law applied to its agreement and, accordingly, that the agreement was enforceable under Florida law.
Decision
The lower court accepted Florida’s choice of law clause in the agreement without first considering whether the non-compete agreement was reasonable under Georgia’s Restrictive Covenant Act (RCA). Applying Florida law, the lower court ruled that the non-compete agreement was enforceable.
The appeals court reversed, correctly identifying compliance with Georgia’s RCA as the first step in analyzing whether the public policy exception prevails over Florida’s choice of law provision. The Court of Appeal held that the non-compete was unenforceable and contrary to public policy because, among other things, the non-compete was viewed as an “for all intents and purposes” agreement. The appeal court correctly found that the non-competition clause must be appropriate in terms of time, space and activities. Since it did not provide for any limitation on the scope of activities, it was unreasonable and void.
The Georgia Supreme Court granted review solely to clarify the framework for determining whether to apply the foreign choice of law rule to determine the enforceability of the non-compete agreement. It was recognized that while Georgia’s RCA is more permissive than previous common law in enforcing restrictive covenants, the RCA “has not disrupted the established understanding that restrictive covenants that are unreasonable under Georgia law are not only illegal, but are even illegal.” [Georgia’s] This means that in order to determine whether applying the law of another state to a restrictive covenant would violate Georgia public policy, a Georgia court must first determine whether the restrictive covenant complies with the RCA. If the restrictive covenant, as written, is reasonable under the RCA, the court may respect the choice of law clause in the agreement and apply the law of that foreign state to decide whether to enforce the agreement. However, if the restrictive covenant is unreasonable under the RCA (i.e. it violates Georgia’s). “public policy” and therefore cannot be enforced), then the agreement will be governed by Georgian law, regardless of what the agreement’s choice of law states. The court concluded that the Georgian General Assembly “continued the agreed upon agreement” in adopting the RCA. that unreasonable restrictive covenants are general restraints on trade that are contrary to public policy.” In fact, the RCA explicitly states that such covenants are not only “unlawful” but also “void and unenforceable.” The court thus justified that the choice of law analysis in the context of the non-competition clause has not changed over time. Georgia courts may not apply foreign law to enforce a restrictive covenant that would be considered unreasonable under Georgia law.
comment
Out-of-state employers who employ Georgia employees should ensure that their restrictive contractual agreements comply with Georgia law. If not, no foreign choice of law rule will save it.
For further information on this topic, please email Jeffrey Mokotoff or Leslie Harnett at FordHarrison ([email protected] or [email protected]). The FordHarrison website can be accessed at www.fordharrison.com
Endnotes
(1) OCGA 13-8-2(a).
