An Important Development Regarding Georgia’s New Restrictive Covenants Law

Posted by Benjamin I. Fink on

The following article was featured in the Summer 2012 Edition of The Atlanta Bar Association’s Labor & Employment Law Section Newsletter.

Eleventh Circuit Issues Key Ruling on Georgia’s New Restrictive Covenants Law

By Benjamin I. Fink and Neal F. Weinrich

Much has been written about how Georgia’s new restrictive covenants law significantly changed the landscape in Georgia with respect to the enforcement of non-competes and other restrictive covenants.  Much has also been written about the timing of when House Bill 173 (“HB 173”), the original version of Georgia’s new restrictive covenant law, took effect.  By its terms, HB 173 was to take effect on the day following the ratification of the constitutional amendment which gave the General Assembly the power to legislate in the area of restrictive covenants, i.e., November 3, 2010.  However, because the resolution proposing the constitutional amendment and the amendment itself did not state that it would take effect immediately, by law the amendment to Georgia’s Constitution did not go into effect until January 1, 2011.  There was therefore an approximately two-month period when HB 173 was in effect but the constitutional amendment was not.  This “gap” led some to argue that HB 173 was unconstitutional until the amendment took effect on January 1, 2011, and “cured” this timing issue, i.e., HB 173 was not applicable to covenants entered into between November 3, 2010 and December 31, 2010.  Others argued HB 173 was void ab initio.

In response to these concerns, the General Assembly passed House Bill 30 (“HB 30”).  HB 30 went into effect on May 11, 2011, and substantially reenacted HB 173.  The passage of HB 30 eliminated most questions about what law applies to restrictive covenants entered into after May 11, 2011.  Absent a court finding that HB 30 or the resolution proposing the constitutional amendment are unconstitutional for reasons other than those discussed in this article, restrictive covenants entered into after May 11, 2011 are governed by the new law.

Restrictive covenants entered into between November 3, 2011 and May 11, 2011, however, remain an area of uncertainty.  A recent opinion from the Eleventh Circuit Court of Appeals, Becham v. Synthes USA, 2012 WL 1994604 (11th Cir. June 4, 2012), addresses covenants entered into during this period.  Although the opinion is unpublished, Becham is still very important for practitioners in this area.

Becham involved employment agreements containing restrictive covenants executed in 2000.  In or around November 2010, the employee notified his employer that he would be resigning at the end of the year.  On or about December 1, 2010, the manager sent him an e-mail with proposed separation terms.  In those terms, the employer promised to pay him $20,521.28 in commissions on January 15, 2011, in exchange for his agreeing to honor the restrictive covenants.  The employee e-mailed his acceptance of these terms on December 1, 2010.  The employee also allegedly made a new promise to honor the restrictive covenants in January 2011.

Shortly after the employee received his commissions on January 31, 2011, he filed suit seeking a declaration that the restrictive covenants in his agreement were unenforceable.  He quickly filed a motion for summary judgment.  In response, his employer argued that the District Court should enforce the Pennsylvania choice-of-law law provisions in his agreements.  The employer argued that the application of Pennsylvania law would not offend Georgia’s new public policy favoring restrictive covenants, and that the former employee had reaffirmed the restrictive covenants at a time when Georgia’s new public policy was in effect, both on December 1, 2010—which was after the successful ballot referendum—and when he accepted a severance payment in January 2011—which was after the constitutional amendment had taken effect.

Thus, the question raised was what Georgia public policy applied for purposes of determining to whether to honor the Pennsylvania choice-of-law provision.  The District Court noted that HB 173 and HB 30 were not intended to have retroactive application.  The District Court further held that because the constitutional amendment had not yet taken effect, Georgia’s public policy did not change until January 1, 2011.  Finding that the operative date for analyzing the covenants was December 1, 2010, the District Court found that Georgia’s old public policy applied: “Here, [the former employee’s] alleged reaffirmation occurred when [the plaintiff] ‘accepted’ [his then-employer’s] severance terms on December 1, 2010, when Georgia’s old public policy was in place.  The fact that payments may have been made after the effective date of the constitutional amendment does not change the date of acceptance.  Thus, because any reaffirmation occurred before January 1, 2011, old Georgia law applies.”  Becham  v. Synthes USA, 2011 WL 4102816, at *6 (M.D. Ga. Sept. 14, 2011)

The District Court therefore disregarded the Pennsylvania choice-of-law provision as enforcing it would have been repugnant to the old Georgia public policy.  As the restrictive covenants were unenforceable under Georgia’s old law, the District Court entered summary judgment in favor of the employee.

On appeal, the employer argued that the District Court erred by not applying Georgia’s new public policy.  In its opinion, the Eleventh Circuit panel explained the history of the change in the law and then examined what possible events in this history could have altered Georgia’s public policy.  The Panel identified the passage of the constitutional amendment and HB 173 taking effect as possible events.  The Panel found that the amendment did not change Georgia’s public policy as the amendment’s text said nothing about Georgia public policy.  Rather, once it took effect, the amendment merely authorized the General Assembly to legislate in the area of restrictive covenants.  That is, the General Assembly had to act to change the public policy.

While the Panel noted that the General Assembly did act to change the public policy by enacting HB 173, the Panel found that HB 173 is unconstitutional and void.  The Panel noted that under Georgia law, a statute’s constitutionality is tested at the time it was passed.  HB 173 was approved by the General Assembly in 2009 and became effective on November 3, 2010.  At that time (and until January 1, 2011), Georgia’s Constitution prohibited the General Assembly from enacting any legislation authorizing the enforcement of restrictive covenants.  The Panel held that HB 173 was therefore unconstitutional and void at the moment that it went into effect.

The Panel further found that when the constitutional amendment took effect on January 1, 2011, this event did not “revive” HB 173.  While the Panel noted that a constitutionally void statute can be revived if it is reenacted, even though HB 30 substantially reenacted HB 173, it did not “revive” it because by its express terms HB 30 does not apply in actions determining the enforceability of restrictive covenants entered into before its effective date, i.e., May 11, 2011.

In sum, the Panel found HB 30 does not apply retroactively and HB 173 is unconstitutional, and concluded that Georgia’s public policy did not change until May 11, 2011.  Therefore, the District Court did not err in disregarding the Pennsylvania choice-of-law provision and applying Georgia law.

Becham is not published and is therefore not binding precedent even on District Courts within the Eleventh Circuit.  It is also possible that the Panel may reconsider its ruling or that the entire Eleventh Circuit will hear the case en banc.  At the time the authors submitted this article for publication, the appellants’ deadline to file a petition for rehearing or a petition for rehearing en banc had not passed.  It is also very likely the Supreme Court of Georgia will address the issues decided in Becham in another case, and it is possible the Supreme Court may view them differently.

Nevertheless, as courts continue to sort out the various issues raised by Georgia’s new restrictive covenants law, Becham is undoubtedly a significant ruling.  Litigators should take heed of this opinion, and drafters who helped clients implement new restrictive covenant agreements between November 3, 2010 and May 11, 2011 should carefully consider the potential implications of this opinion for those covenants.

Benjamin I. Fink and Neal F. Weinrich are with the Atlanta law firm Berman Fink Van Horn P.C. where they focus their practices on non-compete, trade secret and other competition-related disputes.