What Law Governs Restrictive Covenants?

Since last week’s post dealt with the above question regarding the sharing of commissions, I thought it would be a good idea to address that question with respect to restrictive covenants.  With many insurance agencies now conducting business in more than one state, how to protect an agency’s customers in other states from the solicitation efforts of a former employee has become an important issue.   Unlike the situation with commissions, the state in which the risk or customer in question is located is not determinative.   Instead, as a general rule, the law of the state in which the former employee is located will govern the enforceability of  any restrictive covenants imposed on that employee.

This is true even though, ordinarily, the parties to a contract are permitted to choose the state’s law that should be applied to the contract’s interpretation and enforcement.  However, there is an exception to this general rule if doing so would violate the public policy of the state in which a lawsuit for breach of contract is brought.  Like Georgia, the courts in most states have determined that enforcing a restrictive covenant against a resident under the law of another state where the law of the resident’s state would not permit the imposition of the restriction in question would be against the public policy of the resident’s state.

Including a provision in the contract that requires any lawsuit to be brought in the courts of the state whose law is to be applied (known as a forum selection clause) is a possible way around this potential problem.   While ordinarily such contract provisions are enforceable, the courts of Georgia and most other states have created a limited exception to the general rule of enforceability.  If the former employee can prove that the law likely to be applied by the courts of the state chosen would result in the enforcement of a restrictive covenant that would be unenforceable under the law of the state of the employee’s residence, a forum selection clause will not be enforced by courts in the state of the employee’s residence.  However, to take advantage of this exception in Georgia, a former employee would have to file a lawsuit asking a Georgia court to determine whether such a clause was enforceable before having taken any action that may violate the restrictive covenant in question.   That can be a hard requirement to satisfy, as many former employees take actions in violation of such covenants soon after or even before their employment is terminated.   Other states may or may not have the same or a similar requirement.

To give itself the best chance of being able to enforce restrictive covenants against a former employee, if an employee resides in Georgia, an agency should include restrictive covenants that comply with Georgia law in any employment agreement with that  employee or in a separate restrictive covenant agreement.  If the employee resides in another state, restrictive covenants that comply with that state’s laws should be included in any such agreement.  If that state’s restrictive covenant laws are not sufficient, an agency can include a clause in the agreement that requires the application of Georgia law and that any lawsuit for breach of it must be filed in a Georgia court.  It will then be a race to the courthouse to see which side can obtain a judgment first.

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