What are Non-Competes?
A non-compete is a contract between an employee and an employer in which the employee agrees not to enter into or start a similar profession or trade in competition with the employer for a specified period of time and within a specified geographic area . In the medical field, for example, a surgeon may agree, as part of his or her employment contract, to not compete with the hospital at which he/she has staff privileges if that surgeon resigns his or her position. Commonly, such non-compete provisions prohibit the physician from providing similar services in the same geographical area for a period of twelve months after the termination of the physician’s practice at that hospital.
What Does Florida Law Provide
Factors such as the age of the employee, their position, their salary, their length of employment, and the nature of the company are assessed to determine whether or not a non-compete is enforceable. A non-compete must contain reasonable time and geographic limits as well—what is reasonable is determined on a case-by-case basis.
Because non-competes are generally disfavored in Florida and viewed as a restraint on trade, if the non-compete is signed in connection with the sale of a business, it will have greater latitude and longer geographic and time restrictions than if one is signed as a term of employment.
An employee must be compensated for their agreement to a non-compete. Courts disfavor such contracts and so require additional consideration, outside of the job itself, for the employee to agree to the restriction. It is not necessary for the consideration for the non-compete to be a job or employment offer, as long as it is any other form of consideration that is not trivial.
Florida statute governs non-competes. Fla. Stat. 542.335 (Formary v. Bandi, 2014). The attorney general has the right to seek an injunction on a party forming or enforcing a non-compete if it is detrimental to the general public and contrary to the public interest. Even though private entities cannot seek any kind of damages in association with the breach of a non-compete, the attorney general has the discretion to award attorney’s fees and costs.
Which State’s Law Applies? If the principal place of business of the employer is in Florida, then Florida law will apply. The exception is if the non-compete states that the law of a different state will apply, in which case: If the parties agree Florida law should apply, then Florida law will apply even if the principal place of business of the employer is outside the state. But if the employer can demonstrate the interest of the state where the agreement was made will be more seriously impaired than will the interest of Florida, then Florida law will not apply and the agreement will be interpreted in a manner most consistent with the interests and policies of the other state.
So What Does This Mean? It means there is always a difference in how Florida courts view non-competes and how courts in other states view non-competes. For example, courts in other states may look closely at the employer’s business interests when considering the reasonableness and enforceability of a non-compete, whereas in Florida, the general policy is to allow any agreement that is not illegal and does not restrain someone from practicing a lawful profession, trade, or business, as long as the non-compete agreement is reasonable in time and space.
Who Can Enforce Them
Non-Compete agreements in Florida are only enforceable if they are reasonable in time, scope and must also satisfy a legitimate business interest for the employer. This is not to say that a Florida courts will not find that the agreement is enforceable, but a well drafted non compete agreement should include the following elements:
Legitimate Business Interest: You should state the reason(s) for the imposition of the non-compete obligation. The Florida Legislature has provided that "legitimate business interest" includes the substantial relationships with specific prospective or existing customers, substantial relationships with customers, substantial ongoing or planned investments by an employer, client goodwill, and extraordinary or specialized training.
Duration: Courts will not enforce non-compete agreements for extended periods of time. A two year non-compete agreement is generally acceptable. If you need a longer duration, you should consider inserting an exception that permits the agreement to be renewed or extended, provided the employee is given a reasonable period of time to object or reject the requested extension.
Geography: The geographic area covered by the agreement can be an expansive as the position of the employee demands. Employees with no customers or clients will have a much lower geographic area than an employee who routinely deals with customers or clients. A good rule of thumb is that you should limit the restriction of employee activities to a two hour driving radius or 125 miles from the point where your company does business.
Relevant Case Law in Florida
The world of non-compete agreements and clauses in Florida has seen significant developments with the advancement of evolving case law. The interpretation of such agreements has become an ongoing subject of interest for practitioners and employers in Florida. In recent years, several landmark decisions have been rendered by Florida courts that have affected how non-compete cases are analyzed.
Most notably, the Florida Fifth District Court of Appeal’s ruling in Enterprise Leasing Co. S-W v. E-Z Rent-A-Car, 899 So. 2d 1160 (Fla. 5th DCA 2005), affirmed the long-held, but previously-unpublished, proposition that a non-compete agreement need not to be supported by independent consideration if the employee was hired for the primary purpose of competing with the employer. In Enterprise, the employee was terminated while he was training to open a new franchise location. The court reasoned that the employee applied to work for the employer with the primary purpose of competing with it and was therefore not required to receive independent consideration for the agreement to be enforceable.
Equally important were two 2003 cases handed down by the Florida First District Court of Appeal that seemingly contradicted Enterprise Leasing. In A.E.I. Group Int’l v. Peters, 793 So. 2d 105 (Fla. 1st DCA 2001), the appellate court refused to enforce a non-compete agreement when the employee continued to work exclusively for the plaintiff after being offered a new position by a competitor. The employee relinquished some duties to accommodate the new job, but for the most part continued to work until the competitor’s offer was withdrawn. Prior to the employee leaving his job with the plaintiff at the end of a five-year term of employment, he removed confidential materials from the office.
In the second case, Centurion Air Cargo, Inc. v. McCarthy, 882 So. 2d 1063 (Fla. 1st DCA 2003), an employee received a modest bonus for signing the non-compete agreement and up to 25% of his gross income for four years, which was contingent upon the employee’s continued employment through the bonus period with no more than three months’ notice. The employee signed the agreement on the very first day of his employment and admitted that he had never seen it before. Although the employee was terminated within the bonus period without cause, the appellate court held that the agreement was not enforceable under these facts because there was no consideration at the time the contract was made.
Furthermore, in KPGS, Inc. v. Chen, 935 So. 2d 65 (Fla. 4th DCA 2006), the court held that a non-compete agreement that expires one year after the employee’s termination is unenforceable. The agreement contained a choice-of-law provision that provided that the agreement was governed by the laws of Ohio. The court determined that the Florida statute applied despite the fact that the statute was not mentioned in the agreement because the statute’s application was "irrevocably set into motion." The person who prepared the agreement sent a draft to her employment law attorney for review. However, before the attorney reviewed the non-compete agreement, the putative employer and employee signed it without the attorney’s advice. The employment agreements were signed almost contemporaneously with each other and no specific language showed the drafter’s intention to make the agreement effective in absentia. The parent company of the employer was based in Ohio and the employee signed the agreement in the state of Ohio. Even though the employment agreement contained a Florida choice-of-law provision and specified that the governing law would apply if it were invalid in another jurisdiction, the court held that severability provisions in Florida were not overriding. The court ruled in Chen that one year or less is "reasonable" under Florida law and that the Covenant Not to Compete Act should apply.
The body of existing case law that applies to the enforceability of non-compete agreements continues to develop, with potentially favorable and unfavorable results for different classes of employers. In a number of pending cases, courts are addressing key issues relating to the enforceability of non-compete agreements. For example, in Robert’s Ins. Agency, Inc. v. Hartman, 89 So. 3d 1050 (Fla. 1st DCA 2011), the plaintiff argued that the circuit court erred by rejecting its request to lift a stay he ordered until it removed the geographic limitation in its non-compete agreement. The plaintiff also contended that the circuit court erroneously prevented it from recovering attorney’s fees based on the jury’s finding that its non-compete agreements, which limited competition in a multi-county area, did not protect a legitimate business interest. The plaintiff also asserted that the circuit court incorrectly dismissed its request for a permanent injunction against the defendant because those requests rendered moot its request for a temporary injunction and because the jury’s finding in favor of the plaintiff did not constitute a final judgment.
The outcome of these cases will have broad implications in the context of negotiating jurisdictions, drafting enforceable contracts, and advising clients about non-compete agreements.
Pros and Cons for Employers
Employers contemplating non-competes must weigh the benefits and drawbacks of entering into a restrictive covenant. The obvious benefit is the protection by the employer of its business interests. This takes on particular importance to businesses who go to great lengths to build customer relationships and goodwill. An overreaching non-compete promise, however, can result in an unfriendly departure of an employee and strained relations with other employees. And, no matter how well drafted and narrowly tailored a restrictive covenant may be, an employer in Florida faces the hurdle of convincing a judge or court to enforce it. Given the discretion afforded a trial judge upon reviewing a non-compete, litigating for enforcement can be challenging – particularly in those instances when the employer has lost key employee personnel, invested considerable time, energy, money and goodwill into a customer or significant relationship, and is forced to defend what may easily appear to be a perplexing non-compete promise to an objective third-party. Further, even when an employer prevails after enforcing a non-compete, the vindication is short-lived as it is at best a temporary injunctive victory. In Florida, there can be no recovery of damages for the loss of business as a result of a breach of a restrictive covenant. See, e.g., National Medical & Technical Service, Inc. v. Bottger, 487 So. 2d 1069 (Fla 2d DCA 1986); see also, Organic Fruit Company v. Ralston, 510 So.2d 111 (Fla. 3d DCA 1987). Whether a former employee’s past actions in breaching a restrictive covenant causes irreparable harm to an employer depends in large part on the specific factual circumstances of each case.
Impact to Employees
Non-compete agreements can significantly affect employees and contractors by inhibiting their opportunities as well as their mobility both within their field and in other careers. This is especially true in regards to high level employees who may have specific technical skills or special customer knowledge that a subsequent employer could utilize if they were allowed to work for a competitor.
Before a potential employee applies for a position, he or she may be unaware of the non-compete agreement or the potential limitations it places on their future job opportunities. Even if an employee is aware of a non-compete agreement, they may still take the position in question if the candidate thinks that the non-compete is overly broad or that they have other methods of working around the non-compete . While certain industries require confidentiality agreements, for employees who believe that more restrictive non-compete agreements might be used to unjustly prevent them from working in their field, the threat of an injunction or lawsuit may be enough to dissuade ultimately deter the employee from taking other employment opportunities. Even if an injunction is not granted preventing the employee from going to a competitor, litigation regarding the non-compete agreement could put the employee and their old employer in front of courts and administrative proceedings which could negatively impact their careers.
Depending on the industry and whether the employee has knowledge of trade secrets, non-compete agreements can severely limit the career mobility for employees who might otherwise be provided additional job opportunities based on what they learned in a previous position or their current skillset.
Negotiating Language in a Non-Compete
Parties have room to negotiate the terms of a non-compete and, in some cases, even employers allow employees to have a lawyer create the non-compete for them. An experienced attorney knows how to write enforceable and reasonable language for a non-compete agreement or employment contract.
While every case is unique, here are some general tips regarding the negotiation of a non-compete agreement:
-Every non-compete should state the duration of time that the non-compete will be in effect. If the non-compete does not have a duration of time set out, it may be deemed to be without an enforceable term.
- Similar to the above, an unenforceable geographical area may render the entire non-compete unenforceable. For example, if an individual operates a spill clean-up business in the state of Florida, a non-compete that would prohibit the individual from working in another state would likely be deemed unenforceable. Florida courts do not require a non-compete agreement to be reasonable but should be.
- If a non-compete prevents an employee or independent contractor from competing with another company, the business name in the non-compete may become an important term.
- If there is a change in ownership or control of a business, the new owner may not be entitled to enforce a non-compete that was signed by the previous owner or an employee prior to the sale of the business.
- Some companies have strict non-hire agreements that include language stating that one company will not hire another company’s employees and sub-contractors.
- There should be a clear statement in the non-compete of what will happen for a breach or violation of the terms of the non-compete agreement. Certain companies include attorney’s fee provisions in their non-competes so that they can force a former employee or contractor to pay their fees if they have to sue to enforce the terms or obtain an injunction.
Options Other than Non-Competes
In many cases, there are contractual agreements or protections that an employer can use to adequately protect its business without seeking an employee to sign a non-compete agreement. After all, under Florida Statute §542.335(1)(e), post-employment non-compete restraints are presumptively invalid for employees or owners who are not "key employees." A "key employee" is defined as an owner or someone operating at a managerial level with substantial control over operations. Employers have been known to draft general non-compete agreements that apply to all employees in an effort to cover employees who may be considered key employees; a practice that violates the statute.
If a non-compete restraint is invalid because the restrained individual is not a key employee, there are still ways to protect valuable business interests via other contractual restrictions.
One of the primary contractual tools that helps protect confidential business information, customer relationships, future business plans, acquisition potential or sales commissions is the non-solicitation agreement (or clause). This is a popular restriction because it allows an employer to prohibit an employee from recruiting away other employees or current/former customers. It is much less intrusive than a non-compete agreement because the employee is not restricted from going to work for a competitor; he or she is simply banned from taking any employees or customers with them.
Another contractual provision is a non-disclosure agreement (or clause). This type of clause is popular because it often is not a restriction on the employee’s right to work elsewhere. Instead, it restricts the use or disclosure of business information, such as trade secrets, new business plans, processes or projects, financial information, customer lists, market information, etc. Essentially, the agreement is designed to prevent the employee from using secret information competitively or from sharing it with another company or business.
A carefully drafted no-rehire provision is also beneficial for an employer so that the employer is not forced to take back a former employee who has shared trade secrets, proprietary business information, or important customer relationships with competitors.
Challenging a Non-Compete Agreement in Florida
Conduct a Comprehensive Examination of the Non-Compete and Develop a Game Plan
In analyzing a non-compete for the first time, it is important to understand that an employee will not be able to challenge the non-compete on every basis. While some employees may think they can simply refuse to sign a non-compete that is unreasonable on its face and not be subject to it, Florida courts and judges have been very reluctant to invalidate non-competes on these grounds since the Florida Legislature passed what is called the Florida Competitive Trade Secret Act (FCTSA). The FCTSA directed our courts to enforce non-competes so long as they are reasonable and not contrary to the public interest.
For those reasons, you cannot just take the old cut and paste method that many lawyers previously used prior to FCTSA when examining a non-compete. Instead, you must look at a case by case basis and be much more flexible when challenging a non-compete. We have developed a new approach when drafting, negotiating , and ultimately litigating against non-compete agreements. If your lawyer has not become very experienced in dealing with non-competes then it might be worth it to consult with someone who has. This may help you develop a strategy for addressing the non-compete that you otherwise would not have thought of.
Examine a Potential Lawsuit Seeking to Invalidate the Non-Compete
If you are going to challenge whether the non-compete is enforceable, you are going to need to start looking at filing a lawsuit to have the court determine the enforceability of the non-compete. At this time, many firms only examine one portion of the non-compete and analyze that portion only. It has been our experience that attacking the entirety of the non-compete should yield better results. However, it is beyond the scope of this blog post to provide exact details. When we attack the non-compete we argue that the employer has the burden of proof to show the entire non-compete is enforceable as it is written. This, combined with a motion for partial summary judgment, can yield excellent results.
Seek a Settlement Prior to Any Lawsuit
The other thing is that if the agreement is too unreasonable, we believe many lawyers take too long to even try to seek settlement of the dispute. Even if a lawsuit is inevitable, it is important to make some attempt to settle the entire matter prior to starting a lawsuit.
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