BY Donald J. Spero, Esq.
It is altogether reasonable for employers to wish to prevent disclosure of trade secrets and other confidential information by employees. It is understandable that they do not want to invest time and money training an individual who then quits and goes to a competitor or opens a competing business. On the other hand it is reasonable for an individual who accepts employment to avoid forever being barred from using hard earned skills in pursuing a livelihood. Florida law undertakes to balance these interests, but that balance is not always easy to find.
The law relating to non-compete agreements is found in Florida’s Anti Trust Act. The starting point is F.S. §542.18 which establishes that "Every contract, combination, or conspiracy in restrain of trade in this state is unlawful." Non-compete agreements are reprieved from the proscriptions of this section by subsequent sections of the statute.
A. The Law Prior to June 28, 1990
At the present times the validity of an employee’s covenant not to compete is determined with reference to the date on which the contract was entered into with the employer. The portions of the Anti Trust Act governing employer/employee non-compete agreements, as written prior to June 28, 1990, still apply to non-compete agreements entered into before the act was amended effective on that date. Prior to the 1990 amendment F.S.§542.33 read as follows:
(1) Notwithstanding other provisions of this chapter to the contrary, each contract by which any person is restrained from exercising a lawful profession, trade, or business of any kind as provided by subsection[ ] (2) ... hereof is to that extent valid, and all other contracts in restraint of trade are void.
(2)(a) ...one who is employed as an agent, independent contractor, or employee may agree ... with her or his employer, to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a reasonably limited time and area ... so long as such employer[ ] continues to carry on a like business therein. Said agreements may, in the discretion of a court of competent jurisdiction, be enforced by injunction.
A party seeking the issuance of an injunction by a court is required to demonstrate that in the absence of such relief it will suffer irreparable injury. In Capraro v. Lanier Business Products, Inc. the Florida Supreme Court held that where there is a breach of a valid covenant not to compete, irreparable injury is conclusively presumed. Thus where an employer that was still engaged in the business contemplated by an employee’s covenant not to compete sought to enjoin a violation of the agreement, a court was required to enforce the agreement. The court could consider only the extent to which the agreement was reasonable in time and area covered. The court was barred from considering factors other than time and area that may have been inequitable to the employee. If the court found the time or area to be unreasonable, it would in effect modify the agreement by limiting the injunction to a reasonable time or over a reasonable area.
B. The 1990 Amendment to F.S.§542.33(2)(a)
Courts were given more discretion in deciding whether to enjoin an individual from competing in violation of an agreement with a former employer by the June 28, 1990 amendment to F.S. §542.33(2)(a). The amendment, in pertinent part, added the following language to §542.33(2)(a):
However, the court shall not enter an injunction contrary to public health, safety, or welfare or in any case where the injunction enforces an unreasonable covenant not to compete or where there is no showing of irreparable injury. However, use of specific trade secrets, customer lists, or direct solicitation of existing customers shall be presumed to be an irreparable injury and may be specifically enjoined.
The amendment allowed the court more latitude by permitting it to determine when a non-compete covenant is unreasonable. It eliminated the irrebutable presumption of irreparable injury in every case where there was a violation of the covenant. It became necessary for the employer to prove that such an injury would occur before the court would grant an injunction. The 1990 amendment did, however, preserve the presumption of irreparable injury where the employee was using trade secrets, customer lists or directly soliciting the employer’s customers.
In Hapney v. Central Garage, Inc. the court determined that to be enforceable a restrictive covenant must relate to a legitimate business interest. The court took note of the fact that the amendment injected the factor of reasonableness as a prerequisite to the issuance of an injunction. The court went on to reason that in some cases special training provided by the employer may constitute a legitimate business interest. The court observed that where an employer invests time and money to significantly enhance an employee’s skills it is unfair to allow that employee to give the benefit of that training to a competitor where the employee has agreed not to do so. That training must be extraordinary in order to justify an injunction. Training in the performance of perfunctory tasks, or that can be obtained by following directions are not extraordinary. In Hapney the employee had been trained to install cruise controls and cellular telephones in automobiles. The court found that this training did not rise to the level of a protectible interest of the employer.
In summary Hapney ruled that not every non-compete clause was enforceable. Where there was no "...use of specific trade secrets, customer lists, or direct solicitation of existing customers" the employer must proved that it will suffer irreparable injury in the absence of an injunction.
An employer was denied enforcement of a covenant not to compete in Kephart v. Hair Returns, Inc. where there was no showing of irreparable injury. The former employer was serving the employers customers who came to her, but she was not directly soliciting their business. Direct solicitation is required to raise the presumption of irreparable injury.
The mere fact that an employer will lose business by the former employee soliciting its customers does not by itself establish the irreparable injury that is required to obtain an injunction against competing. This was the holding in King v. Jessup where a physician opened an office near that of his former employer, a physician with whom he had signed a non-competition agreement. The court further ruled that the placing of an advertisement in a newspaper was not the "direct solicitation of existing customers" which presumptively constitutes irreparable injury under the statute.
At least one decision Under the 1990 amendment held that the employer can not satisfy the need to prove that there will be irreparable injury by inserting a stipulation that such injury will occur in the employment contract. In Spencer Pest Control of Florida, Inc. v. Smith the court found that an employer may not use its economic leverage to require an employee to bargain away the strong public policy against restraint of trade.
In Sun Elastic Corporation v. O.B. Industries the court granted relief to the employer where the former employee directly solicited its customers. Judge Cope concurred with the other two appellate panel members in the result but he disagreed with some of their reasoning. He did not agree that where there was direct solicitation of customers the presumption of injury was irrebuttable. He would find that there are certain circumstances where direct solicitation of customers would cause no injury. He gave as an example an individual’s submitting a competitive bid on a government contract that was open to all bidders. In Such a case he would apply the amendment’s empowerment of the court to decline to enforce an unreasonable restriction.
In Jewitt Orthopaedic Clinic v. White, an action to enforce a non-compete agreement against a medical doctor, the court rejected the concept that the employer must demonstrate a legitimate business interest to enjoin a violation of a restrictive covenant. Instead the court required the showing of an actual injury to the employer that can not be compensated by money damages. It required the balancing of the employer’s interest against the harm that enforcement would cause the employee. The court further held that the amendment’s prohibition against an injunction that is "...contrary to public health and safety" does not per se invalidate a physician’s non-compete clause.
The court in Lovell Farms, Inc v. Joseph Levy considered the enforcement of a non-compete agreement to prevent a former employee from using the nursery owner employer’s growing techniques in his position with a subsequent employer in the horticulture industry. The court held that the statutory presumption of irreparable injury from the use of trade secrets does not come into play automatically. The employer must first establish both that the information it seeks to protect truly constitutes a trade secret and that the employee is using the trade secret with a new employer. In the absence of such proof, enforcement of the non-compete agreement depends on weighing the "...the public interest, the potential effects on the employee, and the legitimate business interests of the employer."
If an employer hopes to be in a position to enforce a restrictive covenant, should it become necessary, the employer should be certain that it has fulfilled its contractual obligations to the employee who it will seek to enjoin. A restrictive covenant is based on a contractual relationship. The employer’s breach of the contract relieves the employee from the obligation of the restrictive covenant. This was the finding of the courts in Chandra v. Gadodia, and Bradley v. Health Coalition, Inc.
C. The 1996 Amendment to The Florida Anti Trust Act
Currently any Florida employer who wishes to draft an effective covenant to prevent an employee from competing with it or using the employer’s confidential information to benefit another enterprise must now do so with reference to F.S.§542.335. Effective on July 1, 1996, F.S.§542.332 was repealed and the 1996 amendment took effect. The repeal was prospective only. Enforcement of prior non-compete agreements will be based on the law in effect on the date they were entered
The 1996 amendment retains much that is in the prior statutes and the case law interpreting them, while setting forth some more specific standards for enforcement. The new statute specifically requires the covenant to be in writing and signed by the person against whom enforcement is sought. The requirement of reasonableness as to time and area is retained, with requirement of reasonableness as to line of business specifically included. Any restriction of six months or less against a former employee’s competing with the employer is presumed reasonable and any restriction of more than two years is presumed unreasonable. Restrictions "... predicated on the protection of trade secrets" are presumed to be reasonable if they are of five year or less duration and unreasonable if they exceed ten years. These are rebuttable presumptions which can be overridden by evidence showing lack of reasonableness.
An employer seeking enforcement under the 1996 amendment is required to plead and prove justification for the existence of the restrictive covenant on the basis of one or more legitimate business interests. The statute enumerates the following non-exclusive list of legitimate business interests:
1. Trade secrets as defined in s. 688.002(4)
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.
3. Substantial relationships with specific prospective or existing customers, patients, or clients.
4. Customer, patient, or client goodwill associated with:
a. An ongoing business or professional practice, by way of trade name, trade mark, service mark, or "trade dress";
b. A specific geographic location; or
c. A specific marketing area or trade area.
5. Extraordinary specialized training.
A court will enforce a restrictive covenant only where the employer both pleads and proves that the restriction is reasonably necessary to protect the legitimate business which the basis for the covenant. Once that proof is demonstrated the employee has the burden of proving that "...the contractually specified restraint is overbroad, overlong, or otherwise not necessary to protect the employer’s interests. The 1996 amendment specifically requires the court to modify an excessive restriction and grant such necessary limited relief as is necessary to protect the employer.
The 1996 amendment broadens the court’s discretion in deciding whether to grant relief by recognizing certain considerations in F.S. §542.335(1)(g).
... a court:
1. Shall not consider any individualized or other economic hardship that might be caused to the person against whom enforcement is sought.
2. May consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.
3. Shall consider all other pertinent legal and equitable defenses.
4. Shall consider the effect of enforcement upon the public health, safety, and welfare.
A court is required to give a broad construction to a restrictive covenant, a construction that favors protection of the employer’s legitimate business interests. Courts are not permitted to use the traditional rule of contract construction pursuant to which interpretation disfavors the party who drafted the contract. Neither may they construe restrictive covenant based on the premise that public policy disfavors restraint of trade.
A court may not to decline to enforce a restrictive covenant on the basis that it violates public policy unless it articulates what that policy is and finds the requirements of that policy outweigh the employer’s legitimate business interests. The amendment adopts the doctrine announced in Capraro v. Lanier Business Products, Inc., supra, that a "...violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement."
The person seeking enforcement of a restrictive covenant is required to post a bond. The bond is mandatory. An agreement in the contract purporting to waive the bond requirement will not be enforced by a court. The court is required to hear evidence from the parties as to the appropriate amount before setting the amount of the bond.
A new feature contained in the amendment is the provision allowing attorney’s fees to the prevailing party in an action to enforce a restrictive covenant. Hopefully the risk of being assessed attorney’s fees will discourage frivolous suits.
D. Judicial Decisions Under the 1996 Amendment
Although the amendment has been in effect a relatively short time, it has come into play in a number of decision from appellate courts in Florida. One feature of the 1996 amendment was considered in American Residential Services, Inc. v. Event Technical Services, Inc. where the court upheld an injunction involving confidential business information as permitted by F.S. §442.335(1)(b)2 without reference to whether or not it amounted to trade secrets.
In Belasco v. Gulf Auto Holding, Inc. the court looked to F.S. §542.335(1)(b)(5) in allowing an injunction against a former employee who was raiding the plaintiff automobile dealer for salespeople that it had invested considerable time and money in training. It was the dealer’s practice to hire only inexperienced salespeople and train them in house. The dealer incurred the expense of a full time trainer to train the salespeople. This holding is consistent with the reasoning in Hapney v. Central Garage, Inc., supra, which was decided while the 1990 amendment was in effect. See also Aero Cool Corporation v. Gilbert Oosthuizen, where a non-compete clause was enforced to prohibit an individual from working for a competitor of an employer who had provided him with extensive training in aviation repair. He had progressed by virtue of that training from having no knowledge to receiving a Temporary Airman Certificate from the Federal Aviation Administration authorizing him to perform certain repairs.
The court found that an employer had a legitimate business interest in protecting price information and identity of customers in Austen v. Mid State Fire Equipment of Central Florida, Inc. While it sustained the injunction against the former employee disclosing this information, it did not bar him from working for the competing employer as a service technician. The court reasoned that he was not in a key position. Since he merely went on service runs, not allowing him to work for the competitor would be an unreasonable restraint.
The requirements for enforcement should be borne in mind. Courts will not enforce every covenant not to compete. The party seeking enforcement must have a legitimate business interest to protect. For example in Anich Industries, Inc. v. Raney, the court refused to enjoin a former employee from working for a competitor in the absence of proof of irreparable injury. It also declined to prohibit him from soliciting certain customers who bought on from whomever offered the lowest price. The court found that there was no "substantial relationship with specific prospective or existing customers" that would constitute a protectible legitimate business interest as set out in F.S. §542.335(1)(b)3.
The 1996 amendment retained the employer’s obligation to perform its contractual obligations under the agreement containing the non-compete clause it wishes to enforce. In Benemerito & Flores v. Roche, the court denied an injunction against a medical doctor who had signed a non-compete agreement where her former employers had failed to pay her as required by the contract. The court referred to F.S.§542.335(1)(g)(3) which requires a court to "...consider all other pertinent legal and equitable defenses" when determining whether a restrictive covenant should be enforced.
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