Restrictive Covenants – Keeping Matters In “the Family”

Posted almost 2 years ago. Applies to Florida, 1 helpful vote

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Beating the competition is crucial to the success of any business, whether for profit or non-profit. Enterprises maintain a competitive edge through proprietary internal processes, cultivation of skilled employees, taking special care of customers, and acting to prevent the growth of enterprises in the same field, and, other such measures. Very rarely can one person do all of this alone. Eventually other employees are needed to efficiently operate the business. All of these steps to remain competitive are secure provided the employees remain with the business. Restrictive covenants are drafted as a contingency against the possibility of employees leaving and taking knowledge and skills with them. Covenants that restrain these activities are legal and binding under Florida Statutes ?542.335. The section in its opening allows for these restraints to exist despite Florida Statutes ?542.18 otherwise making restraints on trade unlawful.

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The ability to enforce a covenant of this type is only valid if signed by the party it is to be enforced against; oral contracts are not valid. Moreover, the covenant must have some purpose related to business intent. These are defined as, but not limited to: (1) Trade secrets, as defined in F.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, trademark, service mark, or "trade dress"; (b) A specific geographic location; (c) A specific marketing or trade area; and (5) Extraordinary or specialized training. F.S. ?542.335(1)(b)

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Effectively, it is possible to enter into a restrictive covenant with employees or business associates that possess marketable skills or knowledge of the former business. However, it is important to note that any restriction must be related to the former activity. A general restriction on any sort of employment would be ignored.Equally as important as valid intent, the restraint must appear reasonable to the court. Reasonableness is determined by a facts and circumstances test based primarily on duration of the restraint and the breadth of restraint. Breadth might be not to engage in the restricted activity within a fixed geographic point such as a city or it might be scattered such as a restriction preventing activity within a certain distance from the holdings of the entity seeking to enforce the covenant.

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The reasonableness of breadth is further modified by the scarcity of skills and information the person is departing with. Entry-level employees will face less severe restraints than managers who will encounter lesser restraints than those with nearly unique skills such as specialist surgeons. A 50 mile radius from a car dealership manager's former place of employment and a 10 mile restriction around other holdings of the employer was held to be reasonable. Autonation, Inc. v. Maki, 895 So.2d 453 (Fl

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Covenants relating to competition have different presumptions of reasonableness of duration based on the relationship between the parties. Reasonableness is presumed against employees for contracts less than 6 months and are unreasonable if more than two years. These durations increase to 1 year and 3 years for distributors, dealers, franchisees, and licensees. Duration of presumption increases again to 3 years and 7 years respectively against those who are leaving the entity in the process of selling a significant ownership right such as shares or a partnership interest. Covenants restricting the dissemination of trade secrets are presumed reasonable if lasting no more than 5 years and unreasonable if more than 10 years.

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Covenants that fall within the median range of time are weighed against the breadth of the covenant with longer durations equating to narrower radii of forbidden conduct. If the enforcing entity is no longer engaged in the restricted trade, then the statute encourages a reduction in restraint duration. F.S. ?542.335(2)(g)(2). In this modern era of instantaneous communication, certain restrictions are rightly modified in relation to the physical area the restriction envelopes or ignore such constraints together. As an example, a restriction on soliciting customers of the enforcing entity may mean that no customer may operating within a certain distance can be approached. With access to phones and the Internet, a person could work from nearly any location but still try to steal away the existing customer base rather than grow a new market.

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A fairly standard example of a restrictive covenant is found in Supinski v. Omni Healthcare, P.A., 853 So.2d 526 (Fla. 5th DCA 2003). Essentially, a doctor agreed not to work within ten miles of the P.A.'s offices in Brevard county or to solicit any patients of the P.A. for a period of two years beginning with the doctor's departure from the P.A. The court found the breadth, as it was not even a countywide ban and the duration was at the upper end of the span allotted for employees. In contrast, Don King was unable to successfully enjoin a fighter from signing on for a two fight promotional deal with another company because of the total exclusivity granted by the original covenant and the lack of harm inflicted upon Don King Productions by the breach. Don King Productions, Inc. v. Chavez, 717 So.2d 1094 (Fla. 4th DCA 1998).

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As shown above, the most common relief sought by a plaintiff is to enjoin another from acting or further action in the manner restricted by the covenant. Another common form of relief is to recover damages from the economic losses caused by poaching customers or implanting stolen trade secrets. In the alternative, an employer could include a clause requiring a former employee to repay the cost of specialized training in the event of a breach. This type of action also allows the plaintiff to recover reasonable fees and costs.

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The primary risks in utilizing restrictive covenants are the effects on morale and the costs of prosecution. While signing these agreements becomes increasingly common, their presence creates an element of mistrust that can hamper an ongoing relationship. Possibly of greater importance are the costs to pursue enforcement of the covenant in court. The prevailing party gets fees even if the defendant wins. Sun Group Enterprises, Inc. v. DeWitte, 890 So.2d 410 (Fla. 4th DCA 2004). A further cost is that the plaintiff may be required to post a bond. North American Products Corp. v. Moore, 196 F.Supp. 2d 1217 (M.D. Fla. 2002). Despite these costs, restrictive covenants are still worthwhile to any intended long-term or training intensive relationship.

Additional Resources

Key Cases - Restrictive Covenants 1. Maki v. Autonation, Inc., 895 So.2d 453 (Fla. 4th DCA 2005). The trial court granted AutoNation's motion for temporary injunction to enforce a non-compete agreement signed by appellant, an employee. The Court found no abuse of discretion in the enforcement of the non-compete agreement, which prohibited appellant from competing against AutoNation within fifty miles of the location where he was employed, or within ten miles of any other AutoNation dealer, for a one year period. 2. Supinski v. Omni Healthcare, P.A., 853 So.2d 526 (Fla. 5th DCA 2003). Trial court did not abuse its discretion in entering temporary injunction enforcing a covenant not to compete in a doctor's employment contract by prohibiting him from practicing medicine within 10 miles of any care center of the medical practice. The appellate court held that the entry of the temporary injunction was not an abuse of discretion. The doctor's new office was within 10 miles of one of the practice's care centers, and 40 percent of the patients at the doctor's new office were patients he treated when he was with the practice. There was not a change in circumstances to support a modification of the temporary injunction. The injunction was not overbroad. There was substantial evidence that the practice had legitimate business interests to protect and that temporary injunctive relief was necessary to protect those interests. Prohibiting the doctor to practice within 10 miles of any practice care center was not error. The doctor failed to prove a breach of contract by the practice. Given the small differential in the net adjusted collections claimed by the doctor versus the paid adjusted collections, the materiality of any breach was questionable. The case was remanded to the trial court to determine whether the amount of the injunction bond was stipulated. 3. Don King Productions, Inc. v. Chavez, 717 So.2d 1094 (Fla. 4th DCA 1998). Appellee boxer signed an exclusive promotional contract with appellant fight promoter but subsequently signed a two-bout agreement with another promoter. Appellee filed suit to determine the enforceability of his contract with appellant, who counterclaimed and moved for a temporary injunction, but cancelled a hearing to prevent the first fight, which took place. The trial court denied the temporary injunction, finding that appellant had suffered no irreparable harm, and, in the alternative, that appellant had "waived" any irreparable harm by withdrawing its motion to stop the fight. On appeal, the court found Fla. Evid. Code ' 90.301(2) provided the legislatively enacted rule that presumptions were rebuttable unless conclusive under the law from which they arose. The legislative history of the statutory amendment showed that the legislature did not intend to create a conclusive presumption in the statute. The court affirmed. 4. Sun Group Enterprises, Inc. v. DeWitte, 890 So.2d 410 (Fla. 4th DCA 2004). The principal and employee worked for a plumbing company that later sold its assets to appellant. Their employment contract barred them from working for competing companies. The principal left his job and formed the corporation, a plumbing company; the employee also left his job to work for that corporation. Appellant acquired the employment contracts when it bought the first plumbing company's assets. The appellate court noted that when a corporation's sale of its assets included a personal service contract containing a noncompete agreement, the purchaser could enforce its terms only with the employee's consent to an assignment. The language of the employment agreements did not provide the requisite consent that would allow assignment. Further, the sale agreement entered into between the first company and appellant suggested that the employment contracts were not assignable. 5. North American Products Corp. v. Moore, 196 F.Supp. 2d 1217 (M.D. Fla. 2002). The magistrate first addressed whether the employer breached the agreements by failing to pay the employee amounts he was lawfully owed, and found that the employer had established that it had a substantial likelihood of success on the merits regarding the affirmative defense of material breach. The magistrate then turned to the issue of whether the employer had a substantial likelihood of success on its claims that the employee breached the 1991 agreement and the 1998 agreement. Controlling for purposes of the motion was the 1998 agreement. The magistrate concluded that the employer had established that it had a substantial likelihood of success of proving that the employee violated the non-solicitation clause in the 1998 agreement. It also found that the employer had established that if an injunction was not issued, it would have been irreparably injured, that the balance of harms weighed in favor of the employer, and that an injunction would further the public interest. 6. Coastal Loading, Inc. v. Tile Roof Loading, Inc., 908 So. 2d 609 (Fla.2d DCA 2005). The parties' asset purchase agreement provided that they would enter into a noncompetition and non-solicitation agreement at closing. In the noncompetition agreement, the parties specified that the seller would not to engage in the business of "roof tile loading." When the buyer learned that the seller had hauled roof tiles after the closing, it filed suit, seeking injunctive relief and damages. The buyer argued that the parties intended to include both hauling and loading of roof tiles in the sale of the business. The appellate court held that it was clear from the record that the parties understood that roof tile hauling and roof tile loading were two separate aspects of the seller's business. The parties negotiated and specifically agreed to the description of the business that was handwritten on the noncompetition agreement. Therefore, pursuant to Fla. Stat. ' 542.335(1)(a) (2003), the trial court erred in entering a temporary injunction that prohibited roof tile hauling. Because the evidence did not establish that the seller called on or solicited a customer, there was no breach of the covenant not to solicit. Consequently, the injunction went beyond the covenants. 7. Cooper v. Thomas Craig & Co., LLP, 906 So. 2d 378 (Fla. 2d DCA 2005). Where the former employee sought dissolution or modification of a temporary injunction that enforced a covenant not to compete with the former employer, the parties were mistaken that Fla. Stat.'542.33(2)(a) (Supp. 1990) applied to the action. That law was inapplicable because it was not effective when the covenant became effective. 8. Advantage Digital Sys. v. Digital Imaging Servs., 870 So. 2d 111 (Fla. 2d DCA 2003). Under Fla. Stat. '542.335(1)(b) (2000), the injunction against two former employee was too broad. The injunction impermissibly rewrote the parties' agreements by disallowing any "contact" with company customers. The noncompetition agreements prohibited only solicitation. Additionally, the injunction did not distinguish between present and future customers. Finally, the agreements contemplated a five-year period, but Fla. Stat. '542.335(1)(d)(1)(2000) presumed a restraint in excess of two years was unreasonable. Where a former employee had not signed a noncompete form and could no longer allegedly sabotage the machines of the company's customers or adversely affect company customer relations, the remedy for the alleged sabotage, if any, was damages. The injunction entered against this employee was reversed. Where the court enjoined the corporation based on the company's claim of tortious interference with business relationships but the company failed to show a substantial likelihood of success on the merits, the court erred in enjoining the corporation from soliciting the company's customers, and the injunction was reversed.9. Diaz v. John Adcock Ins. Agency, Inc., 729 So. 2d 465 (Fla. 2d DCA 1999). Plaintiff insurance agency filed suit against defendant former employee to enforce a noncompetition agreement. At plaintiff's insistance, the trial court temporarily enjoined defendant's contacts and dealings with plaintiff's customers. On appeal, defendant contended that the trial court should have conditioned the injunction on the posting of a bond. The court affirmed the trial court's order, finding that there were no public policy reasons for refusing to honor the parties' prior agreement to waive the bond requirement. Accordingly, the court held that the trial court correctly enforced the contract provision waiving the requirement that plaintiff post a bond in order to obtain a temporary injunction. 10. Corporate Express Office Prods. v. Phillips, 847 So. 2d 406 (Fla. 2003). Employer could enforce noncompete agreements that former employees entered into with prior employers, which employer had acquired through 100 percent stock purchase and merger. Assignment of noncompete agreement was only needed in asset sale. 11. Gray v. Prime Mgmt. Group, Inc., 2005 Fla. App. LEXIS 15778 (Fla. 4th DCA 2005). Since the statute of frauds, Fla. Stat. ch. 725.01, required the written renewal of a non-compete clause as the employment contract had expired, the trial court erred in granting a temporary injunction which enjoined the former employees from soliciting existing clients from the former employer. 12. Lee v. Mark A. Pinsky, M.D., P.A., 895 So. 2d 1187 (Fla. 4th DCA.2005). Trial court erred in granting a temporary injunction because there was substantial evidence that the employer materially breached the agreement where he did not compensate the employee for over $275,000 worth of services provided by the employee. 13. Sun Group Enters. v. DeWitte, 890 So. 2d 410 (Fla. 5th DCA 2004). As appellees never consented to assignment of employment contract containing a non-compete agreement, purported assignment to appellant was invalid and court properly dismissed count in appellant's complaint requesting injunction against appellees. 14. Southernmost Foot & Ankle Specialists, P.A. v. Torregrosa, 891 So. 2d 591 (Fla. 3d DCA 2004). The employer argued that the trial court abused its discretion in failing to enforce the full two-year term, in narrowing the geographic limitations in its final order versus those it pronounced orally in court, and in concluding it was in the public interest for the employee, a podiatrist, to remain on staff at certain hospitals. The court found that the trial court erred in reducing the two-year term of the agreement because there was no evidence supporting such a modification, and the term was not unreasonable under Fla. Stat. ch. 542.335(1)(d)1. The court also found that the trial court improperly narrowed the geographic restriction beyond its oral pronouncements without any basis. Finally, the trial court properly excluded the employer's evidence as to its plans to expand its practice in a certain area and properly found that it was in the public interest to allow the employee to maintain staff privileges at certain hospitals where he was the only podiatrist on staff. 15. Wolf v. James G. Barrie, P.A., 858 So. 2d 1083 (Fla. 2d DCA 2003). Noncompete covenant was inapplicable as it had no legitimate business interest to protect as when veterinarian opened his new practice his former employer no longer operated the clinic where he previously worked. 16. Passalacqua v. Naviant, Inc., 844 So. 2d 792 (Fla. 4th DCA 2003). Employer failed to show legitimate business interest in enforcing non-compete agreements with former employees where employer failed to identify one misappropriated customer, and employer's methodology was widely used in securities industry. 17. Univ. of Fla. v. Sanal, 837 So. 2d 512 (Fla. 1st DCA 2003). University failed to carry its burden to prove that a legitimate business interest supported the enforcement of a non-compete agreement with a doctor the hospital formerly employed.The university hired the doctor as a clinical associate professor of medicine. The written employment contract contained a non-compete provision. The doctor claimed that the record demonstrated that the subject non-competition covenant was not supported by any legitimate business interest and was, therefore, void and unenforceable. The university argued that the trial court misconstrued the controlling statute, Fla. Stat. ch. 542.335(1)(b)(3) (1999), and, as a result, reached an erroneous conclusion. On appeal, the court concluded that the trial court correctly determined that the university failed to carry its burden to prove that a legitimate business interest, as that term was defined in ch. 542.335(1)(b), supported enforcement of the non-compete agreement. 18. Am. II Elecs. v. Smith, 830 So. 2d 906 (Fla. 2d DCA 2002). Trial court improperly denied employer's motion for temporary injunction against employee to enforce non-compete agreement, as employer's evidence was sufficient to establish a violation, and created a rebuttable presumption of irreparable injury. The employee began working for the employer as an electronics component distributor. In the non-compete agreement, the employee agreed not to disclose or use any confidential information, trade secrets, or proprietary information belonging to the employer, and agreed that for a period of two years following his employment he would not render any service in any capacity to any competitor, vendor or customer of the employer. When the employee left the employer, he commenced employment with a competitor. The trial court denied the employer request for relief on the ground that the employer failed to present evidence that the employee had directly solicited its customers or that the employer otherwise would have suffered irreparable injury if the injunction was not entered. The appellate court held that the record reflected that the employer's evidence was sufficient to prove a violation of an enforceable restrictive covenant under Fla. Stat. ch. 542.335 (2001). Therefore, its evidence was sufficient to create a rebuttable presumption of irreparable injury for the purposes of obtaining an injunction under Fla. Stat. ch. 542.335(j). 19 Open Magnetic Imaging, Inc. v. Nieves-Garcia, 826 So. 2d 415 (Fla. 3d DCA 2002). Employer's customer information database was legitimate business interest entitled to protection. Trial court abused its discretion in denying injunctive relief rather than modifying non-compete provision to protect employer's business interests. 20. Lubkey v. Compuvac Sys., 787 So. 2d 121 (Fla. 2d DCA 2001). Judgment for use of "confidential information," in breach of parties' restraint-of-trade contract which statute permitted as to "legitimate business interests," was upheld. Although the trial court did not use the words "legitimate business interest," found in Fla. Stat. ch. 542.335 (1999), it impliedly found that certain software met that definition and was reasonably necessary to protect. The appellee-prepared final judgment was inconsistent with the trial court's pronouncement as to trade secrets. 21. Anich Indus., Inc. v. Raney, 751 So. 2d 767 (Fla. 5th DCA 2000). Employer sued employee for breach of non-compete clause but failed to demonstrate the existence of any legitimate business interests in need of protection The trial court denied appellant's motion for temporary injunction. On appeal, the court affirmed because appellant did not demonstrate the existence of any legitimate business interests in need of protection. Appellant failed to prove that appellee employee possessed trade secrets, that appellee employee had learned valuable confidential information, and that there were substantial relationships with specific customers derived from her work for appellant that appellee employee sought to use to her advantage in her new position. 22. Aero Kool Corp. v. Oosthuizen, 736 So. 2d 25 (Fla. 3d DCA 1999). The employment agreement and a six-month covenant not to compete furthered plaintiff's legitimate business interests in protecting its investment in defendant's specialized training in aviation repair. Plaintiff hired defendant and provided him with 195 hours of specialized training, enabling him to become skilled in repairing and overhauling aircraft components, particularly heat exchangers. As a condition of continued employment with plaintiff, defendant entered into an employment agreement that contained a covenant not to compete. Defendant eventually started working for plaintiff's competitor. Plaintiff appealed from the trial court's non-final order denying its emergency motion for temporary injunctive relief to enforce the six-month covenant not to compete. The appellate court held that the employment agreement and the covenant furthered the legitimate business interests of plaintiff in protecting its investment in defendant's specialized training. Accordingly, the court reversed and remanded the judgment of the trial court with directions to issue a temporary injunction. 23. Austin v. Mid State Fire Equip., 727 So. 2d 1097 (Fla. 5th DCA 1999). An injunction was not proper where there was no evidence to show that an employer would be irreparably harmed by an employee working for another company if the employee did not divulge price information or approach employer's customers. 24. Don King Prods. v. Chavez, 717 So. 2d 1094 (Fla. 4th DCA 1998). Appellant fight promoter was unsuccessful in contending that a conclusive presumption of irreparable injury (rather than a rebuttable presumption) should be applied to a breach of contract action, thus entitling appellant to an injunction. On appeal, the court found Fla. Evid. Code ' 90.301(2) provided the legislatively enacted rule that presumptions were rebuttable unless conclusive under the law from which they arose. The legislative history of the statutory amendment showed that the legislature did not intend to create a conclusive presumption in the statute. 25. Balasco v. Gulf Auto Holding, 707 So. 2d 858 (Fla. 2d DCA 1998). Car dealership invested enough time and money in training its employees that it had a legitimate business interest in preventing former employee from soliciting them to leave dealership. Because appellee car dealership hired personnel with little or no sales experience and invested considerable money and time to teach them how it wanted them to sell cars, there was a legitimate business interest at stake. Restrictive covenants could not be found void for lack of consideration if they specified that continued employment was consideration. However, the three-year period was presumptively unreasonable and therefore had to be shortened to two years. 26. King v. Jessup, 698 So. 2d 339 (Fla. 5th DCA 1997). Neither appellee employer's act placing of advertisement in local newspaper nor past patients voluntarily seeking out appellee at new practice established direct solicitation in breach of covenant not to compete action by appellant former employee. although placing an advertisement in local newspaper was certainly a form of solicitation, it was not a form of "direct solicitation" of past patients; the fact that past patients voluntarily sought out appellee at his new practice did not establish direct solicitation; and the record contained sufficient competent evidence to support the conclusion that appellant failed to establish he had suffered irreparable injury by appellee's breach of the covenant not to compete. 27. Sun Elastic Corp. v. O.B. Indus., 603 So. 2d 516 (Fla. 3d DCA 1992). The court reversed the order of the trial court that denied appellant former employer's request for an injunction against appellee's violation of the noncompetitive agreement. The court found that appellant demonstrated an irreparable injury when appellee admitted that he solicited appellant's customers and appellee failed to rebut the presumption that appellant was entitled to injunctive relief.The court reversed the trial court's order denying appellant's request for an injunction because appellant demonstrated an irreparable injury when appellee admitted that he solicited appellant's existing customers. The court also found that appellee failed to rebut the presumption that appellant was entitled to injunctive relief. The court remanded with directions to enjoin the violation of the agreement. The court held that the terms of the injunction should be in accordance with the trial court's subsequent determinations of the reasonableness of the contract's time and space restrictions and the appropriate commencement date. 28. Hapney v. Cent. Garage, 579 So. 2d 127 (Fla. 2d DCA 1991), review denied, 591 So. 2d 180, (Fla. 1991). The court vacated the temporary injunction with leave to serve amended pleadings because the covenant not to compete was void per se unless it protected a legitimate business interest, and an amended state law applied retroactively because it was remedial. The court found that state law recognized a limitation on covenants not to compete that they be reasonably related to the protection of a legitimate business interest. The employer had the burden of proving the protectable interest, and its training may have constituted such an interest, but the lower court made no findings in this regard. Fla. Stat. '542.33(2)(a) (1990), regulating restrictive covenants, applied retroactively because it was remedial. As a result, the court found the employer had not proven it was entitled to an injunction.

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