Covenants Not to Compete in Florida Employment Contracts: An Overview
Employees sometimes get information about an employer’s business that would be useful to the employer’s market competitors. Such information could include trade secrets, proprietary processes, or specialized training that would be useful in a competing business. In addition, employees may learn about the employer’s present customers, future sales prospects, and business plans. In some instances, an employee could get enough knowledge to set up his or her own competing business.
In industries or trades where employers feel vulnerable to such competition, employers often seek to limit employees’ rights to work for or start a competing business within specified geographical areas for a long time after their employment ends. This is typically done through an agreement requiring employees, as a condition of their employment, to limit their post-employment activities. The employer’s intention is to prevent former employees from working in or starting a competing business for as long as possible and to keep them as far away as possible if they do. Such an agreement is known as a “covenant not to compete" or a “restrictive covenant." The word “covenant" sounds very imposing, but it means the same thing as a promise. Nevertheless, such promises can be legally binding and have significant potential to impair former employees’ ability to work in future.
Florida law has balanced the interests of employers and employees so that covenants not to compete are legally enforceable under certain circumstances. The remainder of this article will summarize the requirements for enforcement of covenants not to compete.
First, in order to qualify for enforcement, the agreement must be in writing and signed by the employee.
Second, the agreement must be justified by one or more “legitimate business interests." These can include, but are not limited to:
Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
Substantial relationships with specific prospective or existing customers, patients, or clients;
Customer, patient, or client goodwill associated with an ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress," a specific geographic location; or a specific marketing or trade area; or
Extraordinary or specialized training.
In other words, employers must have some reasonable, competition-based justification for limiting former employees’ ability to work. Absent such justification, the agreement is unenforceable.
Third, the restriction on post-employment activity must be reasonably necessary to protect the employer’s interest. However, overreaching restrictions do not necessarily invalidate the entire agreement. If a contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect legitimate business interest or interests, courts have the power to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests. In other words, if the issue goes to court, the judge can tailor the agreement to fit the circumstances.
Florida law specifies some guidelines for determining what restrictions are reasonable. If the restriction is not predicated on trade secret protection, which is most cases, a restriction that lasts six months or less is presumed reasonable. A restriction that lasts more than two years is presumed to be unreasonable. A restriction predicated on trade secret protection that lasts five years or less is presumed reasonable and more than ten years is presumed unreasonable. All these presumptions are rebuttable. For example, a former employee could try to prove that a six month restriction is unreasonable, or an employer could try to prove why more than a two year restriction is reasonable.
Assuming the employer can establish an otherwise enforceable restrictive covenant, there are some defenses available to the former employee. Unfortunately, the individualized economic or other hardship that might be caused to the former employee from enforcement of the restrictive covenant is not among the available defenses. A defense that is available to the former employee is that the employer no longer continues in business in the area or line of business that the restrictive covenant was intended to protect. However, this defense is not available if the former employee’s violation of the restrictive covenant is the reason for the employer’s discontinuance of the business. Another defense for the former employee is that the employer violated the employment agreement before the former employee did. This defense is known as “prior breach" but detailed discussion of that defense is beyond the scope of this article.
Market competition at all levels of the economy is fierce. Business owners arguably have a legitimate interest in protecting their business from competition from employees in whom trust has been placed, with whom valuable knowledge has been shared. and to whom training has been given. However, the law does not provide such protection forever. Restrictive covenants must be drafted with care to ensure they are enforceable. People need jobs and often need little coercion to sign any agreement requested by their employer that they believe will secure their employment. Employees should ensure they are not signing away their ability to earn a living at the hands of an overreaching employer. Although Florida law in this area is arguably stacked against the employee, there are limits to the employer’s power. In the case of an employer seeking to enforce a restrictive covenant, the employer does not automatically win and most judges will attempt to strike a reasonable balance between the competing interests.
Source: Section 542.335, Florida Statutes (2013).