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Business & Estate Litigation

Non-Compete Agreements: Are They Worth The Paper They're Written On?

Non-Competes - Not Your Typical Contract

There are few legal documents as misunderstood as non-compete agreements. There is a perception by many employers that they are worthless or, on the other hand, that there is a perception that the courts will enforce them to the letter. As discussed below, non-compete agreements can be enforced when narrowly drafted and under the proper circumstances, and likewise they can be defeated when they are overbroad and oppressive. Whether you are an employer attempting to enforce a non-compete, or an employee trying to figure out how your non-compete may affect your future employment, there are many things to consider.

Non-competes can be stand-alone documents, or can be contained within another document, such as an independent contractor agreement, as a clause or covenant. Unlike most legal documents, the enforceability of non-compete agreements is determined by not so much what the agreement says, but the relationship between the employer and employee and the circumstances surrounding the employment.

Enforceability – The “Legitimate Business Interests” Requirement

Non-competes are governed by §542.335 of the Florida Statutes. This law provides that non-compete agreements will not be enforced unless they are supported by “legitimate business interests justifying the restrictive covenant.” Although these will be discussed in more detail later, the law can essentially be summed up by asking whether the employee received something from the employer, such as specialized training, access to specific customers, or access to trade secrets, where it would now be unfair for the employee to use that to benefit his/her new employer.

I usually give clients the following extreme example. Let’s say you have an identical non-compete agreement which provides that the employee may not work for a competitor of the employer for two (2) years following the termination of employment and within the Southeastern United States. If the employee was a bagboy at a grocery store, it is extremely unlikely that the non-compete would be enforceable. What did the grocery store bestow upon that bagboy which should prevent that bagboy from working down the street at another grocery store? The answer would be absolutely nothing. On the other hand, if the employer is a high-tech company with only a handful of competitors competing in cutting edge technology, that same non-compete agreement may be completely enforceable. It could be that the employee had access to the employer’s very real trade secrets and was significantly involved in some new invention or process. Would it be fair for that employee to go work for the major competitor with that information? The answer would probably be no.

Florida law sets out a nonexclusive list of these legitimate business interests. These include: trade secrets, confidential business or professional information that does not qualify as a trade secret, substantial relationship with specific customers, patients or clients, or customer goodwill associated with an ongoing business, a specific geographical location or marketing area, or extraordinary or specialized training.

There are many Florida cases interpreting these various business interests, and what may or may not qualify. For example, courts have stated that the specialized or extraordinary training must be very specific. In other words, just because an employee receives some on-the-job training, such as how a particular company does things, does not necessarily mean that this training would qualify as extraordinary. Say the employee receives just basic training on a computer system, such as word processing or spreadsheets, it is unlikely that the training would qualify for specialized training. On the other hand, the courts have held that an airline mechanic, who had no prior experience in this highly-regulated industry, and for whom the employer had invested significant money in training and certifications, did qualify as extraordinary.

Likewise, for relationships with specific customers or clients to be considered a protectable business interest, the client must be specifically identifiable and, depending on the industry, limited in number. For example, a supply company was found not to have protectable business interests in its customers where its prospective customers could be found by merely searching the industry on the internet or in the Yellow Pages, and where the customers would often shop by price.

Duration and Geographical Limits – What is Reasonably Necessary

Florida law also provides that a non-compete agreement could only be enforced to the extent reasonably necessary to protect the employer’s business interest. Here, non-compete agreements can differ from other contracts as the law specifically allows the courts to modify the terms of non-competes to the extent that they are overbroad or otherwise unreasonable. This usually means modifying the geographical area or the duration of the non-compete period.

For example, say that a hair salon has an otherwise enforceable non-compete agreement within an employee, but the non-compete provides that the employee may not work for a competing salon within thirty (30) miles. If a court finds that the evidence shows that the average client will not drive more than five miles then the court can limit the geographically area accordingly. The court may also find that a three-year non-compete period is too long and modify it accordingly and reduce it to one. As discussed above, the burden is on the employer to plead and prove existence of these legitimate business interests, and also prove that the restriction sought to be enforced is reasonably necessary to protect those interests.

Non-Competes and Employee’s Defenses

An employee facing a lawsuit on a non-compete may defend by challenging the existence of the business interests claimed by the employer or the reasonableness of the restrictions themselves. There are other defenses available to the employee as well. A common defense by an employee is a claim of prior breach. That is, that the employer first breached some aspect of the employment agreement, thereby rendering the non-compete provision unenforceable.

For example, where the employer has failed to pay the employee’s last paycheck or has failed to pay commissions which were otherwise due. While this defense is not always successful, I usually counsel my employer clients not to withhold any pay, which is otherwise due, especially when they plan on enforcing a non-compete.

A big misconception is that a non-compete is not binding if the employee is forced to sign – usually on a take it or leave it basis and perhaps after several years with the employer. This is not the case, as a non-compete agreement need not be supported by additional consideration. It is well-settled that continued employment, at least in an at-will situation, is sufficient consideration to support a non-compete agreement. This might not be the case, however, where the employee is contractually guaranteed employment for a specific duration and is required to sign or face termination.

The Pitfalls to Enforcing Non-Competes

As I often tell my clients, both employers and employees, that non-compete agreements do not enforce themselves. From the employee’s standpoint, even though the enforceability of particular non-compete as applied to him may be questionable at best, many times, because of his ability to afford a lawsuit, he has no choice but to capitulate rather than spend the significant money in the hopes that a judge later agrees with his position. From the employer’s standpoint, if an ex-employee has taken employment which the former employer believes to violate the agreement, the employer must file a lawsuit seeking to have the court enforce the non-compete agreement by way of a temporary injunction. The reason why this injunction is only temporary is because it only resolves the issue initially during the pendency of the case. This assumes that there will ultimately be a full trial – perhaps months or even years down the road. A hearing on a temporary injunction usually happens fairly early in the case – within a few weeks or months, after the lawsuit is filed. The hearing is essentially a mini trial, which could take an hour or a day or more – thus the “front loaded” nature of this litigation where the fees can be very expensive early on in the case.

Often, if not in the majority of cases, what happens at the injunction hearing will determine the remainder of the case. If the court rules that the employee is prohibited from working for a particular company, a geographical area or in a particular field altogether, the employee may have no choice but to just give up and move on, rather than to try to continue the fight. On the other hand, if the court rules against the employer, often that employer will decide that he no longer wants to spend further resources on the case and let it go.

An often shocking aspect of non-compete cases is the requirement that the employer post a bond. Assume the judge agrees with the employer and enters an injunction prohibiting the employee from working for a particular employer, which essentially puts the employee out of a job. Great result, right? Not so fast. Given that this is only a “temporary” injunction, the employer is required to post a bond in the event that it is later determined, at a full trial that may be a year or two down the road, that the injunction was improper. This can be significant, and employers have been required to post bonds of several hundred thousand dollars after they “win” the injunction hearing.

Should the Non-Compete Case be Settled?

The vast majority of non-compete cases, like most civil cases, are resolved via a settlement. This is as it should be. Maybe the former employer is very angry at the former employee, who may have been his protégé, and who has now repaid him by leaving and joining another company or opening up his own shop. However, when faced with the costs and uncertainty of enforcing the non-compete agreement, often the employer will rethink his decision. Because non-competes are typically drafted well before any future violation and therefore cannot possibly be expected to cover every contingency, there is usually a very good opportunity for a post-employment resolution. For example, say the non-compete provides that the employee may not work for a competitor for a period of three (3) years within fifty (50) miles. However, perhaps the employer’s main interest is making sure that the employee does not go after the company’s major customers or clients. Accordingly, rather than insist on the employee leaving the employ of the competitor, the former employer may be satisfied with an agreement that the employee refrain from contacting those customers or clients. Likewise, as to the employee, while she may certainly get a jumpstart with her new employer by going after her previous employer’s customers or clients, she may be wise to agree to refrain from doing so in order to avoid the cost and uncertainty of a lawsuit.

Non-Competes Will Be Enforced When Reasonable

In today’s business world, there is certainly a place for non-compete agreements. Many employers have legitimate business interests that should be protected. However, employers should endeavor to draft their non-compete agreements as specifically as possible, so as to protect their business interests without unduly and unfairly restricting the employee’s ability to earn a living after his or her separation. Although a court can modify an employment agreement’s restrictions, sometimes judges simply refuse to enforce a non-compete agreement at all when it is overreaching or oppressive. Where the non-compete agreement is narrowly tailored to protect the employer’s legitimate business interests, and is likewise sought to be enforced in a reasonable and non-oppressive way, it is very likely that a court will enforce the agreement accordingly.

 

John Chapman is the principal of The John Chapman Law Firm in Sarasota.  He is Board Certified as a specialist in business litigation by the Florida Bar and is AV rated by Martindale-Hubbell. He focuses his litigation practice in the areas of probate and trust, construction, banking, real estate, commercial, employment contract, and ad valorem tax.  Mr. Chapman is a Florida Supreme Court Certified Circuit Civil Mediator, and works with institutions, businesses and individuals to facilitate settlement of disputes both prior to and after the commencement of litigation.   He is also a Florida Supreme Court Approved Arbitrator.

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