Non-Compete Agreements: What Are They?
Non-compete agreements (also referred to as restrictive covenants) are employed by employers attempting to protect intellectual property or information that is company specific and in danger of being shared with a competitor .
A non-compete agreement restricts an employee’s ability to work for competitors or start a competing business, within certain parameters.
The essential purpose of non-compete relationships is to prevent former employees from gaining an unfair or unearned advantage over their former employer(s) by using inside information from the now-previous company.
The Legal Landscape in Florida
The legal framework in Florida for non-compete agreements is highly specific and has been extensively developed through Florida Statute 542.335, which governs non-competition covenants within the state. The statute delineates the parameters under which an employer may require an employee to enter into a legally binding agreement not to compete with the employer upon leaving or terminating their employment. Florida Statute 542.335 explicitly addresses the requirements for such agreements to be reasonable in their scope, temporal duration, and geographical area.
Per Florida Statute 542.335, an employer must demonstrate that the restriction is necessary to protect one of the following legitimate business interests: trade secrets, valuable confidential business information, substantial relationships with specific prospective or existing customers, customers, or clients by the employer by virtue of genuine efforts; certain employee training and experience; or goodwill associated with an ongoing business, a business reputation, or a specific geographic location. Without evidence of one of these business interests, the restriction would be considered overbroad and not enforceable. If one of these legitimate business interests exists, the employer must still demonstrate that its attempted time, place, or activity restriction is reasonably necessary to protect one of the listed interests and that it is not overbroad.
Unlike a number of other states, Florida does not mandate a time limit for non-compete agreements. Therefore, they can last for any length of time so long as the employer can show a legitimate business reason for it. This is very different from neighboring jurisdictions like Alabama and Georgia, which limit non-compete clauses to two years in most cases. The non-compete laws in Florida are fourfold more favorable to businesses than those in Alabama or Georgia, and even appear to be gaining ground in the state.
Essential Conditions for Enforceable Agreements
A non-compete agreement in Florida will not be considered enforceable unless it is reasonable in time, area or location, and line of business restrictions. Pursuant to Florida Statutes § 542.335, if a non-compete contract is reasonable as to time, area, or line of business restrictions, Florida law presumes the contract protects a legitimate business interest.
Florida law identifies three legitimate business interests:
A non-compete contract will be considered reasonable in time if the time period at issue between employment termination and a violation of the non-compete agreement is for a period tailored specifically to the business.
The geographic scope of the non-compete agreement will be considered reasonable if it is limited to the specific area where the employer’s business actually did business before the termination date, or if the geographic area is tailored to protect only the commercial interest at issue.
A non-compete agreement will be considered reasonable with respect to line of business activities if the restricted activities do not overlap. This means the non-compete agreement must be narrow enough to protect the employer’s interest with respect to the particular business segment or operation at issue (e.g., separate business, division or department).
Common Defenses and Legal Challenges
Among the most common challenges to the enforceability of non-compete agreements are overbroad scope, justification, and geographic restrictions. Overbroad Scope: To be enforceable, a non-compete must be reasonable in both temporal and spatial terms. The general rule is that the period, number of clients restricted, and geographical restrictions must be narrowly tailored, and no broader than necessary to protect the employer’s legitimate business interests. For example, the enforceability of a two-year, 1,000 client prohibition on a former Beauty Counter distributor was just recently upheld in Miami-Dade, as the court found the restrictions were reasonably related to and incident to the distributor’s former employment. Id. The court also held that the distributor’s right to sell products outside of South Florida was not a need for the non-compete because although she testified to the company’s overall level of success, she did not quantify it; nor did she testify she was in fact losing sales outside of her territory. Justification: In general, if an employee has been given notice and an opportunity to comply with the covenants, a court may enforce them. In the earlier discussed, W. Indus. Gas, Inc. v. Verhaalen, the court found the former employee’s failure to demonstrate that he made a good faith effort to comply with his client solicitation covenant prior to bringing suit was sufficient grounds to deny his motion for a permanent injunction. Additionally, the court found the oral and written statements made by his employer, that the non-compete agreement was no longer valid, was an affirmative defense of at least partial Justification. Failure of Proof of Legitimate Business Interest: While Florida Statute 542.335(1)(b) lists seven (7) legitimate business interests, neither Florida Statutes, Florida case law nor Florida’s Administrative Code contains a threshold value that every client relationship must reach in order to become protectable. In Other Sales & Mktg. Group, Inc. v. Schaka, the Court found that a company has a protectable interest in client relationships paid for or earned by significant investments of time or money. In addition to the defenses listed above, the Florida Unfair and Deceptive Trade Practices Act (FDUTPA) will also bar enforcement of non-compete agreements. Specifically, Florida Statutes 501.204 prohibits "[u]nfair methods of competition, unconscionable deceptive acts or practices in the conduct of any trade or commerce." The codified Florida common law tort of covention of contract claims (also known as an action for tortious interference with a contractual relationship) prohibits a non-party for a contract from intentionally inducing a contracting party to breach the contract.
Effects on Employees and Employers
Non-compete agreements can have a substantial impact on employees and employers. In some cases, non-compete agreements may be beneficial to both employees and employers. For example, a non-compete agreement may be beneficial to employees in that they may receive the benefit of additional training and education provided by employers. In addition, employees are often rewarded with more responsibility as well as additional salary and/or bonuses, and therefore, they may be beneficial to employees as well. However, non-compete agreements have the potential to be a great disadvantage to employees in some situations. Many non-compete agreements, for example, are placed in employment contracts with very short notice (or no notice) or without the advice of a lawyer, which may put employees at a disadvantage . Therefore, it is important for employees carefully to consider their rights, duties and obligations under a non-compete agreement before that agreement is entered into with an employer.
Since employers usually draft the non-compete agreements, they generally benefit more from the clauses. Non-compete agreements may further benefit employers by protecting proprietary information. One negative impact of non-compete agreements on employers is that they may limit the pool of potential new hires, as fewer candidates may be willing to join a new company if they are not allowed to work for a competitor after they leave the company. Another negative impact of non-compete clauses on employers is that employees may undermine them. For example, employees could provide confidential information to a competitor if the information was not explicitly protected by a non-compete agreement.
Emerging Case Law and Trends
As noted above, a judge can rewrite an agreement to make it enforceable. However, that doesn’t mean they will do so all the time. For example, this Court denied an employer’s request to have a judge re-write a non-compete agreement of a former employee. The judge found that the agreement’s language unambiguously barred the employee from engaging in any services even remotely related to the services the employee actually performed for the period of the non-compete.
In contrast, another judge recently found that a non-compete agreement was unenforceable in part because the manager who signed it was working at less than 50% of her job capacity at the time it was executed. The Court also found, among other things, that general competitive industries were not defined with any particularity and thus the non-compete did not protect the employer’s legitimate business interests when considering the employee’s actual day to day roles and responsibilities.
In the past, Florida courts were highly skeptical of "moonlighting" non-competes preventing competitive employment or independent contracting after hours. Recent case law shows something of a trend to more permissible moonlighting agreements. In one case, for example, a Florida court upheld an agreement that expressly allowed the employee to work for a competitor on nights and weekends so long as it was done without notice to the employer or monetary compensation. Another case upheld a non-compete that prohibited one of two jobs, but permitted the employee to continue her business that competed with her employer (where she worked the bulk of her time), nights and weekends. Thus, while the courts still look closely at the breadth of a non-compete agreement, when an agreement is clear on its face and reasonable in its scope, courts will enforce it even if it restricts the ability to work during nontraditional hours or during other jobs. The key factor seems to be the need to define precisely what is seen as "moonlighting" versus a job that is approved to nevertheless remain in competition.
When we consider further the question of when a non-compete may be reasonable, we must not forget that an employer has the initial burden of establishing a legitimate business interest. In a recent case, a Florida court overturned a temporary injunction where the employer did not meet its burden of showing a legitimate business interest. Specifically, the employer argued that it had a legitimate business interest in the confidentiality of its trade secrets. Florida courts have held that confidential business information may constitute a trade secret where it meets the following elements: 1) the information must not be generally known or readily accessible to entrepreneurs in the industry; and 2) the information must derive independent economic value, actual or potential, from not being generally known and not being readily accessible to entrepreneurs in the industry. When interpreting these requirements, courts have found that the following definitions should apply:
The court in that case found that neither of the two criteria was met. In particular, the court found that while the employer had a legitimate business interest in the customer list maintained within the state, the information was not confidential because it was routine information disclosed to service companies and the government on a regular basis.
Overall, what’s the bottom line? While employers in Florida have clearly established that they may rely on valid non-competes in the face of competition and other restrictions even during periods of time where there appears to be a close relationship between both parties and the parties have mutual reputations, an employer’s ability to do so likely rests in providing (and documenting) valid and painstaking sacrifice and consideration and at all times precisely defining all relevant terms of non-compete agreements. If in doubt, employers will need to seek legal help prior to entering into any non-compete agreements.
Effective Drafting Strategies
Florida courts have been clear that a non-compete agreement can be that brandished sword or shield to protect your strategic interests, but only if they are properly drafted. We offer the following best practices for employers:
Geographical scope: the geographical scope of the non-compete should not extend into areas where the company does not regularly or previously conduct business.
Duration: the duration of the restricted period should not extend any longer than is necessary to protect your legitimate business interests, meaning you should be able to justify the duration with some reasonable evidence.
Legitimate business interest: you must be able to detail your legitimate business interests. Some examples of legitimate business interests might be:
It is not sufficient to simply state or recite a legitimate business interest in the agreement; the employer must be prepared to defend the legitimate business interest.
If you are struggling to identify what is necessary to protect your legitimate business interests, consider other methods of protection that do not require a covenant not to compete, such as non-solicitation and confidentiality agreements.
Strategies for Challenge a Non-Compete Agreement
If you are an employee who wants to work for a competing business, you may want to state your legal intent to contest the non-compete agreement. In many instances, individuals charged with violating non-compete agreements claim they are unenforceable, and this defense has proven successful. Who your argument should be made to depends on whether you are an employee or a former employee. If you are an employee, you should let your employer know via a written demand to invalidate the non-compete agreement, listing reasons why the contract violates Florida law and is objectively unreasonable. For example, Florida Statute §542.335 includes numerous reasons a non-compete agreement can be unenforceable. There is no statute of limitations on filing a lawsuit to contest your non-compete agreement, but you should prepare to have valid reasons from the date you entered into the agreement and anytime it is updated with your signature.
If you are a former employee , however, there is the possibility you can file a declaratory judgment action to contest the restriction. A declaratory judgment action may involve the same parties and issues as for a breach of a non-compete agreement; however, it can be brought without having to wait or be bound to a mediation clause in an existing agreement. In Florida, a declaratory judgment action must be filed prior to the expiration date of the non-compete agreement at issue.
In either case, the argument for your non-compete agreement’s invalidity must include the following:
• The non-compete agreement is a restraint of trade.
• The restraint is greater than needed to protect the legitimate business interests of the employer.
• The restraint unfairly restricts trade or commerce; and
• The restraint creates a hardship for the person contesting it that overrides the public interest.