What is a Non-Competition Covenant?
Non-compete agreements – sometimes called non-competition agreements – are the basic means by which businesses in Florida, and many other states, protect their interests against the potential of competition from former employees. Given the resources and expertise that may be required to grow a business, there is significant incentive to avail yourself of the protections afforded under Florida’s non-compete statute if your business has employees.
Florida Statutes § 542.335 governs non-compete agreements, which can be classified as either non-compete covenants or non-solicitation covenants. Non-compete covenants are designed to prevent a former employee from performing work that competes with your business. Non-solicitation covenants are designed to prevent a former employee from soliciting your clients or customers. A non-compete agreement can have both a non-compete covenant and a non-solicitation covenant .
Florida law requires that a non-compete agreement be supported by a legitimate business interest. Unspecified, vague, or speculative interests will not support a non-compete covenant. Legitimate business interests that the courts have found sufficient for enforcement include:
In addition to consideration for the non-compete agreement in the form of a job, raise, etc., the non-compete agreement should also be reasonable. A non-compete agreement that is too broad as to time and geography may not be enforceable. Although Florida law presumes a two-year restriction is sufficient, the case law and practice confirms that the covenant should be crafted with the specific interests to be protected in mind so that the court is not left to decide how much of your former employees’ professional life you seek to prohibit. A court may not enforce a non-compete agreement, or limit the geographic or temporal scope of the restrictions, if it deems them not to be reasonable.
Florida Statutes Regarding Non-Competes
Pursuant to Florida Statutes Section 542.335, the statute codifies that contracts, which include non-competition agreements, are valid and enforceable if it is reasonable in time, area and line of business which the contact protects is established by the parties. Furthermore, this particular statute section states that a contract with unreasonable time, area and/ or business restrictions can be sustained by other conditions contained in the contract. Further, the statute itself lists certain elements that must be present for a non-compete agreement to be enforceable and is a rebuttable presumption that the contract protects one of the following: (i) trade secrets; (ii) valuable confidential business or professional information; (iii) an established business relationship; or (iv) goodwill associated with an ongoing business or professional practice.
Pursuant to the Florida Statutes, a non-compete agreement must contain a geographic scope. However, pursuant to the case law, there does not have to be a defined territory. Case law has stated that if a non-compete agreement is not geographical limited but instead is based on the limitations of customer location, it may still be enforced. For example, the agreement may state that you cannot solicit any customer of your former employer in the same area that you called on during the course of your employment.
Requirements for Enforceability under Florida Law
For any prior agreement prohibiting the leaving employee from competing to be enforceable under Florida law, it must meet the same requirements as an agreement ordered upon departure. While a covenant in an earlier agreement that it will last for 2 years may satisfy the time element of a non-compete, it typically will not measure up because, among other things, it likely will lack reasonably necessary enforceable geographic scope – that is, the scope of the restriction may have been limited to competing only within close proximity of company locations even if one of the company’s offices was in Florida (even though non-compete agreements with such unreasonable limitations have been enforced in the past).
Florida Statute Section 542.335(1)(b) provides that an agreement not to compete or otherwise not to compete "is enforceable only to the extent necessary to protect" a legitimate business interest. This statute further indicates that "legitimate business interest" includes "the employer’s or principal’s:
A "legitimate business interest" may arise from an employer’s "goodwill" among clients; "extraordinary or specialized training" given to an employee (e.g. where the company bears the major portion of the training costs); and "intangible or tangible" trade secrets or confidential or proprietary information.
Of course, the analysis does not end there. The non-compete agreement must be reasonable regarding, among other things, its time, geographic or actual territory, and substantive scope. For example, if a non-compete forbids solicitation of a customer who is located 250 miles from the company’s headquarters (i.e. effectively outside the company’s territories) and also prohibits the former employee from becoming employed by any company that competes with the former employer, this may go too far to be enforceable. In fact, the latter restriction may be overbroad even if:
This is because such a broad restriction can be challenged on the basis that although it restricts conduct as opposed to employment, it nonetheless has the effect of prohibiting the former employee from obtaining comparable employment. Further, a restriction with regard to solicitations must not be more limited than what is most reasonable to protect legitimate business interests.
Even if a non-compete is reasonable relating to time, geography and substantive scope, the contract may still not be enforceable. For that to happen, it must be established that the former employee’s competitive activity is likely to cause adverse effects to one or more of the former employer’s legitimate business interests (often through the use of a preliminary injunction). Both issues -whether a legitimate business interest exists and whether adverse effects are likely – present a factual dispute that requires a hearing and court ruling prior to enforcement (subject to appeal).
Common Issues and Defenses
Employers who seek to enforce a non-compete against a former employee may find themselves facing one or more common legal challenges and defenses, the most prominent of which may stem from an employee challenging the employer’s alleged injury from the employee’s actions. Practically speaking, an employee will often argue that the employer does not have a "protectable interest" in the alleged interest that the non-compete seeks to protect. Florida law recognizes that the following are generally protectable interests that may justify a non-compete: (1) trade secrets; (2) valuable confidential business or professional information that is secret; and (3) substantial relationships with specific existing customers. However, non-competes that seek to protect confidential information, customer relationships, or goodwill that are not protectable must fail. The distinction between what is protectable and what is not is often difficult to make, and each case is highly fact-specific.
Additional arguments against the enforcement of a non-compete include: the non-compete is overbroad in terms of time, is overbroad in terms of geographic reach, is overbroad in terms of the type of work the former employee is prohibited from engaging in, and that the non-compete imposes an undue hardship on the former employee (e.g., the former employee cannot earn a living), that enforcement of the non-compete would effectively put the former employee out of work, or that enforcement of the non-compete would cause the former employee to leave the state.
Given the difficult analysis and factual review necessary to make this determination, it is essential that non-competes provisions are tailored on a per-fact basis to cover only those matters which an employer legitimately needs protected, either by statute or by virtue of its relationship with its employees, customers and confidential information.
Recent Developments and Trends
The Florida Legislature has made non-compete agreements a priority in recent years. Amongst other legislative changes, in 2013 the Florida Legislature approved and then the Governor signed into law an amendment to certain Florida Statutes governing contracts in restraint of trade. The amendment is codified as Fla. Stat. Section 542.335 which includes a presumption that covenants not to compete utilizing "narrow restraints" are reasonable in time, geographic area and type of business. Another key amendment was the elimination of the judiciary created rule in Fla. Stat. Section 542.335(c) that "any material change" in the employment relationship may permit an employee to challenge the enforceability of the post-employment restrictive covenant. Courts continue to interpret and apply this amendment strictly, meaning that employers who want to protect their non-competes must vigilantly police and/or document compliance . The Florida Legislature is also considering an additional amendment to Fla. Stat. Section 542.335(c), which would eliminate the ambiguity with respect to whether an employee’s resignation under the following circumstances would permit that employee to challenge the enforceability of the post-employment restrictive covenant: [C]onduct of the employer that is inconsistent with?, or which materially increases the discharged or employee’s duties in relation to the obligations under the noncompete covenant. For example, an example in proposed bill H.B. 287 states: "a material change includes, but is not limited to, a unilateral change to the terms of an employment agreement, including benefits, job duties, responsibilities, job title, compensation and/or compensation structure". However, as of this date, the time, geographical, and type-of-business test remains the law in Florida.
“Best Practices” for Employers and Employees
Employers should seek the assistance of an attorney experienced in drafting enforceable non-compete agreements. The attorney should understand your business and long-term goals so that the non-compete can be properly tailored to meet legal requirements as well as maximize your rights to enforce the agreement should the need arise. Employees who object to the terms of a non-compete have a number of options. If you intend to remain with the employer, you should attempt to negotiate the particular terms with your employer. The scope of your negotiation will undoubtedly depend on your respective bargaining power. If you intend to accept employment with another employer and the non-compete will foreclose that future employment, you may consider seeking a change in the terms or denying acceptance of the employment offer. If you are a valued employee, your employer may be willing to negotiate. However, if your employer is unwilling, you may have to consider whether to forego the employment offer or test the validity of the non-compete in court. Your decision will probably depend on your willingness to take on the risk that your former employer will file suit to prevent your employment with the new employer, thereby causing you to be without a job for an unknown length of time.
Conclusions: The Future of Non-Competition Covenants in Florida
As non-compete disputes continue to compound and the volume of non-compete litigation grows, many speculate that the Florida legislature will act, and pass sweeping amendments to the current Florida Statute. Additionally, with Florida being a desirable place to live, many non-compete issues continue to arise between closely held family owned and private companies; and arguments continue to be advanced on both sides in the courts regarding the reasonableness of many non-competes, either in total or severable . For instance, will the court strike down a non-compete as a whole, or simply toss out geographically overbroad portions or other unreasonable parameters? The arguments applied by these companies to support overbroad non-competes will become focal points for Florida courts in the coming years.
The question going forward is whether Florida’s existing statutory framework remains sufficient to protect legitimate business interests and promote competition, and whether Florida courts will be averse to invalidating unreasonable non-competes at the request of the employee or former employee. Regardless, it is clear that the issue regarding non-compete enforcement and the scope of allowable restrictions will be hotly contested in 2016 and beyond.