August 24, 2018
Author: Karen M. Buesing, Esq.
Organization: Akerman LLP
I. History of Restrictive Covenants
A. Restraints of Trade Historically Disfavored
Agreements which restrain trade have historically been looked on with disfavor. The enforceability of covenants restricting competition between employers and employees is governed by state law. Florida was among the states that historically considered non-compete agreements to be contrary to public policy.
See Flammer v. Patton, 245 So. 2d 854 (Fla. 1971) (“Contract provisions restraining or hindering a man’s right to follow his calling were considered as void against public policy.”). However, over time courts have recognized that some restraints must be enforced. Where that line is drawn has varied in the past 70 years, but has settled somewhat since 1996.
B. Restrictive Covenants Expressly Authorized: Fla. Stat. 542.12 (1953) and 542.33 (1980)
Florida has had a series of statutes governing such restrictivecovenants. In 1953, Florida enacted F.S. §542.12,1 the first Florida statute to expressly authorize contractual restrictions upon competition. In two key early decisions applying §542.12, the Supreme Court of Florida declared that the purpose of the statute was to \"protect the legitimate interests of the employer\" and to protect employers from unfair competition: \"The statute is designed to allow employers to prevent their employees and agents from learning their trade secrets, befriending their customers and then moving into competition with them.\" Miller Mechanical, Inc. v. Ruth, 300 So. 2d 11, 12 (Fla. 1974). Section 542.12 expressly provided that all contracts that restrain an individual’s ability to engage in a lawful trade or business were void, but also expressly provided that Florida courts could enforce restrictive covenants in two circumstances: 1) when an agent or employee agreed to refrain from carrying on or engaging in a similar business and from soliciting his/her former employer’s customers within a reasonably limited time period and geographic area; and 2) when partners, in anticipation of the dissolution of a partnership agreed that all or some of the partners would refrain from carrying on a similar business within a reasonably limited time period and geographic area. Courts interpreting the statute focused on the reasonableness of the time period and geographic scope. The courts created a presumption of irreparable injury where an employee breached a valid covenant not to compete, without the necessity for the employer to allege or prove any such irreparable injury. See Capraro v. Lanier Business Products, Inc., 466 So. 2d 212 (Fla. 1985). 1 Section 542.12 was recodified in 1980 as Section 542.33.
C. The 1990 Amendments to 542.33 and Resulting Confusion
However, enforcement of the statute varied, leading to conflicting rulings and unpredictability for employers. Against this backdrop, in 1990, the Florida Legislature amended §542.33. The 1990 Amendments and subsequent case law interpreting it resulted in significant changes. The 1990 version of the statute provided that courts may not enforce non-compete agreements against employees, independent contractors or agents, when: 1) the agreements are contrary to public health, safety or welfare; 2) the agreements are unreasonable; or 3) the agreements are not supported by a showing of irreparable injury. The judicially created presumption that a breach of a covenant not to compete will cause irreparable injury was eliminated by the statute, which expressly provided that such a presumption would only arise in specific circumstances: 1) use of trade secrets; 2) use of customer lists; 3) direct solicitation of existing customers; or 4) where a seller of the goodwill of a business or a shareholder selling or otherwise disposing of all of his/her shares in a corporation breaches an agreement to refrain from carrying on or engaging in a similar business. In all other cases, the party seeking to enforce had to plead and prove irreparable harm before obtaining injunctive relief. However the statute did not articulate the standards for determining \"unreasonableness,\" did not address the overlap with 542.18 (the Florida Antitrust Act analogue to §1 of the federal Sherman Antitrust Act, 15 U.S.C. §1), did not identify the extent to which contract rules of interpretation should apply, and had no provision for attorneys' fees.
Moreover, in Hapney v. Central Garage, Inc., 579 So. 2d 127 (Fla. 2d DCA), rev. denied, 591 So. 2d 180 (Fla. 1991), the Second District Court of Appeal in 1990 engrafted on to the statute a detailed \"legitimate business interest\" test for such restrictions. Requirement of \"legitimate business interest\" engrafted on to statute by Hapney decision. In Hapney, the Plaintiff had nearly seven (7) years of prior experience working in the business of installation and repair of car and truck air conditioning systems. He worked for Central Garage for 9 1/2 months, during which time he signed a non-compete agreement prior to the effective date of the 1990 amendments. Hapney received little or no additional training, he had no access to the company’s trade secrets or confidential information, and developed no significant relationships with Central Garage’s customers. Hapney left his employment with Central Garage and began working for a competitor. Central Garage then sought and obtained an injunction to enforce Hapney’s covenant not to compete. On appeal, however, the Second District Court of Appeal reversed the trial court, and refused to uphold the injunction. Instead, the Second DCA adopted a “legitimate business interest test” – under which a court had the power to extend its analysis of reasonableness beyond simply examining the time and geographic restrictions contained in the non-compete agreement. Hapney essentially engrafted an additional requirement that the employer demonstrate the non-compete agreement it sought to enforce was based on the need to protect a “legitimate business interest,” aside from merely restraining competition with the former employer.
Not all courts agreed. For example, the 5th DCA disagreed and held that no such requirement for a “legitimate protectible interest” exists under the 1990 amendments at all. See Jewett Orthopaedic Clinic PA v. White, 629 So. 2d 922 (Fla. 5th DCA 1993). In reaching its decision, the 5th DCA ruled that courts must balance “the employer’s interest in preventing competition against the oppressive effect of the covenant on the employee.” Id. at 926. Conspicuously absent from the 5th DCA’s ruling in Jewett was any analysis of the “legitimate business interest” test employed by the 2nd DCA in Hapney. The Hapney test also was not utilized by the 3rd DCA in Sun Elastic Corp. v. O.B. Industries, 603 So. 2d 516 (Fla. 3d DCA 1992). The Court ruled that when there is a direct solicitation of a former employer’s customers by a former employee (which is presumed to constitute irreparable injury under the 1990 amendments), it is not necessary to consider the direct holding of Hapney.
The inconsistent use of the \"legitimate business interest\" criteria resulted in the possibility of different results on the same facts in different districts and encouraged forum-shopping within the state. By 1996, the \"rules\" governing the enforcement of contractual restrictions varied widely, and the resulting lack of predictability made it very difficult for businesses to have certainty about business transactions and employment relationships involving such restrictions.
D. Enforcement Made Easier/ More Predictable: The 1996 Statute
Accordingly, in 1996, the Florida Legislature enacted Fla. Stat. § 542.335, which governs enforcement of all restrictive covenants entered into or having an effective date on or after July 1, 1996. The statute uses the term \"restrictive covenants,\" which includes all contractual restrictions upon competition, including non-competition agreements, non-solicitation agreements, confidentiality agreements, exclusive dealing agreements, and all other contractual restraints of trade. The statute adopts the “legitimate business interest” requirement articulated in Hapney, and expressly states that \"[a]ny restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.\" Section 542.335(l)(b).
Section 542.335 is broadly “aimed at making enforcement of bona fide restrictive covenants easier and more certain.” See John A. Grant & Thomas Steele, Restrictive Covenants: Florida Returns to the Original “Unfair Competition” Approach to the 21st Century, 70 Fla. B.J. 53, 53-56 (Nov. 1996).
II. Basic Rules Governing Enforcement Under Section 542.335
In contrast to its predecessor, Section 542.335 is very detailed and lays out the rules for enforcement, as follows.
Enforcement of contracts that restrict or prohibit competition is not prohibited so long as they are reasonable in time, area, and line of business. Fla. Stat. § 542.335(1).
A court shall not enforce any non-compete agreement that is not in writing and signed by the person against whom enforcement is sought. Fla. Stat. § 542.335(1)(a).
Sections 542.335(1)(b) – (e) broadly mandate that the person seeking enforcement of a restrictive covenant plead and prove: i) the existence of one or more “legitimate business interests”; and ii) that the contractually specified restraint is “reasonably necessary” to protect such interests. Enforcement is only available to the extent it is reasonably necessary to protect the interest.
Section 542.335(1)(b) identifies a non-exhaustive list of \"legitimate business interests”:
- Trade secrets, as defined in § 688.002(4), Fla. Stat.;
- 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; iv. 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; or c) a specific marketing or trade area; or
- Extraordinary or specialized training.
Violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. § 542.335(1)(j). The presumption is rebuttable.
Sections 542.335(1)(d) provides a list of presumptions as to reasonableness of durations of restrictive covenants in different contexts. Again the presumptions are rebuttable. Specifically, Section 542.335(d) expressly provides that:
- In the case of a restrictive covenant sought to be enforced against a former employee, agent or independent contractor, a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.
- In the case of a restrictive covenant against a former distributor, dealer, franchisee, or licensee of a trademark or service mark, a court shall presume reasonable in time any restraint 1 year or less in duration and shall presume unreasonable in time any restraint more than 3 years in duration.
- In the case of a restrictive covenant sought to be enforced against the seller of all or a part of: a) the assets of a business or professional practice, or b) the shares of a corporation, or c) a partnership interest, or d) a limited liability company membership, or e) an equity interest, of any other type, in a business or professional practice, a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.
- In the case of a restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less and shall presume unreasonable in time any restraint of more than 10 years.
Once the party seeking to enforce a restrictive covenant establishes a “legitimate business interest” and proves that the restriction at issue is “reasonably necessary” to protect that interest, the burden shifts to the party opposing enforcement to establish that the restriction is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests.” Section 542.335(1)(c).
Under Section 542.335(1)(c), if a court finds that a restriction is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest(s) at issue, that court cannot simply refuse to enforce the restrictive covenant in its entirety. Rather, Section 542.335(1)(c) mandates that, upon making such a finding, “a court shall modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.”
Section 542.335(1)(f)(1) states that a court “shall not refuse enforcement” of a restrictive covenant on the grounds that the party seeking enforcement is a third-party beneficiary where the restrictive covenant expressly identified the party as a third-party beneficiary and expressly stated that the restrictive covenant was intended for the benefit of that party. Section 542.335(1)(f)(2) states that a court “shall not refuse enforcement” of a restrictive covenant on the grounds that the party seeking enforcement is an assignee or successor where the restrictive covenant expressly authorized enforcement by such parties. See, DePuy v. Orthopaedics, Inc. v. Waxman, 95 So. 3d 928 (Fla. 1st DCA 2012) (provision that rights and obligations of the employer \"shall inure\" the employer's assignee was sufficient to constitute express authorization of enforcement by assignee as required by non-compete statute.)
In contrast to an asset purchase, neither a 100 percent purchase of corporate stock, nor a corporate merger or name change, affects the enforceability of non-compete agreements. Corporate Express Office Products v. Phillips, 847 So. 2d 406 (Fla. 2003). In other words, an express statement that the restrictive covenant is enforceable by an assignee or successor is not necessary in a stock purchase, but necessary in an asset purchase. See, e.g., Wolf v. James G. Barrie, P.A., 858 So. 2d 1083 (Fla. 2d DCA 2003) (non-compete was unenforceable since the predecessor sold its assets to the successor which required the employee’s consent to a transfer of the non-compete.)
In determining the enforceability of a restrictive covenant, Section 542.335(g) expressly provides that a court shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought, may consider the fact that the enforcing party no longer continues in the line of business unless that resulted from the violation. That same section mandates that the court shall consider shall consider all other pertinent legal and equitable defenses, and the effect of enforcement upon the public health, safety, and welfare. However, the court may not refuse enforcement on the ground that the contract violates public policy unless the public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interest or interests established by the person seeking enforcement of the restraint. The court is expressly precluded from employing any rule of construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract. While the statute contemplates that the court shall enforce the restrictive covenant through temporary and permanent injunctions, it expressly precludes enforcement absent an injunction bond even in the presence of language waiving the bond. Section 542.335(j).
The statute also permits but does not mandate the award of attorneys' fees and costs to the prevailing party, even in the absence of a contractual provision authorizing such an award of attorney’s fees and costs to the prevailing party,
III. Basic Drafting Considerations
Consider each of the following:
- Unilateral / bilateral
- Covenants of Confidentiality
- Covenants of Non-Competition
- Independent covenants
- Third Party Beneficiary/ Assignee
- Survival of obligations after termination
- Cumulative Remedies
- Liquidated damages
- Integration clause
- Choice of Law
- Incontestable on account of fraud
- Works for hire
- Waiver of Jury Trial