Eleventh Circuit Weighs in on Florida Non-Compete Law

Florida law, specifically section 542.335, Florida statutes, generally authorizes courts to enforce non-compete and other post-employment restrictive covenants, provided the agreements are in writing and signed by the employees against whom enforcement is sought, are reasonable in time, area, and line of business, and are supported by one or more legitimate business interests supporting the restrictive covenants. 

Section 542.335 is fairly detailed.  The statute defines what a reasonable time period is (it depends on the nature of the restrictive covenant), it lists several legitimate business interests, and it even addresses potential defenses.  For example, it states that the court "[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.".

Still, section 542.335 leaves several issues unaddressed, leaving the courts to sort them out.  Several of those issues are addressed in a 48 page opinion issued recently by the Eleventh Circuit Court of Appeals in Proudfoot Consulting Co. v. Gordon (11th Cir., July 30, 2009).  The Eleventh Circuit affirmed the district court's injunction, but reversed the $1.66 million damages award to the former employer.

Here are some key points to take away from the court's decision:

  • Where a non-compete covenant does not contain a geographic limitation, the court can supply a reasonable geographic scope.  And where, as here, the employee had been assigned to a territory that included all of North American and Europe, this geographic area is reasonable.
  • The court expressed doubt that a broad non-compete agreement that prohibits the former employee from working for a competitor, irrespective of which clients he is serving, would be reasonably necessary to protect an employer's interest in the relationships that the former employee developed with its clients. 
  • The court also expressed doubt that such a broad non-compete agreement would be reasonably necessary to protect client-specific confidential information, if restrictions that prevent the employee from contacting, or working for, those clients would be sufficient to protect that information.
  • On the other hand, the court stated that where an employee has access to confidential business information crucial to the success of the employer's business, the employer has a strong interest in enforcing a covenant not to compete, irrespective of whether the employee improperly retains and uses that information in his new employment. But the court noted that it is unclear under Florida case law precisely when confidential information will justify a broad non-compete covenant.  Is it sufficient that the employee be in a position at his new employer to use the former employer's confidential information?  Or must the former employer meet the higher burden of proving that disclosure of the confidential information by the employee would be inevitable in the employee's new position?  The court declined to answer this question, finding that under the facts of this case, where the employee had actually retained some of his former employer's confidential business information, the potential disclosure of that information to his new employer justified the enforcement of the non-compete covenant.
  • It is not necessary that the former employer prove that the employee intentionally breached the restrictive covenants at issue in order to receive injunctive relief.  The employee's good faith, reasonable belief that he is not in breach of a restrictive covenant is no defense.
  • With respect to damages, the fact that the new employer profits from a breach of its employee's non-compete agreement with his former employer is irrelevant absent a finding that the employee directly caused his former employer to lose profits.  "Damages for breach of a non-compete are intended to make the prior employer whole, not to punish employees."  Furthermore, "disgorgement of profits earned is not a remedy for breach of contract," especially where the new employer is not even a party to the litigation.

 

 

Does Hiring an Employee Under a Non-Compete Agreement with a Competitor Constitute Tortious Interference?

When a former employee is in violation of a non-compete agreement, the former employer often files suit not just against the former employee for breach of contract, but also against the new employer for tortious interference.  Under Florida law, the elements of a tortious interference claim are as follows:

(1) the existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the
defendant; and (4) damages to the plaintiff as a result of the breach of the relationship.

The Second District Court of Appeals' recent decision in Fiberglass Coatings v. Interstate Chemical, Inc., Case No. 2D08-1847 (Fla. 2d DCA, February 27, 2009), illustrates an interesting defense to a tortious interference claim. 

Fiberglass Coatings, Inc. (FCI) had a non-compete agreement with its salesman Robert Hutchens.  Hutchens left FCI to work for a competitor, Polymeric.  Hutchens left Polymeric after a short time to work for another competitor of FCI's, Interstate Chemical, Inc.  While at Interstate, Hutchens allegedly solicited FCI's customers.  FCI filed suit against Interstate for tortious interference.  On a motion for summary judgment, Interstate argued that FCI could not meet the causation element of its tortious interference claim because Hutchens was predisposed to breaching his non-compete agreement, as evidenced by Hutchens' employment with Polymeric.  The trial court agreed with Interstate, concluding that Interstate did not cause or induce Hutchens to breach his non-compete agreement.

The Second DCA affirmed, citing Florida case law and the Restatement (Second) of Torts:

Causation requires a plaintiff to "prove that the defendant manifested a specific intent to interfere with the business relationship." [Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Fla., Inc. 832 So. 2d 810, 814 (Fla. 2d DCA 2002) (citing Tamiami Trail Tours, Inc. v. Cotton, 463 So. 2d 1126, 1127 (Fla. 1985))]. No liability will attach unless it is established "that the defendant intended to procure a breach of the contract." Id. " 'One does not induce another to commit a breach of contract with a third person under the rule stated in this Section when he merely enters into an agreement with the other with knowledge that the other cannot perform both it and his contract with the third person.' " Martin Petroleum Corp. v. Amerada Hess Corp., 769 So. 2d 1105, 1107 (Fla. 4th DCA 2000) (quoting Restatement (Second) of Torts § 766 cmt. n (1977)). As noted by the Fourth District, Florida follows this section of the Restatement in these circumstances. Id.

Under this prevailing case law, we conclude that the circuit court did not err in granting summary judgment under the "employment" theory of liability set forth in paragraph 29 of the amended complaint. As explained by comment n of the Restatement (Second) of Torts, section 766, Interstate merely entered into an employment agreement with Hutchens knowing that he could not honor his covenant not to compete with FCI and at the same time work for Interstate.

The takeway from this case is that, absent evidence that the new employer induced the former employee to violate his non-compete agreement, merely hiring an employee whom the employer knows to be in violation of a non-compete agreement may not be sufficient to sustain a tortious interference claim under Florida law. 

Having said that, it should be noted that the Second DCA did not let Interstate completely off the hook.  Because Hutchens had allegedly solicited FCI's customers, the court held that Interstate could be held liable for tortious interference under a "solicitation of customers" theory.  In other words, although Interstate may not have crossed the line in hiring Hutchens despite his non-compete agreement, it may have crossed the line by inducing him to solicit FCI's customers in violation of that agreement. The court therefore affirmed in part, and reversed in part, the trial court's summary judgment order.

Third DCA Reverses Injunction in Non-Compete Case

Florida's Third District Court of AppealUnder Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old. 

But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008). 

Zupnik had signed a two-year employment contract with All-Florida.  The contract provided that "during the Employment Term and within twelve (12) months from the termination of said term, he or she will not directly or indirectly … compete against ALL FLORIDA, within a fifty (50) mile radius of where ALL FLORIDA then engages in business[.]" The contract further provided that "[a]t the expiration of this two (2) year contract, the employee can exercise an option to remain in ALL FLORIDA’S employ as an at-will employee."  But the contract did not contain language specifying that the restrictive covenants would continue beyond the two-year term if Zupnik remained an at-will employee after the two-year term expired.

After the expiration of the initial two-year term, Zupnik remained an All Florida employee for an additional two years, but the relationship was not formalized in a written document.  Zupnik then formed his own company intending to serve his long-standing customers.  All-Florida sued Zupnik and the trial court entered an injunction enforcing the non-competition covenant.  The Third DCA reversed.  Citing its decision in Sanz v. R.T. Aerospace Corp., 650 So. 2d 1057 (Fla. 3d DCA 1995), the court held that "post-termination restrictions expire upon the termination of an agreement for a specific term, even if an employee remains an at-will employee after the term of the written agreement expires."

For employers, the Zupnik case highlights the importance of drafting non-competes and other restrictive covenants carefully.  Where an employment contract is for a specified term (e.g., two years), employers should include language in the contract which provides that the restrictive covenants contained in the contract continue beyond the specified term if the employee remains an at-will employee after the term has expired.   

Fourth DCA Reverses Ex Parte Injunction in Non-Compete Case

A trial court should not have entered a temporary injunction enforcing a non-compete agreement against a former employee on an ex parte basis, i.e., without notice to the employee, according to the Fourth District Court of Appeals in a recent decision, Bookall v. Sunbelt Rentals, Case No. 08-26291 (Fla. 4th DCA, December 3, 2008). 

The employer, a company that rents construction equipment, employed the former employee until February 7, 2008, under a written agreement containing a non-compete and non-solicitation provision. Shortly after the employee resigned, he began to work at a competing company. Upon discovering this, the employer sent the former employee a letter advising him of the breach of the agreement. The former employee’s counsel responded that the employee understood and would comply with his obligations under the agreement.

Upon learning that the former employee continued to work for the competitor, the employer filed a verified complaint with supporting affidavits and an ex parte emergency motion for temporary injunction. The motion sought a temporary injunction against the former employee and the competitor based on the noncompete and non-solicitation provisions of the employment agreement.  The duty judge assigned to the case entered the temporary injunction. 

In its opinion, the Fourth DCA noted that under the Florida Rules of Civil Procedure, a temporary injunction "may be granted without written or oral notice to the adverse party only if: (A) it appears from the specific facts shown by affidavit or verified pleading that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (B) the movant's attorney certifies in writing any efforts that have been made to give notice and the reasons why notice should not be required."  Furthermore, "[e]very temporary injunction granted without notice . . . shall define the injury, state findings by the court why the injury may be irreparable, and give the reasons why the order was granted without notice if notice was not given." See Fla. R. Civ. P. 1.610(a). 

According to the Fourth DCA, the injunction suffered from a "fatal defect": it failed to give the reasons why the order was granted without notice.  The court noted that "[t]his deficiency could have been cured if the employer articulated in its complaint or motion reasons why notice should be dispensed with....Unfortunately for the employer, neither the complaint nor the motion cured the deficiency in this case."

One lesson from the Bookall decision is clear: follow the civil procedure rules carefully.  The rules are just that - rules - not guidelines or suggestions.  The employer's and the court's failure to articulate why the order was granted without notice required a reversal of the injunction order under a plain reading of Rule 1.610(a). 

One might surmise that there was no good reason why notice was not given to the former employee.  After all, the opinion notes that the former employee was represented by counsel.  How hard is it to fax, email and/or call opposing counsel before a hearing, even on an emergency motion?

But perhaps the former employee's counsel was on vacation or otherwise unavailable to receive notice of the hearing.  In that case, an ex parte injunction may have been appropriate, and the employer's and the court's failure to state why the order was granted without notice a mere oversight.

However, even where an ex parte injunction is appropriate, employers and their counsel should be aware that it may be short-lived.  Under Fla. R. Civ. P. 1.610(d), "[a] party against whom a temporary injunction has been granted may move to dissolve or modify it at any time. If a party moves to dissolve or modify, the motion shall be heard within 5 days after the movant applies for a hearing on the motion."  Thus, if a court enters a temporary injunction on an ex parte basis, the employer's counsel should clear his calendar for the next week.  The employee is entitled to a file a motion to dissolve and obtain an expedited hearing, and he may stand a good chance of getting the injunction modified or dissolved entirely once he tells his side of the story. 

 

Fourth DCA Reverses Denial of Injunction in Non-Compete Case

In a recent decision by the Fourth District Court of Appeals, USI Insurance Services of Florida, Inc., v. Pettineo, Case No. 4D08-303 (July 16, 2008), the appellate court reversed the trial court's denial of a temporary injunction in a non-compete case filed by the buyer of an insurance agency.  The decision is noteworthy for a few reasons:

First, it states explicitly, in a way that few appellate court decisions do, that section 542.335, which replaced section 542.33, "places a substantially smaller burden on the party establishing the need for injunctive relief and shifts some of the burden on the defending party."  The court then neatly summarizes the burden-shifting scheme under the "new" statute (which is now more than a decade old but is still frequently misconstrued by trial courts). 

Second, the decision notes the distinction between a non-compete provision in an asset purchase agreement and one that is incidental to an employment agreement.  In the former case, the buyer has a particularly strong claim to enforcement of the non-compete agreement, "to enter the field of competition unhampered by the adverse influence of the seller."  The court even goes as far as quoting a 1931 Florida Supreme Court decision, Massari v. Salciccia, 136 So 522, 524 (Fla. 1931), for the proposition that "[p]arties to the sale of a business are free to forge agreements 'which have for their object the removal of a rival and competitor in a business.'”

Third, the court notes that an injunction can be entered against those who are not parties to a non-compete agreement as long as they receive notice and an opportunity to be heard.  The court cites its own decision in Leighton v. First Universal Lending, LLC, 925 So.2d 462, 6465 (Fla. 4th DCA 2006),  which notes that "an injunction may bind non-parties identified with parties in interest, in privity with them, represented by them, or subject to their control."

Third DCA Rejects "Strict Liability" in Noncompetition Case

Third District Court of AppealsSection 542.335, Florida Statutes, generally permits courts to enforce noncompetition agreements that are reasonable in time, area, and line of business, and that are supported by a legitimate business interest. 

In drafting such agreements, employers often attempt to prohibit their former employees from competing “directly or indirectly” with them. But what is “indirect” competition, and can an employer actually prohibit it?

A recent decision by the Third District Court of Appeals provides some guidance on these issues. In Air Structures American Technologies, Inc. v. Buitrago, Case No. 3D07-2648 (Fla. 3d DCA, June 18, 2008), Plaintiffs Air Structures American Technologies, Inc. and Dan Fraioli sued defendant German Buitrago, alleging that Buitrago had breached his noncompetition agreement with his former employer, Air Structures. During trial, the plaintiffs and Buitrago entered into a settlement stipulation which took the form of a new three-year noncompetition agreement.

Several months after expiration of the three-year term, the plaintiffs filed a motion alleging that Buitrago had breached the agreement prior to the expiration of the three-year term. All parties moved for summary judgment. The trial court granted Buitrago’s motion, and the defendants appealed.

Paragraph four of the settlement stipulation prohibited Buitrago from “soliciting or competing, directly or indirectly, with the plaintiffs for anyone on a customer list attached to the settlement stipulation.” Buitrago subsequently supplied goods to a manufacturer, Johnson Marcraft, who resold them to someone on the prohibited list, who resold them to the ultimate customer.  Johnson Marcraft submitted an affidavit stating that by company policy, the company would not disclose to a supplier, such as Buitrago, the identity of Johnson Marcraft’s customers.

In other words, Buitrago did not know, and had no reason to know, that Johnson Marcraft would resell the goods to one of the companies on the plaintiffs’ customer list. Nonetheless, he did indirectly compete with the plaintiffs in apparent violation of the settlement stipulation. The issue in the case was whether plaintiffs were entitled to enforce the stipulation’s prohibition on indirect competition under these facts.

The Third DCA said no:

We agree with the trial court that the provision on indirect sale necessarily includes a knowledge requirement, such that the defendant knew or reasonably should have known that the indirect sale would reach a person or entity on the prohibited list. We agree with the trial court in rejecting the plaintiffs’ argument that this was a "strict liability" provision such that the defendant would be liable even if the defendant did not know, and could not reasonably have known, that the resale would reach a person or entity on the prohibited list.

The take-away from this case is that employers must be careful in drafting noncompetition agreements to ensure their enforceability. A clause that purports to prohibit “indirect competition” will only be enforceable to the extent that it is reasonable. And as the Buitrago case suggests, a prohibition on indirect competition that the employee has no reason to know about is not likely to be deemed reasonable.

Section 542.335 Legislative History Available Here

I recently visited Nova University Law Library's microfiche room because my firm was litigating a tricky issue under  section 542.335, Florida Statutes, and I couldn't find the legislative history on Lexis, Westlaw, or even through a Google search.  (As you may know, section 542.335 is the statute that governs the enforceability of non-compete agreements and other restrictive covenants entered into between employers and their employees or independent contractors.) So, in an environmentally conscious effort to save you a trip to the library and conserve fuel, I am posting the legislative history here