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Under 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.   

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Section 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.

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