What Is a Non-Compete Agreement?
What is a non-compete agreement?
A non-compete provision, often referred to as a "covenant not to compete," is a specialized type of restrictive covenant utilized in many employment contracts. Generally speaking, it is a contractual clause that prevents employees or independent contractors from competing with their employer after the employment has come to an end. Non-compete agreements typically restrict the employee or contractor from working for a competitor or starting a competing business, usually for a period of time ranging anywhere from a few months up to several years. The primary reason that employers use non-compete clauses in employment contracts is to ensure that former employees do not take confidential and proprietary business information to a direct competitor. Through a non-compete agreement, an employer can contractually prohibit a former employee from using trade secrets or other confidential information as the basis for their new business or their new position with a competitor . While non-compete clauses are fairly common, most people do not realize that they are of limited enforceability in Florida. With most standard employment contracts, including agreements with employees and independent contractors, non-compete clauses are generally just one of many types of restrictive covenants. While the most commonly used restrictive covenant is the non-compete clause, there are actually quite a few other provisions that could be included in an employment contract to track a similar purpose. These other types of restrictive covenants include non-solicitation clauses, hiring restrictions, confidentiality agreements, and non-disclosure agreements. Although restrictive covenants can be included in any type of employment contract, they are not typically contained in employment contracts with government employees. Given the large volume of government personnel in the State of Florida, this exclusion means that it is not unusual for a sizeable portion of Florida’s work force not to be bound by non-compete clauses.
Legal Principles in Florida
Florida non-compete agreements, which are also referred to as restrictive covenants, are controlled by Florida Statute 542.335. These statutory provisions are considered "special" statutes that must be followed without ignoring the requirements in Chapter 542. In other words, even though a non-compete agreement is a contract between two or more parties, the courts in Florida will not enforce a non-compete agreement that does not comply with this statute. Legal practitioners should remember that regardless of whether there is a restrictive covenant at issue, the most critical part of the statute is what it does not say. While many states have "blue penciled" the overly burdensome portions of the restrictive covenant in order to limit the agreement’s restrictions on the employee, Florida does not allow "blue penciling" of the provisions of a restrictive covenant where it can be avoided by eliminating a portion of the restrictive covenant instead of re-writing the remaining provisions. In other words, if the restrictive covenant can be re-written by deleting a word or phrase, the courts can do so. However, if that cannot be done, the courts will not "blue pencil" the restrictive covenant, but strike the restrictive covenant in its entirety. This is troublesome for employers, and because of this willful judicial disregard of a non-compete agreement, they must be carefully drafted from the outset, taking into consideration the dispute resolution provisions in Chapter 54. If the judge does not have the ability to modify the agreement in question, the agreement might not be enforceable. Further, Florida courts will not enforce a non-compete agreement where it extends beyond the duration of employment. Florida courts consider and evaluate non-compete agreements on a case-by-case basis upon hearing evidence in a specific case. In Harris v. HR Options, the court held: the trial court "must" conduct an evidentiary hearing . . . to determine "whether, in light of the totality of the circumstances," the restriction is "reasonably necessary to protect" a legitimate business interest. However, the Florida Supreme Court held a restrictive covenant that did not even require an evidentiary hearing is invalid under Section 542.335. Horizontal Bldg.Asociate v. Granat, 737 So.2d 1112(Fla. 4th D.C.A. 1999). The Florida District Courts of Appeals have taken this language into consideration and tended to hold that where an evidentiary hearing is not previously held, the restrictive covenant is per se invalid. See South FloridaSurgical Clinic v. Perkins, 826 So.2d 458 (Fla. 4th D.C.A. 2002) (per curiam). This means the Florida courts will likely void a non-compete agreement where one party attempted to enforce the agreement, without first holding a hearing. While drafting a Florida non-compete agreement can be difficult, it is essential to have a well thought out restrictive covenant from the beginning to avoid problems and potential breaches down the road.
Enforceability Requirements
Florida courts closely scrutinize whether a non-compete agreement is reasonable. The reasonableness of the restriction is based on whether the non-compete agreement protects a legitimate business interest; and, the temporal and geographic scope of the restriction in relation to the protected legitimate business interest.
With regard to time, a period greater than ten (10) years is per se unreasonable. Palm Beach County v. Horizon Estates, Inc., 371 So.2d 153, 154 (Fla. 1979)(holding twenty (20) years for a closed landfill was arbitrary and unreasonable since "there was no logical basis for a twenty-year limitation"). A five (5) year period has previously been held unreasonable for both a former employee (McNeal v. Lubow Machine & Repair, Inc., 651 So.2d 691, 692 (Fla. 4th DCA 1995); Baker v. ENT Surgery, P.A., 912 So.2d 653, 654 (Fla. 1st DCA 2005)) and a former employer (Baker, supra). A five (5) year period may be reasonable, however, when the former employer showed, by means of a jury instruction, that it was reasonable under the circumstances. See Rubex, Inc., v. Adams, 476 So.2d 1342 (Fla. 5th DCA 1985).
Generally, a geographic area which encompasses the entire State of Florida is excessive. See Freirich v. Paul Revere Life Ins. Co., 566 So.2d 821, 825 (Fla. 5th DCA 1990) ("[a] geographic limitation of two counties, such as Pinellas and Hillsborough have been found reasonable. The limitation of a twelve-state area has not."). The geographic scope of a non-compete agreement, however, may be upheld as reasonable where it is linked to business connections furthering an employer’s legitimate business interest. See, e.g., Promark Retail, Inc. v. Pollo Tropical, Inc., 564 So.2d 1237, 1239 (Fla. 3d DCA 1990) (upholding a non-compete agreement preventing a restaurant manager from operating a restaurant with similar food concepts or serving as a consultant for any restaurant within fifteen (15) miles of the restaurants, stores or units operated by the employer in a five (5) state region). Florida courts also recognize that an employer’s use of its marketing strategy and customer contacts can support a non-compete agreement which places the former employee in competition with the employer. Id.; see also Lewis v. North Am. Sur Agency, Inc., 392 So.2d 1008, 1011 (Fla. 4th DCA 1980)(whereby customer contacts and relationships were sufficient to support a non-compete agreement).
Common Mistakes
One common pitfall encountered by employers is an attempt to enforce an overly narrow limitation period or geographic restriction in the enforcement of their non-compete agreements. A Florida non-compete agreement must be "reasonable in time, geographic restrictions and line of business" in order to be enforceable. Attempting to enforce a time restriction of less than six months or less than 10 miles is not typically reasonable absent unusual circumstances and should be avoided. See, e.g., Electra v. O’Shaughnessy, 84 So. 3d 405 (Fla. 3rd DCA 2012)(finding non-compete restrictive of a 2 year term covering the entire United States to be reasonable). Additionally, an employer’s failure to clearly set out its trade secrets or confidential information in its prohibits the employer from seeking enforcement of those terms. See, e.g., Sworn v. Gator Freightways, 25 Fla. L. Weekly D294 (Fla. 3rd DCA 2000)(burden is on the employer to identify the trade secret information it desires to protect). Parties typically fail to consider how a non-compete agreement may affect the vesting of stock options, the earn out of bonuses and payments of deferred compensation. For example, an employer may have a significant amount of equity deferred compensation set to vest years into the future that may be lost through the operation of a non-compete provision. In these cases, the employer would be wise to provide for continued or accelerated deferred compensation in the circumstances where an employee’s trade secrets have not been misappropriated and exits the company by mutual consent.
Modifying or Contesting Agreements
Florida courts favor the modification of overbroad non-compete agreements as a method of enforcing such agreements. Under Florida Statute Section 542.335(1)(c), restraints that are too broad in any respect may be amended by the court if necessary to render the restraint valid and enforceable.
But, to what extent can an agreement be modified? If a court determines that the restriction on time, scope or geography is overbroad, the court will modify the restriction to "be no more extensive than necessary to protect the legitimate business interest" of the party seeking enforcement. Fla. Stat. ยง 542.335(1)(c). Consequently, Florida courts do not require the offending provision of the non-compete agreement be stricken. Instead, the offending provision can be reformed and modified to make it reasonable. In absence of a express and specific request or demand for modification at the time of trial , a party seeking to challenge the enforceability of an overbroad covenant cannot later argue on appeal that the covenant is overbroad but should be modified.
Likewise, Florida law provides for a bidirectional exception to restraining orders. For restraining orders, Florida law provides that any person whose interests are affected by the action must be joined as parties, or it must be shown that the interests of those who are not joined are not so disposed toward the action as to forfeit their rights. Under Florida Statute Section 542.335(1)(e), when a court enters an order granting a temporary injunction or restraining order, the court simultaneously shall set the time and manner for filing a motion to dissolve or modify the order. A party may, within 10 days of entry of the order, file a motion (with supporting affidavits) to alter or amend the order or to vacate or dissolve the order. The order remains in effect until the date that the time for filing the motion expires or until the motion is decided by the court, whichever occurs first.
Practical Resources for Employers and Employees
Employers should carefully evaluate their need for a non-compete agreement to restrain a former employee. A non-compete agreement is only one tool to safeguard an employer’s competitive interests, and the "pro" side of the balancing test must outweigh the "con" side.
If an employer decides it needs a non-compete agreement, it should ensure that the secret, confidential or proprietary information it wants to protect is fully documented in writing. This can include an employee handbook, policies, procedures, pricing lists, customer lists, product specifications, all manner of training materials and more.
Broadly speaking, employers should restrict their agreements to activities that are reasonably related to the legitimate business interests being protected. Overreaching agreements that prohibit employees from using information or skills they learned outside the workplace or from working in legitimate competition for future employers may be deemed overbroad, even if the agreement is otherwise enforceable.
To the greatest extent possible, leave the non-competition provisions to qualified counsel. Even then, without specific state legislation, courts often consider the issue of restraints on trade under the general anti-competitive practices provisions of the Federal Trade Commission Act. To many courts, the state Enforcement Statute provides only a floor of protection of legitimate business interests and the FTC Act provides a ceiling on anticompetitive restraints.
It is important to understand that all restraints on trade are illegal to some degree under the FTC Act. Reasonable restrictions are only protected under the FTC Act if they do not threaten to substantially lessen competition or harm anyone.
With respect to considerations of time and territory, courts often consider the employee’s prior experience, location and the nature of the industry. The employee’s former position may heavily influence the scope of the post-employment restraint that is reasonable.
If an employer is contemplating the use of non-compete agreements, it should look to its competitors for their use or lack of use to gauge normative views in the industry and its position within the industry’s market.
For employees, a non-compete agreement is a material term of the employment relationship that should be fully evaluated before being signed. While broader non-compete agreements may render employees unemployable in a competitive market, employees are frequently free to be employed by a new employer if their non-compete agreement is limited in scope.
The employee who freely agrees to sign a non-compete agreement has, in effect, given up the priceless ability to freely compete in all legitimate endeavors. Therefore, the employee should read and understand each portion of the document he/she is signing. If the document is fuzzy or confusing on a major issue, try to negotiate a different provision or provision language; no matter what is at stake, the time to do that is now.
Employees should never feel pressured to sign a non-compete agreement. Employees should seek to have the opportunity to read and understand the agreement, including time to seek independent legal advice.
If an employer observes that an employee is trying to obtain a competitive advantage through what may be identified as a competitive business practice, the employee may already be disloyal to the employer’s interests and may have earned the benefit of the doubt.
Career and Business Development Considerations
In addition to the harms of blue-penciling, Courts have also highlighted how the failure to include a time-limit on a non-compete agreement can effectively "stifle an employee’s career growth, create disincentive for innovation, and drastically affect the interest and opportunity for advancement of employees" in Florida. See generally, Conopco, Inc. v. McDonald & Assocs., Inc., 5 So. 3d 1285, 1288 (Fla. 2nd DCA 2009) ("Thus, while the trial court may have been correct in its view that the purpose of a covenant is to allow for the speedy reprogramming of the computer system in order to prevent the loss of clients, it misread the noncompetition agreement itself when it failed to recognize that, without a time limit, a violation could extend indefinitely . "). Indeed, limiting the duration of employment restrictions for former employees is one of the many benefits of Florida’s law on blue-penciling non-compete agreements. Former employees that are impacted by overly broad non-compete agreements may be reluctant to leave otherwise desirable employment opportunities not wanting to find themselves in another similarly situated but unenforceable predicament in their future. For businesses, such takes away any competitive edge they otherwise would have enjoyed to attract the best and the brightest. Further, the burdens associated with enforcing an overbroad non-compete agreement may serve as a disincentive to innovation and growth overall.