What Exactly is a Noncompete Agreement?
A noncompete agreement is a type of restrictive covenant, a legally binding agreement between two parties in which one party agrees not to conduct the same or similar business as the other. Although they are most often used by employers to protect their business interests, noncompete agreements can be a tool for entrepreneurs to limit competition among certain businesses.
There are three main types of restrictive covenants:
As discussed in the blog, Protecting Trade Secrets with Non-Compete Agreements – Part One: A "Vanishing" Art Form, the purpose of a noncompete agreement is to prevent an employee from leaving the employer’s business and going to work for a competitor or starting his or her own business in the same or similar field that competes with the company. For example, consider an employee working as a laboratory technician at a company that manufactures medicinal drugs. The employee has been with the company for over five (5) years and has become familiar with the company’s primary products and its manufacturing process. Included in the employee’s compensation is training, certification, and licensing of the employee as a laboratory technician. During that time , the employee has developed a feel for the medicinal drugs being manufactured by the company and eventually separates from the company to start a new business that manufactures the same medicinal drugs, only cheaper, while employing a similar manufacturing process.
Without a noncompete agreement, the employee is free to engage in the same or similar business and can take the knowledge gained from his or her experience and apply it elsewhere. Conversely, employee non-compete agreements can also be used by a company to prevent a former employee from soliciting the company’s customers or clients. There are a number of other examples of noncompete agreements in different industries such as:
A noncompete agreement is a contract subject to state law and can only be enforced to the extent allowed by the state. In Florida, the noncompete agreement would have to fulfill its purpose, such as: protect a legitimate business interest, restrict the right to work in a particular business or industry, restrict the right to work in a particular geographical area, restrict the right to work for a period of time, and be reasonably necessary to protect the legitimate business interests stated in the agreement. An experienced Florida business attorney can explain other best practices for noncompete agreements.
The Legality of Noncompete Agreements in Florida
Florida, known for its flourishing job market and ever-growing economy, regulates noncompete agreements — popularly referred to as "covenants not to compete" — between employers and employees through the Florida Statutes. As noncompete agreements are disfavored under Florida law, a Florida noncompete agreement must be narrowly drawn so as to only afford protection to the legitimate business interests of the employer. For an employer to succeed in an injunction action enjoining a former employee from violating a noncompete covenant, the employer must do the following: (1) establish a legitimate business interest supporting the restriction, and (2) show that the described restraint is reasonably necessary to protect that business interest.
The following are a sample of permissible restrictive business interests under Florida Statute §542.335(b): Florida Statute §542.335 (c)(1) provides courts with a list of illustrative methods to protect the employer’s business interests. More specifically, the statute provides: A covenant not to compete may include any requirements necessary to protect an employer’s legitimate business interests, including without limitation any one or more of the following provisions that may be applied to the circumstances:
Among those provisions is Section 542.335(e) which permits public utilities to obtain, a rebuttal presumption if they demonstrate two things: (1) a danger of the loss of customers and equipment, plant, and materials held in the field; and (2) demonstrating a legitimate business interest arising from customer goodwill associated with the demand for their services in a specific market area.
"Reasonable time." Florida Statute §542.335(c)(1) also provides that a covenant not to compete is considered reasonable as to time if it is based on the time reasonably necessary for the employer, or those to whom the employer has assigned or transferred the business interest, to secure a comparable and similar business; while Florida Statute §542.335(c)(2) provides that a restriction on competition is reasonably necessary to protection an employer’s business or professional interest if it protects against actual or threatened action and the restriction bears a legitimate relationship to the interest protected.
"Reasonable geographic area." The statute allows restrictions to be limited to a specific geographical area in which the employee was previously employed provided (1) the employee has consented in writing to a restriction permitting such limitation, and (2) the geographical area is no broader than necessary to encompass the areas the employer has established a legitimate business interest. Florida Statute §542.335(c)(3). However, if the restriction on competition extends to the geographic area of a customer of the former employer if the employee established or maintained a relationship with that customer by virtue of employment, Florida Statute §542.335(c)(3) provides that the restriction is considered reasonable.
"Restricted period." The statute allows restrictions if they limit competition for a restricted period of time if the duration is no greater than necessary to protect a legitimate business interest. Florida Statute §542.335(c)(4). However, if the employee was a franchisee or dealer, Florida Statute §542.336(c)(4) provides that the restricted period of time may not exceed the greater of the time agreed to in the contract or three years.
Florida Statute 542.335(d) provides that a freestanding judgment in a breach of contract action based on the restrictive covenants may constitute prima facie evidence that the restrictions are reasonable in time, geographic area, and line of business, and provides a rebuttable presumption that they do not impose an undue hardship on the employee and that the restrictions are reasonable in scope, time, and area.
Pursuant to Florida Statute §542.335(j), a presumption exists that a covenant not to compete which contains an automatic renewal provision upon the employee’s continued employment no longer than the date on which the applicable contract for restrictive covenants terminates is enforceable in its entirety without necessitating another consideration to validate the renewal provision.
For purposes of a noncompete agreement, ‘legitimate business interest’ shall include, but not be limited to, the following: 1. Absolutely necessary to protect trade secrets, including lists of actual or potential customers and suppliers; 2. Customer, supplier, and services provider relationships; 3. Investor relationships; 4. Exclusive, tangible or intangible proprietary information; 5. Research and development; 6. Superior product sourcing and manufacturing; 7. Endorsements by customers in the form of case studies; 8. A substantial relationships with one or more prospective or existing customers, suppliers, distributors, or other business partners requiring specialized training, or expertise, unique to the employer.
As noted above, a well-written noncompete agreement should be narrowly tailored to protect the legitimate business interests of the employer, which should be set forth in the noncompete agreement itself.
Are Noncompete Agreements Enforceable in Florida?
In determining whether an agreement, clause or provision is enforceable, courts typically look at whether it serves a legitimate business interest. Florida law requires, in order to enforce a noncompete agreement, that the restraint be reasonably necessary to protect one or more legitimate business interests of the party seeking to enforce the noncompete agreement or clause. A noncompete agreement cannot contain restraints that are greater than necessary to protect those interests.
Courts will look at whether the restriction on activity is reasonable as to time. Reasonable time restrictions vary with circumstances. Six months is generally presumptively reasonable.
Courts will also look at whether the restriction on activity is reasonable as to area. Here again, reasonableness may vary with circumstances. Restriction to a 20-mile radius from the employer’s place of business has been considered reasonable in some cases.
We should note that parties can agree to what restraints are reasonable in their noncompete agreements.
The good news for employees is that mere economic or idiosyncratic preferences do not qualify as a legitimate business interest. At least one appellate court has held that an employee’s preference for employee status, rather than independent contractor status, does not constitute a legitimate business interest.
Most Frequent Issues and Litigation Surrounding Them
Florida’s noncompete agreements can face a number of challenges and disputes. As in many states, some of the most pernicious issues in Florida involve what courts perceive to be an unreasonable or overly broad restriction on geographic scope or length of restriction. The courts view these overreaches as harmfully interfering with the mobility of employees. Such legal dispute can result from the scope of the restricted activity that the employer prohibits under the noncompete agreement. A noncompete agreement that appears to have an excessively broad geographic area or restriction on activity may, if challenged, be found to be overreaching based on the circumstances of the parties and the nature of the sought after protection. Other challenges and disputes can originate from the language contained in noncompete agreements. Ambiguity in the language can raise issues as to whether the restricted activity is adequately described and thus sufficiently defined to justify the restrictions imposed. Courts are unlikely to provide any protection to an employer that attempts to avoid problems by relying on vague, ambiguous, or indefinite language in its noncompete agreements. Florida courts have found noncompete agreements- that restrain a "physician" to the extent they are "reasonably necessary for the protection of the employer". Florida Statute, section 542.335(1)(c). The Florida Supreme Court held in Baker v. Sizemore, 765 So. 2d 699 (Fla. 2000), that "the term ‘necessary’ requires a comparison of the hardship to the employer and the employee in order to determine the minimum restraint necessary." An employer should understand that their noncompete agreement must accomplish the purpose for which it was created while being reasonable.
How to Write an Effective Noncompete Agreement
A well-structured noncompete agreement is crucial for both employers and employees. It provides clear expectations, protects the employer’s legitimate business interests, and minimizes disputes. Here are some best practices for drafting a noncompete agreement.
Scope: The noncompete agreement should clearly define what acts or conduct are restricted. This may include not soliciting customers, not competing against the employer, or protecting trade secrets. A more narrowly tailored approach is often better received by a court, should enforcement be necessary.
Duration: The noncompete provision should have a reasonable duration. In Florida, noncompetes are typically enforced for one to two years. If an employer seeks to enforce a noncompete that extends beyond two years following termination of employment, the employer should be prepared to explain the need for the longer term.
Geographical Limitations: The provision should specify the geographical scope of the restriction. While a national scope may be appropriate for executives, a smaller geographic area is often more appropriate for other employees.
Noncompete agreements are governed by Florida Statutes §542.335. There, the Legislature recognizes that noncompete provisions are presumed valid if they are "no broader than necessary to protect" an employer’s legitimate business interests. The statute lists six legitimate business interests, including trade secrets, confidential information, valuable use information, extraordinary or specialized training or experience, employee relationships , and overall customer relationships.
Terms of the Agreement: The agreement should clearly stipulate that the terms of the noncompete provision shall survive after termination or expiration of the contract. An optional provision can state the parties’ agreement that the employer’s promise to provide proprietary information is not a sufficient consideration for the employee’s promises within the agreement.
A noncompete agreement should also be specific regarding which Florida substantive law applies. The agreement may be governed by the law of the state where the agreement was executed, where the employee resides, or where the employer resides. Parties to a noncompete agreement should be guided by the same principles that guide courts when enforcing noncompete agreements.
The Florida Supreme Court has previously held that:
The Florida Constitution does not guarantee the right to freely compete, nor does the legislature generally prohibit contracts in restraint of trade. Florida courts generally will enforce contracts with reasonable restrictions as to time, activity and territory where necessary to protect an employer’s legitimate business interests. What is "reasonable" is ultimately a question for the court to determine. In deciding whether a restriction is reasonable, a court will examine both the temporal and spatial scope, and what interest is protected by the restraint. The court then must weigh the hardship on the employee against the good to be attained by the enforcement of the restraint. In general, Florida courts have held that noncompete contract restraints of two years or less are not unduly burdensome, absent unusual circumstances.
Restraining a former employee from engaging in certain activities is an important aspect of a business’s rights. However, overbroad or unclear restrictions may render a noncompete agreement invalid. It is very important that the agreement be clear so that both parties understand their obligations under the contract.
Possible Alternatives to Noncompete Agreements
In some cases, there are legal tools and agreements that can replace noncompete agreements. These include nonsolicitation of customer agreements, nonsolicitation of employee agreements, confidentiality agreements, and the use of an LLC or corporation for the employment of the key employee.
Nonsolicitation of customer agreements prohibit a former employee from soliciting customers from the business for one or two years. The content of this type of clause is not controlled by statute, and does not need to be limited to customers with which the employee interacted or in the territory where the employee worked. Nevertheless, the company bears the burden of showing the reasonableness of the agreement. As such, on a case by case basis, courts are likely to find the agreement overbroad or unreasonable if it makes no effort to restrict the agreement to such customers. Absent a showing of actual damages, however, a violation of this type of clause may only result in a nominal award of money damages regardless of the length of the clause.
Nonsolicitation of employee agreements, which prohibit a former employee from soliciting the employees of his former employer, have much the same effect as nonsolicitation of customer agreements. Generally, such clauses should be limited to employees who were employed in the same line of business as the ex-employee, and/or worked with the ex-employee while employed by the company. Of course, such an agreement has value only if the business has other employees. This type of agreement, by its terms, only lasts for one year.
Confidentiality agreements are much narrower than noncompetition agreements. They merely prohibit a former employee from disclosing the secrets of the company during a period of time. Typically, such clauses are enforced for three to five years.
One thing to keep in mind about these agreements is that you may not be able to expand their reach through technology, and you also are limited in the geographic scope of protection. For example, there is a ruling in the case of MOSEY-VILLAGE IMMOBILIERE S.A., vs. HOGUE, 206 So. 3d 938 (Fla. 4th DCA Nov. 12, 2015) which held that an employee could not be restricted from accepting a job with a competitor in another country, because Florida law only permits noncompetition agreements that are limited geographically to Florida.
An alternative to noncompete agreements is to utilize an LLC or corporation to employ the key employee. In this scenario, the business would hire the employee as an independent contractor and then utilize a corporate shell (which it either owns or controls) that has the appropriate noncompete agreement, confidentiality agreement, nonsolicitation of customer agreement, and a nonsolicitation of employee agreement (if the company has other employees). This way, the key employee is not able to move the employee to a new location and open another business in competition with you.
Past Employment Litigation and Precedents
An interesting case is that of Coastal Surgical Supply Co., Inc. v. Parm Medical, Inc., 774 So. 2d 43 (Fla. 3d DCA 2000). In this appellate decision, the Florida Third District Court dealt with whether a non-compete agreement was enforceable when it was presented to an employee after he had been hired and immediately prior to his termination. The court held that "the trial court correctly painted the Employers1 as scoundrels [because] . . . [w]hen they first hired their salesman, [the Employers] failed to furnish Appellees with a copy of the non-competition agreement or otherwise inform them of its existence. . . . The scoundrels have not earned injunctive relief." The Employers ultimately lost because they waited too long to seek an injunction and the court opined that the delay indicated that the non-compete agreement was not necessary to protect business interests. As you can see, the case law in Florida dealing with non-compete agreements is extensive, and most of it goes back a while as well. For employers and employees alike, it is beneficial to review recent cases that impact and interpret non-compete agreements and consult with qualified employment law counsel regarding applicable laws and available remedies upon the breach of a non-compete agreement. This is especially true in Florida where the law is consistently evolving and provides significant leeway for judges’ discretion in drafting injunctions and awarding monetary damages for violations of non-compete agreements.
Tips for Employees on Noncompete Agreements
Employees in Florida should be particularly circumspect when entering into a noncompete agreement as they are governed under Florida law. The common law presumptively requires that an employer must provide some form of compensation in exchange for an employee restricting their right to work for a competitor after termination; however, Florida cases have held that simply remaining employed is sufficient "consideration."
If you are presented with an opportunity to sign a noncompete agreement, consider the following steps:
- Do not knowingly or unknowingly mislead your employer regarding your prior employment. Misrepresentations about your past can come back to haunt you if you leave your job and the agreement’s enforceability is challenged.
- Negotiate terms of the agreement before you begin employment . Your employer may change terms without telling you. You should always negotiate noncompete clauses with the advice of experienced counsel.
- Remember that your investment in the company (be it in the form of purchasing stock, stock options, and RSUs) will in all likelihood not be enough to save your noncompete from enforcement in Florida.
- Be willing to walk away from employment if the terms of the noncompete are too restrictive.
- Understand your compensation package before you sign your noncompete. Are you getting credit for a prior book? Are you being paid for portable business?
- You are not alone. Attorneys are available to help you decide whether to sign a noncompete agreement and, if you do, how to negotiate more employee-friendly terms.
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