What Are Non-Compete Agreements?
A non-compete clause is a provision in an employment contract or agreement that prohibits an employee or former employee from engaging in competition with their employer for a defined period of time after employment is terminated. Non-compete clauses may be used to prevent a company’s trade secrets or proprietary information from falling into the hands of a competitor and can help protect client lists, client contacts and other confidential information. Depending on the specific clause and the circumstances at issue , both employers and employees are sometimes at risk of exposure to liability due to non-compete agreements. Various state and federal laws apply to non-compete clauses, depending on the context, and may limit the scope of the non-compete to the protection of a legitimate competitive interest of the employer or entity seeking enforcement. In general, however, non-compete clauses are intended to prevent employees and employers from unfairly competing with each other after the employment relationship has terminated.
Enforceability of Non-Compete Agreements in Florida
The enforceability of non-compete clauses in the state of Florida is regulated by Florida Statutes §542.335. The statute is a relatively new addition to Florida law, having been enacted in 1996. The statute serves as a basis for which courts determine the legality of non-compete agreements.
Florida statutes §542.335(1)(c) lists the categories of "legitimate business interests" which a person may seek to protect with a non-compete agreement. Those "legitimate business interests" include:
• Trade secrets;
• Confidential information;
• Valuable confidential relationships with existing or prospective customers;
• Specialized training;
• Specialty services;
• Customer goodwill;
• Franchise agreements; and
• Employer goodwill.
Florida courts have consistently enforced contracts supported by one of the listed "legitimate business interests." However, not every interest listed in 542.335(1)(c) is enough to render a non-compete clause legal— it must serve a "legitimate business interest," which has often been defined as something which "may in some fashion adversely affect the business of the employer" if the employee were to leave the present employer for the competitor or in some way did business with the employee’s current customer.
While some court rulings have been vague on what constitutes a "legitimate business interest," they have also refused to limit the list of interests to those enumerated in the statute section 542.335. One such case, Shands Teaching Hospital v. Smith, upheld the analysis of the case Burk v. B-L Rests., Inc., which affirmed that "the illegitmacy of defendant’s competition with plaintiff is established by defendant’s unlawful conduct and the threatened injurious consequences."
In the Shands case, the Court upheld the "legitimate business interest" requirement enunciated by Burk by stating that an employer is protected against "businesses and activities which are proven to be of equal or greater value as those enumerated in the statute."
The Shands court went on to say that a "former employer may be able to show that a legitimate business interest of a former employer has been harmed by harm to goodwill if such harm can be attributed to an employee who has violated a covenant not to compete."
Thus, while Florida courts have reserved the right to classify "legitimate business interests" more broadly than the statute 542.335(1)(c) provides, they have not defined what legitimate business interests are. And as noted above, the court’s language in the Shands case seemed to be just a reiteration of the reasoning in Burk, rather than the articulation of a new categorical business interest.
However, regardless of which tests apply to cases assessing the legality of a non-compete clause, Florida courts have consistently refused to recognize the "six-month escape clause," where a former employee may work within a year without violating a prior agreement.
Enforceability Requirements
A non-compete clause must satisfy two requirements to be deemed reasonable in Florida: the clause must be reasonably necessary to protect the legitimate business interests of the employer and the scope of the restriction cannot be greater than necessary to protect these business interests. Florida Statutes § 542.335 provides a non-exhaustive list of circumstances that may constitute a legitimate business interest:
- Trade secrets;
- Valuable confidential business or professional information;
- Substantial relationships with specific, prospective or existing customers, patients or clients;
- Customer, patient or client goodwill;
- Intangible business value;
- Special training;
- A high risk of unfair competition from former employees who are subject to post-employment restrictive covenants, including large or established businesses that conduct substantial business in Florida and that have made considerable investments in specialized training and services; and
- Surviving a client or customer’s request for competitive information or for a "shopping list" of competitive information about the principal’s competitors whose number of employees in Florida is "minimal".
If a non-compete clause satisfies the two requirements set out above, it will probably be granted enforcement by the court. However, the reasoning behind the two requirements and the determination of whether or not a party has a legitimate business interest may be a contentious arena in litigation over the issue. For that reason, parties should contract with careful, precise language that both avoids litigation and is enforceable.
Exceptions and Limitations
Florida Statutes Section 542.335(1)(j) expressly prohibits a Florida court from enforcing a non-compete agreement against an employee or independent contractor unless that agreement is supported by a legitimate business interest. Further, a non-compete covenant is not enforceable under Florida law if the restraint it imposes is not reasonable in time or geographic applicability. The Florida courts, in cases that pre-date the codification of the common law restrictive covenants into Section 542.335, had held that to be entitled to enforcement, the employer must establish that the work or services sought to be restricted are related directly to the employer’s business. An employer also must show that the employee’s services or work in noncompeting business activities are sufficiently related to the employer’s commercial activities so as to support enforcement of the covenant. In other words, it must apply only to that portion of the employee’s activities which are directly related to and competitive with the employer’s business. See Central Florida Investments, Inc. v. Martin, 706 So. 2d 373 (Fla. 5th DCA 1998); Sugar Shack Real Estate, Inc. v. McGuire, 709 So. 2d 626 (Fla. 4th DCA 1998). The net effect of the courts’ holdings is that a covenant not to compete must be necessary for protection of an employer’s legitimate business interests in preventing an employee or independent contractor from immediately utilizing training, products or trade secrets that employee or independent contractor would possess following cessation of voluntary or involuntary employment or contracting relationship with the employer; or in preventing an employee or contractor from taking advantage of his or her established contacts and/or specialized training at a competing business.
In 1980, the Florida Legislature codified the common law restrictive covenants of nonsolicitation, noncompetition, nonrecruitment and confidentiality into Section 542.335, Florida Statutes. The statute revised the common law to require that the employers seeking to enforce restrictive covenants must demonstrate a legitimate business interest justifying the issuance of a restrictive covenant, the existence of which must be proven by a preponderance of evidence.
Effects on Workers and Businesses
For employees, non-compete clauses in Florida can create serious restrictions on their ability to seek new employment. Not only do they limit competition from former employees, providing an advantage to former employers, they also make it more difficult for some employees to change jobs, protecting potentially stagnant markets and prices. Another important consideration is the protection of confidential information, which both sides might agree must be kept from the public as long as it would be a competitive advantage to the former employer. However, as mentioned above, this does not have to affect the ability of either the employee or the employer to engage in business in the future .
For employers, the advantages of a non-compete clause are to secure the investment of their business in training employees and to provide a more secure business model in securing the advice, creativity and skill sets of employees by ensuring that these skills and know-how do not move to a competitor. It can also protect some of the inexpensive efforts of a business to develop unique products, services or competitive advantages that cannot be easily replicated by competitors. However, there are potential downsides for employers regarding issues of fairness and balance among employees, as well as how well drafted a non-compete clause is in actually protecting the business without inhibiting future business growth.
Both employees and employers should always consider the way in which the contract is worded and the specific terms that might apply. All employees are not equal, and what might be a fair tradeoff for one employee might not be for another.
Recent Court Rulings
It is important to know Florida’s recent legal developments as they regard the use and enforceability of non-compete clauses. Before the Florida Legislature passed section 542.335, a former employee could work for a competitor in nearly every instance and be largely free from legal restriction. There were few grounds for the successful injunction of a former employee selling a similar product or service. Since the passage of section 542.335, a company has many enforcement avenues it may utilize to protect its business. However, although Florida law is friendlier toward non-compete clauses than is a majority of states, a non-compete agreement is not necessarily conclusive upon an employee.
Legislators sought to make Florida employer-friendly by enacting section 542.335, which presumes covenants not to compete that are reasonable in time and area are lawful. Section 542.335(1)(i). Reasonable in this context is defined as "the restraint necessary to protect the legitimate business interest of the employer sought to be upheld by the covenant." Section 542.335(1)(c). Business interests include "existing parceled customer relationships, customer goodwill, extraordinary or specialized training, trade secrets, . . . substantial relationships with prospective or existing customers" and other interests that are sufficient to support equitable relief for possible future injuries. Section 542.335(1)(b). Thus, if an employee possesses a customer list, the rest of the business’ customers form a legitimate business interest of the former employer.
Courts take into account public policy in enforcing a non-compete clause. Policymakers decided that the cost to the public was less with the passage of section 542.335. A large employer contributing its resources can help bolster a state’s economic potential.
Due to the presumption of enforceability, preemptive counsel relating to non-compete agreements may be very effective.
Alternatives to Non-Compete Agreements
While non-compete agreements are permissible in Florida under certain circumstances, they are not the only legal instrument available to guard an employer’s business interests. Several other alternatives can offer the same or similar protection that non-competes do. Consider the following legal documents and approaches.
Confidentiality Agreements
A confidentiality agreement is a much more efficient tool for most employers worried about protecting sensitive information. While this type of agreement does not prevent employees from working elsewhere after the employment ends, it does legally bind the employees to keeping the proprietary information secret and can be enforced through injunctive relief (an order barring the former employee from using or being exposed to the information).
This legal tool may be a better choice for small businesses or those industries with less restrictive regulations. A confidentiality agreement also does not have to be limited in scope to protect only confidential information. Any provision in a non-compete agreement can be added and protected by a confidentiality agreement.
Carefully crafted job descriptions
By creating job descriptions that detail the duties, responsibilities and expectations of the position, the employer can build a legally defensible barrier to employees leaving the company. If there is a valid reason for the employee to leave the company, such as pursuing a career at a different level in the same field, the employer can avoid potential disputes.
More importantly, if the employee is discharged, the employer can show that the separation was for a specific reason, such as poor performance or missing skills, rather than because the employee is being groomed to move into a competitor’s position.
This tool is extremely efficient for employers. By identifying the roles and responsibilities of the position ahead of time, employers can determine if the candidate will be a good fit for the job and company. This can cut costs of hiring and training a subpar employee that may need to be terminated later.
Employment contracts that anticipate the future
Long-term business relationships between an employer and an employee fall under the purview of an employment contract. This legal tool can provide custom provisions designed for the specific needs of either the employer or the employee, making it a very flexible instrument.
For instance, a contract might prohibit the employee from working for a competitor for two years, unless the employer violates a specific obligation, such as failing to meet minimum sales numbers each month for a year. The contract would already define what the minimal sales numbers are, as well as how the employee and the employer can determine if these were met over the year.
Good record-keeping and vetting candidates
The most effective actions employers can take to protect against employees using any proprietary business knowledge to their own financial benefit is to carefully keep records of all internal changes, such as promotions or transfers. This record helps determine if a confidentiality agreement has been violated.
During the hiring process, employers should carefully vet the candidates, ensuring that no questionable applications slip through the cracks and that the employees are fulfilling their duties and responsibilities.
Some employers will stipulate that candidates that make false statements on their job applications will instantly be barred from employment. This protects the employer in the event the employee leaves the company, taking any trade secrets with them.
Consult an Attorney
Because non-compete clauses can be such a vital aspect of your business agreements with employees and independent contractors, it pays to speak to an attorney experienced in contract law if you are planning to write one or if you have been presented with one to sign. A skilled lawyer can help you determine whether the scope and terms are consistent with Florida law and whether it is in your best interests to sign the contract as is or make a counter-offer .
If you are writing the non-compete clause, you will want to provide thorough details about the geographical area in which the employee cannot work for a competitor, how long the agreement will be in force, the frequency with which the employee may contact customers or clients after leaving your business, the specific actions employees may not take on behalf of a competitor and any other restrictions or limitations you believe are essential.
If you have been presented with a non-compete clause from your employer, you may want to consult an experienced attorney who can help review the restrictions in the context of your particular field or dilemma and examine other legal agreements you may have signed that may influence this one. For example, did you sign a contract as part of a severance package or to receive a bonus that may negate the non-compete clause?