Florida Court Reverses Preliminary Injunction on Restrictive Covenant

If you have followed this blog, then you likely already know that restrictive covenants are legal and enforceable in Florida.  You should also know that – although enforceable – restrictive covenants are strictly construed both with regard to their specific wording and with regard to the restraints set forth in Florida Statutes § 542.335.  Because of this, parties often initiate litigation to enforce restrictive covenants.  In many instances, heated proceedings lead courts to issue preliminary injunctions enforcing parties’ agreements to either keep a former employee from competing against a former employer for a limited period of time, or to keep a former employee from using the former employers’ trade secrets.

As usual with these restrictive covenants, the devil is in the details.  Which leads us to the recent decision of Zodiac Records Inc., et al. v. Choice Environmental Services (Fla. 4th DCA 2013).  The facts in Zodiac, although perhaps not unique, offer some insight into the often complicated analysis a restrictive covenant matter requires.  In a nutshell, Zodiac Records entered into a one-year consulting agreement with Choice Environmental in April 2008.  As part of the agreement, Zodiac agreed that for 36 months after the agreement terminated, Zodiac “would not compete with Choice by soliciting or influencing any of Choice’s customers to discontinue or reduce the extent of their relationships with Choice.” (See Zodiac.)  Zodiac also agreed to a 36 month confidentiality period to protect Choice Environmental’s trade secrets after the agreement terminated.

Zodiac’s principal consulted for Choice Environmental until he resigned in June 2011, at which point he formed a competing company and solicited Choice Environmental’s customers, among others.

Choice Environmental sued, claiming:

  • That Zodiac and its principal agreed to a 36-month restrictive covenant after termination;
  • That at the latest the one-year agreement terminated on its own terms (April 2009); and
  • That as a result Zodiac and its principal was subject to the terms of the agreement until April 2012.

Here’s the twist:  at the hearing on the motion for preliminary injunction, Choice Environmental stipulated that it would not rely on a misappropriation of trade secrets to support its motion for preliminary injunction.  The trial court enjoined Zodiac, its principal, and the competing company that the principal formed.  In April 2013, Florida’s Fourth District Court of Appeal reversed.  Among its analysis, the appellate court reasoned:

Generally, where “a restrictive covenant [is] sought to be enforced against a former employee” or independent contractor, “a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.” § 542.335(1)(d)1., Fla. Stat. (2011). However, “[i]n determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less.” § 542.335(1)(e), Fla. Stat. (2011). In the present case, the consulting agreement expired on April 7, 2009. Therefore, unless the restrictive covenant was “predicated upon the protection of trade secrets,” the restrictive covenant was not enforceable beyond April 7, 2011—a date prior to [Zodiac’s principal’s] alleged violations of the non-solicitation provision. By contrast, if the restrictive covenant was “predicated upon the protection of trade secrets,” the postterm duration of thirty-six months was enforceable, which would allow Choice to enjoin appellants pursuant to the non-solicitation provision through April 7, 2012.

At the preliminary injunction hearing Zodiac argued that if Choice Environmental abandoned (or otherwise failed to prove) its claim that the customer list – and, therefore, the solicitation of customers – was a protected trade secret, then Choice was limited to a two-year enforceability period for the non-compete provisions of the parties’ agreement.  If the two-year period applied, Zodiac argued, then the non-compete provisions expired before Zodiac and its principal formed the new, competing company.  Choice Environmental argued that because the written agreement contemplated both 1) the enforcement of the restrictive covenant and; 2) the protection of trade secrets, the contractual three-year limit was statutorily reasonable, rendering the restrictive covenant was enforceable.  Based on the parties’ stipulation, the trial court received no evidence on the issue of whether Zodiac violated Choice Environmental’s trade secrets.

The appellate court’s reversal notes some interesting points for our clients to keep in mind:

  • A trial court may not grant a former employer’s motion for a temporary injunction against a former employee without first permitting the former employee “to put on its evidentiary case.” JonJuan Salon, Inc. v. Acosta, 922 So. 2d 1081, 1085 (Fla. 4th DCA 2006).
  • [T]he trial court could have determined that the customer relationships Choice sought to protect under its non-solicitation agreement were not trade secrets, and that the restrictive covenant was therefore unenforceable past April 7, 2011.1 See Estetique Inc. USA v. Xpamed LLC, 2011 WL 4102340, at *10 (S.D. Fla. Sept. 15, 2011) (rejecting movant’s argument that the five-year postterm restriction of section 542.335(1)(e) applied because movant “failed to show a substantial likelihood of success that its confidential customer information rises to the level of a trade secret”); Zupnik v. All Fla. Paper, Inc., 997 So. 2d 1234, 1238-39 (Fla. 3d DCA 2008).
  • The trial court also noted that “a former employer’s customer relationships do not automatically qualify as trade secrets, even if a party’s restrictive covenant attempts to characterize them as such. East v. Aqua Gaming, 805 So. 2d 932, 934 (Fla. 2d DCA 2001). To qualify as a trade secret, there must be evidence that a customer list “was the product of great expense and effort, that it included information that was confidential and not available from public sources, and that it was distilled from larger lists of potential customers into a list of viable customers for [a] unique business.” Id.

This case illustrates several important facets of the complexity of litigating restrictive covenants and violation of trade secrets cases in Florida.  First, as always, the parties’ written agreement will define whether and under what circumstances the restrictive covenant or agreed protection of trade secrets is enforceable.  Second, when litigating these cases, the nuances of the Florida statutes present complex issues that can result in a reversal of an injunction, even after a successful and lengthy evidentiary hearing at the trial court.  This is the point in the blog when I suggest that you contact me or any of the other qualified Burr & Forman LLP attorneys to assist you in drafting, reviewing or otherwise to discuss a restrictive covenant or agreement to protect a trade secrets and your business.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement

A Florida court recently held a former employee’s “mass-mailing” to her former employer’s customers did not violate her non-solicitation agreement.  In Variable Annuity Life Insurance Co. v. Laeng, Docket No. 8:12-cv-2280-T-33MAP (M.D. Fla. Feb. 11, 2013), the employer, VALIC, marketed financial services to tax exempt organizations.  As a condition of her employment, the employee, Laeng, executed a “Registered Representative Agreement” under which the she promised to not use or disclose VALIC’s trade secrets and confidential and proprietary information at any time.  Laeng also agreed to not solicit VALIC’s customers for one year after leaving her employment.  However, Laeng was not prevented from competing with VALIC.

After leaving VALIC, Laeng began working at LPL Financial, VALIC’s direct competitor.  Laeng sent a mass-mail solicitation to employees of two local school districts.  The mass-mailing included VALIC’s customers to whom Laeng was assigned.

VALIC filed suit and a motion for a preliminary injunction alleging Laeng violated her agreements to not disclose VALIC’s confidential information, including its customer lists, and to not solicit VALIC’s customers.  VALIC asserted Laeng’s actions resulted in a loss of more than $629,113.32.

The court denied VALIC’s motion for a preliminary injunction on the grounds there was not a substantial likelihood VALIC would succeed on the merits of its case.  Other than its suspicions, VALIC presented no evidence that Laeng took or used any confidential information. Significantly, the court found that even though Laeng’s mass-mailing included VALIC’s customers, the customer information was not unique to VALIC.  Rather, the customers were public employees of local school districts whose identities were publicly available upon request.  The court found Laeng’s mass-mailing was achievable without the use of VALIC’s confidential customer information.

The court did not discuss Laeng’s non-solicitation agreement which, on its face, would prevent Laeng from soliciting VALIC’s customers regardless of how the customer information was obtained.  Rather, the court focused on the fact that the customer information was publicly available.  Hence, the court’s ruling could be read to support the position that a former employee does not violate her non-solicitation agreement when the employer’s customer information is not confidential.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Does the Alabama Trade Secrets Act Limit Remedies for Theft of Information?

Alabama enacted the Alabama Trade Secrets Act (the “ATSA”) in 1987.  However, since that time, there have been relatively few reported court decisions analyzing the impact of the ATSA on common law claims.  A federal district court in Alabama recently grappled with these issues.  Relying on interpretations of other states’ laws based on the Uniform Trade Secrets Act, Judge Blackburn read the ATSA’s preemption provision broadly, holding that the ATSA preempted any common law claims based on “the same underlying facts.”  Madison Oslin, Inc. v. Interstate Resources, Inc., 2012 U.S. Dist. LEXIS 142082 (N.D. Ala., Sept. 30, 2012).

In Madison Oslin, the plaintiff was an Alabama-based paper-coating company who had developed a novel process for using polyester instead of wax to coat corrugated cardboard.  Whereas traditional wax-coated cardboard cannot be recycled, the new polyester-coated cardboard would be fully recyclable, saving landfill costs.

This Alabama paper-coating company was approached by a cardboard-box manufacturer with facilities in Maryland, and the two companies proposed forming a joint venture to manufacture polyester-coated corrugated cardboard boxes.  Under the proposed joint venture agreement, the box manufacturer would pay the paper-coating company an initial lump-sum fee of $6 million, and thereafter, the two would evenly split profits from the sale of recyclable boxes through the joint venture.

However, after the cardboard-box manufacturer signed a confidentiality agreement and had been allowed to observe the polyester-coating process during tours of the paper-coating company’s facilities in Alabama, the cardboard-box manufacturer allegedly began advertising (and manufacturing) a “recyclable corrugated box.”  The proposed joint venture agreement apparently remained unsigned, and the box manufacturer did not compensate the paper-coating company for use of its proprietary processes.  The paper-coating company, as plaintiff, then brought a multiple-count complaint against several defendants, including the cardboard-box manufacturer and its subsidiary in Maryland that operated the box-manufacturing facility.   The counts included a cause of action under the ATSA, as well as common law claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression, among others.

The defendants moved to dismiss the plaintiff’s common law claims, arguing that these claims were subsumed by the ATSA claim, and also moved to have the action transferred to Maryland.  In evaluating the motion to dismiss, Judge Blackburn noted that there was very little Alabama case law on point.  Thus, the court analyzed the comments to the ATSA and to the Uniform Trade Secrets Act and also examined other courts’ analyses of this issue under trade secrets statutes enacted in Georgia.  As noted in one of the Georgia cases, statutes protecting trade secrets are intended to encourage the free flow of information.  Under this analysis, claims involving “theft of information” should be limited to cases in which the information can be shown to be a trade secret; allowing claims for the theft of “non-proprietary” information or for the theft of “unguarded” proprietary information could arguably discourage this free flow of information.  Finding this reasoning persuasive, Judge Blackburn in Madison Oslin determined that the ATSA preempted any common law causes of action arising from the same factual allegations as ATSA claims and thus dismissed the plaintiff’s claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression.  The plaintiff was, however, allowed to proceed with its breach-of-contract claims, as well as its ATSA claims.  Because Judge Blackburn also granted the defendants’ request for a transfer, these remaining claims are now being litigated in Maryland.

A “take away” from the Madison Oslin decision is that an Alabama employer faced with the theft of information may want to begin its analysis of potential legal remedies by looking at the ATSA.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.