Halloween Scares and Non-Compete Agreements

Halloween is always a great time for adults and children. Just think about it, for at least one night we intentionally abandon every notion we teach our children about taking candy from strangers, not acting deceptively, not scaring people unnecessarily and otherwise not acting like little hellions. Indeed, we encourage the opposite. Scary little monsters will roam my neighborhood seeking free candy from strangers who often try to frighten them. Under the pretense of nonchalance, parents will watchfully keep a respectful distance from all front doors as their children boldly explore what an unknown witch or werewolf might hand out as “trick” or “treat.”

And so it goes this season all around our great nation.

And so it goes in many an employment agreement as well. Many of our clients require their employees to execute a non-competition agreement as part of their continued employment. While not all states favor agreements that restrain trade (some essentially disallow non-competition agreements altogether), Florida has detailed statutes spelling out the requirements of a valid non-competition agreement and many cases considering the issue to help all parties involved determine how best to deal with a departing employee.

What remains unclear is whether or not the non-competition agreement in force is a “trick” or a “treat” to either the former employer or to the former employee, or to neither. The answer is that it depends on the circumstances. Florida law recognizes that under certain circumstances an employer has the right to protect its trade secrets, its customers and its remaining employees from the competition of departing employees. While this sounds as if it solely favors the former employer, under many circumstances the situation is ̶ to keep with the theme ̶ more tricky. Often the customers whom the former employer seeks to insulate prefer to continue to work with the former employee. We’ve seen circumstances where customers of the former employer actually pull their business because the former employer has initiated legal action against a former employee pursuant to a seemingly enforceable non-competition agreement.

So what is an employer to do? Remember Halloween. Even when it’s seemingly okay to “trick,” sometimes it’s better to offer a “treat.” In a recent matter, the former employer had a stock repurchase agreement in force for departing officers and managers. The repurchase agreement had a formula that discounted the share value for departing employees. The former employer also informed the departing employee that it intended to enforce the (rather restrictive) non-competition agreement. However, when the former employers’ customers complained about losing the person with whom they had forged a professional relationship, the former employer opted to enter into a consulting agreement with the departing employee rather than to initiate a lawsuit. The benefits of this were many and obvious. First, the former employer could mollify its customer and maintain continuity on the job. However additional benefits also resulted. For one, the former employer could both keep tabs on the former employee (and its customers) and at the same time profit from the continued relationship. A supplemental benefit was that it made any violation of the parties’ agreement other than through the consulting agreement seem all-the-more egregious. In that way, if the matter ever made its way to a courtroom, at least the former employer could argue that it took every possible step to act reasonably.

You might find yourself in a circumstance when there are better business alternatives available than simply initiating litigation to enforce a non-competition agreement. Even though it’s the Halloween season, don’t be scared. At Burr & Forman we have lawyers in offices throughout the Southeast that are experienced with these issues and able to advise you in even the most scary situation.

The World Cup of Non-Competes

Can you imagine if FIFA allowed or enforced non-compete agreements that limited the ability of a player to hold dual citizenship and play for either country?  Would the World Cup have suffered if brothers representing Ghana and Germany had to choose allegiance to only one nation rather than play against one another as respectful opponents?  For that matter, would the United States have survived the “Group of Death” and advanced to the knockout round if not for the array of talented “American” players who grew up in Germany, speaking German.  Whether or not the inclusion of these players aided America’s unquestionable success in this worldwide soccer feast (in case you’ve somehow avoided the news media for the last month, the answer is that “yes, these players were incredible assets for the US team”), you cannot deny that without the ability to utilize the best available talent, it’s difficult to put the best team on the field.

Which brings us to non-compete agreements in Florida.  If you follow this blog, then you already know that Florida law specifically allows employers and employees to enter non-competition agreements under circumstances set forth in Florida’s statutes.  As we’ve discussed many times, the more significant the employee is to the continued operational success of the business she intends to leave, the more restrictive a covenant not to compete she can expect. To continue the sports analogies, it’s a little bit like a no-trade clause in the contract of a professional athlete.  An athlete can leave a team at any time.  It’s just that the athlete cannot leave one team at his/her whim and join a competitor unless the contract allows it.

On the other hand, just like in professional sports, sometimes it’s better to renegotiate a contract than to fight over whether or not an employee is able to leave when an alternate opportunity calls.  In a recent matter, for instance, we represented a corporation that had hired an employee allegedly subject to non-compete agreement.  Our client testified under oath that it was completely unaware of the alleged non-compete agreement at the time of the hiring and terminated the new salesman almost immediately after the former employer filed the lawsuit (which was the first notice of the existence of the alleged non-compete agreement).  Despite the almost-immediate termination, the plaintiff continued the lawsuit against my client.  Instead of seeking an injunction, the lawsuit focused on alleged violation of trade secrets the short-term employee allegedly transferred.  After the parties endured a year of litigation, the matter settled.  Both parties might now agree that reaching an agreement earlier might have saved everyone involved significant time and resources.

Brazil hosted a splendid World Cup.  Its team advanced to the semi-finals until it ran into an indomitable German squad playing at its peak.  As an American soccer fan, it’s nice to know that as long as the rules remain the same, America’s team can benefit from the training some of our best players received in Germany.  As sports professionals, many of those players will join new teams, usually after the transferee team pays a considerable fee.  In the landscape of Florida non-compete agreements, things aren’t always as clear-cut.  When you’re faced with a non-compete question that can affect your business, be sure to consult with an attorney knowledgeable in that area of the law.  Burr & Forman LLP has nine offices in five states throughout the Southeast and a large team of professionals with non-compete experience.

It’s Not the Heat, It’s the Humidity

When you live in Florida, you tend to hear that expression for far too many months of the year.  Even during the winter, weather reports often include information on the “sun index” indicating the level of sunscreen you might need in order to survive your next trip to the local grocery store.  Visitors from the southwest, where temperatures earlier this month reached over 100°F, are quick to inform Floridians that it’s hot in Phoenix, “but it’s a dry heat.”

Well, if you’re looking for things other than the weather to make you sweat, you might take a look at your company’s policy on whether or not a departing employee can go to work for a competitor.  Presumably, your direct competitor will now reap the benefit of the many hours and significant financial commitment your business expended.  And as a business owner, you might ask: “What can I do?”  In many circumstances, your best business move is to protect your businesses’ interests with a carefully crafted non-competition agreement.

The rules for non-competition agreements vary from state to state.  Some states basically do not allow them (or greatly disfavor them).  Other states have no legislation concerning non-competition agreements, choosing instead to allow the legal system to define the issue on a case-by-case basis.  Indiana, for instance, recently allowed a five-year non-competition agreement, concluding that both the length of time (five years), and the restriction (a two county area) were reasonable.    See Mayne v. O’Bannon Publishing Co. d/b/a Corydon Instant Press.  In Florida, the legislature has created a statute that specifically defines the basic structure of contracts that Florida law allows to validly restrain trade.  Key among the allowed restraints of trade are non-competition agreements and limitations on the use of a company’s trade secrets after an employee leaves the company.

Although defined in the statutes, Florida law also requires that the courts interpret non-competition agreements in favor of the employee in those circumstances when the agreement is vague or missing terms.  Even when parties are careful to define terms in a non-competition agreement, the contract cannot confine future employment beyond the statutory guidelines, nor are non-competition agreements immune from legal challenges regarding their breadth, their validity, or their applicability to particular circumstances.

In the real world, employees leave for new positions every day.  They pursue opportunities at other companies.  They perceive opportunities to start companies of their own.  They move on.  Nonetheless, thoughtfully crafted non-competition agreements can significantly help a business retain key employees, or – at the very least – make it far more difficult for departing employees to immediately join a competitor or start a competing business.  As in most contracts, the more specific the limitation (and the more reasonable the limitation relative to the possible damage a departing employee might cause your business), the more likely a court will uphold the contract.  If, for instance, your business is confined to a particular county, then restricting a departing employee from working in an entirely different State makes little sense.  After all, how would that departure negatively impact your business?  So take care to have your attorney tailor your non-competition agreement in a manner that reflects your business and that provides you the protection you deserve for those inevitable situations when an employee critical to your bottom line decides to see if the grass is greener elsewhere.

Which takes us back to the heat and the humidity.  While it’s tough to argue that the humidity can turn your Florida summer from a sauna to a steam bath, it’s also tough to deny that – if nothing else – the rain and the humidity do an excellent job of keeping our lawns green year-round.  If keeping critical employees around makes sense to the financial health of your company, consider hiring an attorney familiar with drafting non-competition agreements.  Under certain circumstances, it could literally save 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.

Why Go to the Movies?

Summer has arrived.  The Hollywood blockbusters are here.  New animated features hit the big screens this week.  Superman is flying once more.  Sure, if the movies are your cup of tea, then summer is your annual thirst quencher.  However if you’re looking for drama, you need only scan the internet to find your daily dose of serious corporate espionage and the criminal theft of trade secrets from American corporations.

Just yesterday the San Francisco Chronicle ran a story of a scientist working on solar cell technology who pled guilty to several counts of wire fraud in an indictment claiming he stole trade secrets from his employer “and tried to take them to a competitor in China.”  The prosecutors in the case “estimate the total loss from the theft of trade secrets at nearly $22.7 million.”  The Telegraph – a British newspaper – reported this week that cyber espionage is rampant in the UK with “foreign hackers” secretly working in some companies for up to two years “discreetly stealing intellectual property.”  American newspapers recently published articles that our government systems are under constant attack not only from rogue hackers but also from foreign governments utilizing sophisticated programs and systems in an effort to steal American secrets and military information.  Same thing for recent stories of Chinese manufacturer Sinovel and two if its executives, recently indicted for alleged theft of wind turbine trade secrets.  Alleged financial loss to the owner of the trade secrets: approximately $800 million according to SecurityInfoWatch.com.

The problem is rampant and unlikely to go away.  Nor is this something new.  Corporate espionage likely began soon after the first business incorporated.  Of course, victimized businesses take little comfort knowing that others victims also exist.  So what can your company do to avoid, eliminate or minimize this potential loss?  First line of defense, of course, is education.  Educate the people in charge of monitoring the transmission of technical data on the best means to detect the “discreet stealing.”  Depending on the value of the intellectual property (and the potential loss to your business if a competitor was to receive the trade secret information without a license or without compensation), the potential losses could justify the investment in employees whose role is to oversee the data transferred to and from your company’s system.

As most of you who read this post already know, Florida employment is at will.  While termination for a discriminatory purpose is unlawful, termination for violation of company policies (or termination for violation of State or federal law) is common.  However, as these events (and the dozens of other recently reported events) indicate, the most difficult task for American companies lies in screening employees so as to minimize the possibility of trade secret theft, while at the same time ensuring that all potential employees are given an equal opportunity to apply for a position for which they are potentially qualified.

If your company faces a patient, technically savvy and stealthy employee, like the ones described who steal trade secrets with stealth for two years before they are discovered, a well-written policy is not likely to act as a significant deterrent.  On the other hand, Florida law specifically allows employers to create written policies regarding the protection of its trade secrets and to enforce those policies against its employees as appropriate.  In most circumstances, employee education (and continuing acknowledgement) of the employer’s policies, in concert with a method for your business to monitor activity and to “police” itself, can deter most of the individuals who might consider trade secret theft.

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.

Is An Assigned Non-Compete Agreement Enforceable?

In the case of a merger or acquisition, the successor company might take an assignment of the current non-compete agreements in favor of the predecessor company.  The enforceability of an assigned non-compete agreement, however, varies from state-to-state, as is true with most issues concerning non-compete law.  Below is a quick survey of how some of the states in the Southeast address the issue:

Georgia – Non-compete agreements, similar to most contracts in the state, are assignable provided that the duties under the agreement do not materially vary from the performance required by the original parties and provided that the contract is not for personal services.  West Coast Cambridge, Inc. v. Rice, 262 Ga. App. 106 (2003) (finding that successor partnership could enforce noncompete agreement against doctor because the law provided no prohibition against the assignment of the agreement and the agreement was expressly binding on successors and assigns, and noting that contract was not for personal services because it only obligated the doctor to not take certain actions).

Tennessee - Tennessee law recognizes that covenants not to compete are assignable absent specific language in the covenants prohibiting assignment.  See Packers Supply Co. v. Weber, 2008 Tenn. App. LEXIS 226 (Tenn. Ct. App. Apr. 14, 2008) (citing Bradford & Carson v. Montgomery Furniture Co., 115 Tenn. 610, 92 S.W. 1104 (Tenn. 1906)).

Alabama - Because non-compete agreements are disfavored as a restraint on trade (see Ala. Code § 8-1-1), a successor employer cannot enforce an employee’s covenant not to compete.  Construction Materials v. Kirkpatrick Concrete, 631 So. 2d 1006 (Ala. 1994) (refusing to enforce noncompete agreement for successor of employer and noting that the legislature’s omission of a specific provision in Ala. Code § 8-1-1 establishing a successor employer’s right to enforce an employee’s covenant with the predecessor employer creates an affirmative interference that this code section was not intended to allow enforcement by successor employers).

Florida - In Florida, the question is answered specifically by  Fla. Stat. § 542.335(1)(f)(2), which provides that a “court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is . . . an assignee or successor” provided that “the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.”  Recently, Florida’s First District Court of Appeal held that a general assignment clause (such as a statement that the agreement will “inure to the benefit of and be binding upon . . . assigns and successor) is sufficient to assign the agreement to a successor.  DePuy Orthopaedics, Inc. v. Waxman, 95 So. 3d 928 (Fla. Dist. Ct. App. 1st Dist. 2012).

BURR POINT:  Special attention should be paid when drafting a non-compete covenant to ensure that the assignability of the covenant is in accordance with the parties’ expectations and the applicable state law.

 

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.

Florida Appellate Court Says: “Independent Contractor” Still an Employee for Purposes of Enforcing Non-Compete Agreement

You hire an employee and pay her a salary.  In order to earn more money at your business, she voluntarily chooses to transition to “independent contractor” status.  Question:  Does that transition trigger the non-compete agreement executed at the time the employee started at the company?  Broadly interpreting the employer/employee employment contract, a Florida Appellate Court recently held that the employer could argue that the transition did not negatively affect the otherwise valid restriction.  This employer friendly decision ‒ a reversal of the trial court’s findings ‒ involved the following basic facts:

  • Employee signed a seemingly valid non-compete agreement restricting future employment for a 2 year period within a 100 mile radius of “any store, office, or facility of the company.”
  • During training, the former employee held a salaried position;
  • Once trained, the employee chose to act as an “independent contractor” allowing her to earn a commission and subjecting her to payments for her share of the business’s rent, supplies, utilities and insurance.  She was also responsible to pay taxes on her commissions;
  • The agreement contained the clause “Any subsequent change or changes in my duties, salary or compensation, will not affect the validity or scope of this Agreement . . . ;”
  • More than two years after her transition to “independent contractor,” the former employee started a competing business approximately 5 miles from the company’s offices.

In the employer’s suit to enforce its non-compete agreement it cited Florida Statute §542.335(1)(b) claiming that it had a legitimate business interest justifying the restrictive covenant.  The motion properly alleged that the restrictive covenants were reasonably necessary to protect the company’s established business interests pursuant to Florida Statute §542.335(1)(c).  Also included in the employer’s motion were the 4 elements required for a temporary injunction (irreparable harm, lack of an adequate remedy at law, substantial likelihood of success on the merits, and a public interest favoring entry of the injunction.)

In response, the former employee argued that even if valid, the 2 year restrictive period began to run when the former employee chose to become an independent contractor and was no longer salaried.  See Anarkali Boutique, Inc. v. Ortiz (Fla. 4th DCA 2012).

The appellate court reversed noting that Florida courts are required to construe a contract as a whole and to broadly give effect to every provision of the agreement.  Using that more broad interpretation of the contract, the appellate court held that the change in the former employee’s status from an employee to an independent contractor “did not cause the 2 year non-compete period to begin running.  Instead, the two year non-compete period did not begin running until the worker left the company.”  Id. Ultimately the Anarkali Boutique Court remanded the matter to allow the trial court to make factual findings as to whether or not the employer had proven the requirements set forth in Florida Statute §542.335.  Nonetheless, this case was a clear victory for the employer whose decision to allow employees to earn a larger salary and build a client base was not manipulated to undermine an otherwise duly negotiated restrictive covenant.

Practitioner’s Note:  Although the employer was able to pursue its arguments upholding its restrictive covenant, this case demonstrates another example of the importance of tailoring your non-compete agreement to the specific situation your business faces.  Had the non-compete agreement in this case ‒ where the employer knew in advance that it would offer salaried employees an opportunity to work on a commission-only basis ‒ it could have included in its non-compete agreement language broad enough to specifically address that situation.  Had the contract contained that language, the employer may have more easily retained its customers and would have, almost assuredly, limited the costs of litigation and enforcement.

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

Does Bird’s Eye View Render Executive Non-Compete Unenforceable?

So here’s a good one for employers to ponder.  Let’s say you have an executive subject to a valid and seemingly enforceable non-compete agreement.  Because the agreement concerns an executive, we would normally presume that a court is likely to strictly read the terms of a non-compete agreement and enforce it accordingly.  Well, the Second Circuit Court of Appeals recently affirmed a decision that an executive whose level of seniority limited his knowledge of the details rendered him not subject to the terms of his otherwise-valid non-compete agreement.

In the typical case, an employee with specific knowledge – let’s use the example of an engineer – enters into a non-compete agreement that states, for instance, that he will not work for a competitor within the same geographic area of his current job responsibilities for one year after his departure, regardless of the reason for his departure.  If the agreement is otherwise enforceable, a Florida court would typically view the above-described restriction as valid.  After all, the engineer has specific knowledge the details of which could, in theory at least, give a competitor an advantage over the former employer.

Taking this analysis one step further, however, led at least one court to determine that the senior executive was so far removed from the mundane specifics of the actual work product, he was actually no longer subject to the non-compete agreement he voluntarily executed.  Which brings us to IBM v. Visentin, 2011 WL 672025 (SDNY 2011), aff’d 437 Fed Appx 53 (2d Cir. 2011).  I’ll keep the facts short, although the somewhat unique nature of the facts obviously resulted in a seemingly unexpected opinion.  Visentin worked at IBM, very successfully, for over a quarter of a century.  So successfully, in fact, that at the time he departed IBM for competitor Hewlett Packard he was in charge of a multi-billion dollar business unit.  He had executed a non-compete with a one year work restriction that on its face appeared to encompass his prospective employment with Hewlett Packard.  The agreement Visentin executed included a relatively standard three-year look-back stating that the agreement only pertained to those areas of IBM’s business in which Visentin worked in the three years prior to his departure.

When Visentin left, IBM sued, seeking injunctive relief based on Visentin’s alleged violation of the non-compete described above.  The federal district court denied the motion for a preliminary injunction.  (In cases to enforce non-compete agreements, denial of the preliminary injunction usually ends the dispute… unless the former employer appeals.)  IBM appealed, only to have the 2nd Circuit Court of Appeal affirm the lower court’s ruling.

While the denial of the preliminary injunction motion in Visentin presents a unique situation due to Visentin’s high level executive position, the district court’s lengthy holding contains some valuable insight in the analysis of non-compete issues.  Among the points raised was that the high level of the former employee’s position allowed him a supervisory capacity (he was a manager of a business line with expertise in making operations “efficient”), and yet insulated him from the specific technological goings-on and to detailed data potentially protected as a trade secret.  So in essence, because he maintained a bird’s-eye view of operations, rather than a position with direct creative input or a position “on the line,” he was insulated from information that would negate his former employer’s presumed competitive advantage.

The district court opinion went even further, at one point discussing that among known competitors with significant resources, the open flow of intelligence in the marketplace rendered the probability of harmful disclosure somewhat remote (if even possible).  Also interesting was the emphasis that success on a motion for preliminary injunction was challenging in the absence of known instances of disclosures of detailed information that clearly violated the non-compete agreement, or detailed information that the employee’s new position would require improper disclosure.  Given the bird’s-eye view Visentin had over the IBM business unit, pointing out specific instances of wrongful disclosures proved difficult.

So where does that leave employers seeking to enforce these agreements?  Certainly in Florida, there a many instances in which the courts uphold these agreements.  What is important to keep in mind, however, is the necessity of providing either enough detail in your non-compete/non-disclosure agreement to make enforcement easier, or to allege with enough specificity the actual information or trade secrets the disclosure of which could cause actual harm.  The case discussed in this article also points out that despite possible factual similarities, each non-compete rests on its own merits and brings to the dispute its own facts.  It is the nature of the information the employer seeks to protect and the factual circumstances surrounding the former employee’s duties and experience that will form the foundation of any successful argument regarding enforcement.

This is the part where I counsel you to get counsel.  Better yet, make sure you get counsel familiar with these issues.

Author Peter C. Vilmos, Esq. works in the Orlando office of Burr & Forman LLP, 407-540-6600.  Contact Peter or any attorney in Burr & Forman’s Non-Compete and Trade Secrets group for more information or for further inquiries.

Sometimes Hiring a New Employee Can Invite an Unwanted Lawsuit

Let’s set the scene:  Your search for an employee with the required job skills and experience results in your Florida-based company’s decision to hire someone presently working for your competitor.  During the salary/benefit negotiations, you learn that your prospective employee executed a non-compete agreement with her present employer.  “Not to worry,” you tell her.  “If your present employer sues you to enforce the non-compete we will pay for your defense.  In fact, we’ll make it part of your contract if you come for us.”  Bad move.

Many prospective employers believe non-compete agreements only have legal consequences for prospective employees.  However if ─ as in the example above ─ the prospective employer is aware of the agreement before hiring the employee, then the prospective employer runs the risk of liability to the former employer for tortiously interfering with the non-compete agreement. While the past employer will have to prove the new employer had knowledge of the non-compete agreement as part of a tortious interference claim, a new employer makes this task easier when it includes a provision agreeing to indemnify the employee for any litigation over non-compete agreements.

To prove tortious interference with a non-compete, Florida courts apply a four-prong test:  1) existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.  Tamiami Trail Tours, Inc. v. Crosby, 463 So. 2d 1126 (Fla. 1985).

How then does a prospective or subsequent employer protect itself from the former employer’s tortious interference claim?  For starters, avoid agreements to indemnify the new employee and/or pay for legal defense costs associated  with possible breach of the non-compete agreement.  As recently as May 2012, a Florida federal court reasoned that the plaintiff was “substantially likely to prevail on the claim of tortious interference” in large part because the new employer “expressly acknowledged the Agreement between [the employee] and [the plaintiff] and the restrictive covenants contained therein.”  The new employer, as part of its agreement with the employee, “agreed to assume [the employee's] defense in the event she [was] sued by [the plaintiff] over the terms of the Agreement, and indemnify her from any and all expenses, fees, damages, judgments, and amounts incurred by her in connection with the action.” The court held that this express knowledge of the non-compete agreement was evidence that the new employer caused the employee to breach the non-compete agreement. See Electrostim Medical Services, Inc. v. Lindsey, (M.D. Fla. 2012).

And this isn’t the first time a federal court in Florida found that a former employer could sue a subsequent employer for tortious interference.  In a 1998 federal court opinion the  employee testified that he had informed the new employer about his employment agreement with the plaintiff without actually providing a copy.  When coupled with testimony that the new employer hired the employee to essentially recreate the former employer’s products, the court found enough evidence to reason that “the facts . . . support a substantial likelihood that Plaintiff [would] ultimately prevail on the claim of tortious interference.”  See Stoneworks, Inc. v. Empire Marble & Granite, Inc. (S.D. Fla. 1998).  In 2009 a court found that the new employer had knowledge of the non-compete agreement with the plaintiff because it “expressly acknowledged the existence of that agreement in the employment contract signed with [the employee].”  The result: an opinion that the plaintiff had “shown a substantial likelihood of success on the merits of its claim that [the new employer] tortiously interfered with the . . . contract for [the employee] not to compete with [plaintiff].”  See The Continental Group, Inc. v. KW Property Management, LLC (S.D. Fla. 2009).

Similar findings appear in Florida appellate courts.  In 2010, Florida’s First District Court of Appeal held that allegations that 1) the employee gave a copy of the plaintiff’s employment contract to the new employer and; 2) that the new employer “devised a plan to allow [the employee] to quit her employment with [the plaintiff] and to . . . work for [the new employer] . . . without compensating [the plaintiff] as required under [the contract]” stated a cause of action for tortious interference against the subsequent employer.  See  Southeastern Integrated Medical, P.L. v. North Florida Women’s Physicians, P.A. (Fla. 1st DCA 2010).

What now?  Well, if you’re subject to a non-compete agreement, read it carefully.  They are often narrowly tailored.  As we discussed in previous posts, even valid non-compete agreements can prove ineffective to stop future competition.  On the other hand, because Florida allows non-compete agreements, it is important to understand the restrictions of a particular agreement and the risks of violating it.  Do you have the right to employ someone seemingly subject to a valid non-compete agreement?  Of course you do.  Just keep in mind that knowingly hiring someone subject to a non-compete agreement can result not only in additional legal fees and costs resulting from the employee’s breach, it may also subject the new employer to substantial damages resulting from a claim for tortious interference with the former employer/employee relationship.  Remember that courts have determined that prima facie evidence of tortious interference exists when a subsequent employer agrees to indemnify the new employee and/or pay defense costs if the former employer files an enforcement lawsuit.

This is the part of the blog where we suggest you seek competent legal counsel when you face these issues.  The nuances of this area of the law and the specific factual circumstances surrounding each situation deserve a sound initial legal opinion. Our Burr & Forman attorneys would be happy to assist you in these matters.

Court Says It’s Time to Pay The Piper, Even if the Piper Hasn’t Paid: Fee Provisions and Third Party Payments

Employers who have the foresight to draft a non-compete agreement often fail to consider some of the potentially adverse financial ramifications from enforcing the non-compete agreement through litigation. Most employers seeking to enforce a non-compete agreement unhappily discover that they may be on the hook to pay the attorney’s fees a subsequent employer funds in defense costs.  Yet that is exactly what could happen if the employer doesn’t correctly draft the fee provision in the non-compete agreement.

Substance of the matter aside, one of the key questions after non-compete litigation is a simple one:  who pays the often high attorney’s fees and costs?  Recent developments in Florida law highlight how important it is to properly draft attorney’s fee provisions in non-compete agreements.  In Rogers v. Vulcan Manufacturing Co., Inc., 37 Fla. L. Weekly D1309a (Fla. 1st DCA June 1, 2012), the Florida First District Court of Appeals found the language of the non-compete agreement at issue entitled an employee to attorney’s fees even though its subsequent employer, a third-party, wholly funded the non-compete litigation.  The non-compete agreement language at issue read: “In any action to enforce any term, condition, or provision of this agreement, the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce the same.” (Emphasis added).  The court found this language demonstrated that the parties intended for the loser to pay attorney’s fees regardless of the source of the funds – even if the source was a subsequent employer.

The court noted that if the parties had intended to limit fee reimbursement to situations in which the prevailing party personally paid the attorney’s fees and costs ─ or incurred an obligation to pay the attorney’s fees and costs ─ then prevailing party language within the non-compete agreement should have clearly said so. In Rogers, the court gave the employee the benefit of the prevailing party fees despite the fact that the new employer, and not the former employee, actually paid the attorney’s fees and costs in response to the former employer’s lawsuit.  The Rogers court reasoned that the non-compete agreement entitled the former employee to reimbursement of attorney’s fees and costs because the clause provides that “the prevailing party shall be entitled to recover the reasonable attorney’s fee incurred to enforce” the agreement, rather than saying that the prevailing party is entitled to the attorney’s fees “it/he/she” incurred.  Thus, the court interpreted the provision as intending for the loser to pay the winner’s reasonable attorney’s fee, regardless of the source of the funds.

The Rogers court further noted that a non-assignability clause will not affect the obligation of attorney’s fees under the agreement. The court found it irrelevant whether the former employee was ultimately responsible to reimburse his new employer for advancing attorney’s fees on the employee’s behalf.  Because the former employee did not actually assign his rights or benefits under the non-compete agreement, the court found that no violation of the non-assignability occurred, despite the fact that the burden of paying attorney’s fees and costs rested solely on the new employer.

Losing valuable employees to competitors poses substantial business risks.  Carefully drafted non-compete agreements can help minimize these risks.  Among the risks are future litigation costs and the possibility that fee-shifting provisions can increase litigation expense, and thus add even more risk.  The Rogers case clearly illustrates the importance of properly wording non-compete agreements.  If minimizing financial exposure from an unsuccessful attempt to enforce a non-compete agreement is important to your business, then you should consider revising your agreement to limit the risk of paying attorney’s fees that subsequent employers advance or fund outright. Our team at Burr & Forman would be happy to aid you in such matters. Please contact any of the Burr & Forman Non-Compete & Trade Secrets team members for assistance.

Valid Non-Compete Agreement Declared Ineffective: Hard Lessons from Soft Language

Even a valid non-compete agreement can fail to provide the scope of protection that the drafter expects.  In March 2012, Florida’s Fifth Circuit of Appeal decided Heiderich v. Florida Equine Veterinary Services, Inc., 37 Fla. L. Weekly D759a, giving little effect to a valid non-compete agreement. The language in the non-compete agreement only prevented the employee from establishing an office located within a specified geographic area and did not prohibit the employee from conducting business within the geographical bounds. In Heiderich, the employee signed a valid non-compete agreement and was reminded of such upon termination. Within the period of non-compete, the employee established an office just outside the geographic radius, and then delivered services within the non-compete geographical boundaries.

In reversing the lower court’s temporary injunction, the appellate court found that the language in the non-compete only meant that the employee could not establish a physical business location within the 30 mile radius.

“[E]mployee shall not own, manage, operate, control, be employed by, assist, participate in, or have any material interest in any business or profession engaged in general equine veterinary practice located within a thirty (30) mile radius of [FEVS's business address]”

The court found that there was nothing in the non-compete agreement to stop the employee from establishing an office 31 miles from the company and then servicing the clients within 30 miles of the company, ruling that “the non-compete agreement does not prohibit [the employee] from providing . . . services within a 30-mile radius of [the company], so long as her business office is outside that radius.”

The clause only prohibits the employee from “owning or being employed by a business or profession engaged in equine veterinary practice located within a 30-mile radius of FEVs. It does not . . . prohibit [the employee] from practicing equine veterinary medicine anywhere within the 30-mile radius.”

Heiderich is consistent with previous Florida decisions on the issue. In Tam-Bay Realty, Inc. v. Ross, 534 So. 2d 1200 (Fla. 2d DCA 1988), a non-compete agreement stated that the sellers of a real-estate brokerage firm were not to compete with the business in any of the following ways:

“by opening, operating, serving as an officer, director or other employee of any real estate brokerage business located with the geographical boundaries of Pinellas County, Florida…” 

However, according to a Florida court the non-compete agreement did not prohibit the seller from advertising in the phone book, obtaining a local phone number, running advertisements for homes, or listing themselves in business directories within the area the non-compete purported to protect.

The court found that the sellers “did not breach the covenant because they had not competed by ‘opening, operating, serving as an officer or director of any brokerage business located within Pinellas County.’ Rather, the sellers had competed within Pinellas County ‘from a brokerage business located outside of Pinellas County thereby adhering to the literal meaning of the non-compete agreement.”

How does this affect your business?  There is the potential that your valid, negotiated non-compete agreement might leave you exposed to unexpected future competition.  In light of the March 2012 decision in Heiderich, it is more important than ever to re-examine existing non-compete agreements to ensure that they offer meaningful protection and do not just make competing less convenient.

Contact Burr & Forman today to ensure that your business is secure. Burr & Forman’s Non-Compete & Trade Secrets team members would be happy to review your company’s non-compete agreement or answer any further questions you have about protecting your businesses from unfair competition.