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.

Specific Limitation on Soliciting Class of Persons May Substitute for Territorial Limitation

Though disfavored in Tennessee, non-compete agreements can be enforced if an employer has a legitimate business interest to be protected and the time and geographical limitations are reasonable.

Non-compete agreements are not analyzed in the abstract, but in the context of the specific circumstances under which they are to be enforced. The question is whether the employer has a legitimate business interest to be protected by the non-compete agreement. Tennessee courts hold that there is no “legitimate interest in protection from competition, only from unfair competition.”  An employer must show special circumstances over and above ordinary competition creating an unfair advantage for the former employee without the non-compete agreement.

Hence, only if a court first finds the non-compete agreement protects the employer from unfair competition by a former employee, will it determine whether the non-compete agreement is reasonable. The time and geographic limitations of the non-compete agreement must not be greater than necessary to protect the employer’s interest against unfair competition.

A non-compete agreement may lack a geographic limit which, in some cases, is fatal to the agreement.

However, Tennessee courts have held a requirement prohibiting former employees from soliciting the employer’s customers and this can substitute for a geographic limitation.

In the most recent case examining this issue, the non-compete agreement lacked a geographic limitation, but prohibited the former employee from soliciting the same type of business for one year from any of the employer’s current customers, customers with whom the employee did business on behalf of the employer, and prospective customers with respect to whom the employee acquired confidential information from the employer. The employee argued that the agreement’s lack of any geographic limitation rendered it unenforceable.

The court held because the non-compete agreement prohibited the former employee from soliciting the same business from the employer’s customers, the agreement was enforceable even without a geographic limitation. The court reasoned that as the specificity of the class of persons with whom contact is prohibited increases, the need for a geographic limitation decreases. Additionally, the restriction on who the former employee may contact, rather than where the former employee may work, gives the former employee greater freedom to practice her profession in the same area as her former employer.

A non-compete agreement which omits a geographic limitation, but prohibits soliciting the same business from the employer’s customers, satisfies the threshold requirement of protecting the employer’s legitimate interest against unfair competition without imposing an undue restraint on trade. The risk, however, of not having a geographic limitation is that the former employee may directly compete for the employer’s potential customers which fall outside of the parameters of the agreement.

In some instances, the former employee could use specialized training received from the employer to compete for those potential customers. Therefore, careful consideration should be given when substituting a restriction against solicitation for a geographic limitation.

For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.