The Multi-State Non-Compete Agreement “Drilled Down”

May 14, 2015 by

Our February article addressed the options available to the multi-state employer attempting to design its non-compete agreements within the “tangled mess” of the various state laws applicable to agreements for employees who reside within those various states. In that article, we advised that unless management has the resources to design, update and manage separate agreements tailored to each applicable state law, the best alternative is to design an “asset protection program” to include as few versions of the agreement as possible, tailoring each version to as many, similar state laws and job categories as possible. In this and subsequent articles, we will dig deeper into the variety of business and state law issues involved in this process.

Initially, employers should identify all employee/independent contractor responsibility levels and titles to be covered by the company’s non-compete agreements and the states in which those employees/contractors reside. Here, it is important to note that most state laws will not support the enforcement of a non-compete covenant unless the employer has a material, protectable interest supporting its post-employment non-compete restrictions. Translated, this means that most state laws will not support the enforcement of non-compete or even customer non-solicitation covenants signed by non-supervisory, non-sales and non-managerial employees. So, don’t expect to enforce a non-compete or non-solicitation covenant when it comes to your administrative assistant or your production employees. Furthermore, a detailed analysis of each employee category in the context of applicable state laws as opposed to a “one-size-fits-all” agreement will aid in the enforcement process. By way of example, it may be ill-advised to include non-compete and customer non-solicitation covenants within the agreements designated for North Carolina-based scientists because such scientists do not have access to customers or secret formulas which could be damaging if they leave for a competitor. In states such as North Carolina where the enforcement of a non-compete or customer non-solicitation is somewhat unpredictable, a good solid confidential information covenant may be preferred.

Along these same lines, this first step will also pave the way for other critical discussions with your counsel. The four primary types of employee restrictive covenants – the non-compete, customer non-solicitation, employee non-solciitaion and confidential information covenants – have varying applications depending on the nature and level of employee to which the agreement is directed. Each occupies what could be described as a “sliding scale of enforceability. Non-compete covenants which, to some degree or another, restrict a former employee’s subsequent employment in the industry are the most difficult to enforce, followed by the customer non-solicitation, the employee non-solicitation and finally, the confidential information covenant. As such a careful categorization of targeted protectable interests for each employee category and the state laws involved for each will help ensure enforcement and reduce the number of agreement versions your Company is required to manage and update.

We will expand on this analysis in future articles, taking a closer look at other key components of this analysis including adequate consideration, blue-penciling laws and the non-compete versus non-solicitation analysis.

Filed Under: Non-Compete Agreements, Non-Solicitation Agreement Tagged With: , , , , ,

My Non-Compete, Your Salary: Words of Caution for Business Owners and Employees

May 13, 2014 by

Without the ability to enforce it, a non-competition agreement can turn worthless, or ˗ perhaps far worse ˗ extremely expensive for an employer whose chooses to file litigation against a former employee.  One area that can turn tricky is the nuanced difference between a “dependent covenant” and an “independent covenant.”  Why does this even matter?  A recent Florida decision sheds some light on this issue.

In a scenario that will surprise no one who follows this blog, this story involves two high-level employees who left their former employer to start their own competing business.  Their employment agreements contained identical non-compete language.  (The differences in the agreements generally dealt with compensation.)  When the employees left to form a competing tower business, the former employer filed a multi-count complaint against them seeking an injunction, enforcement of the non-compete agreements, and damages.  The individuals and their newly-formed company filed a counterclaim seeking, among other things, a determination that the former employer’s prior breaches of the employment agreement (specifically, whether or not the former employer had properly compensated them during their tenure) rendered the non-competition agreement unenforceable.  (Richland Towers, Inc. and Richland Towers, LLC v. Tall Tower Ventures, LLC, et al., Fla. 2nd DCA, March 2014.)

Generally, under Florida law, when an agreement has several components and a variety of obligations from one party to another, one party’s breach of the agreement can cause the entire contractual relationship to terminate.  The logical argument, therefore, is that an employer’s breach of an employment agreement can result in the termination of the employment agreement.  To carry the logic of this argument one step farther: if the employer terminates the employment agreement, then under certain circumstances the employer would lose its ability to enforce the non-competition agreement against its former employee.  Makes sense, right?

As it turns out, whether or not the non-competition agreement remains enforceable is a matter of whether or not the former employer’s alleged breach was a dependent covenant or an independent covenant.  What’s the difference?  Well, for one thing, when a party breaches a dependent covenant “the entire contract is virtually destroyed.”  (See Steak House, Inc. v. Barnett, Fla. 1953)

Whether or not a covenant is dependent or independent is a legal question reserved for the court.  The general rule in Florida presumes dependent covenants.  That is to say, the entire contract is dependent on parties following each of the contract’s terms.  However, Florida law is also flexible in allowing parties to enter an enforceable contract that excludes this general interpretation.  In the Richland Towers matter mentioned earlier, the employment agreements contained “an explicit expression of a contrary intention.”  In fact, the non-competition agreement actually contained a paragraph entitled “Covenants Independent” that stated that “each restrictive covenant” was “independent of any other covenant or provision” of the agreement.

In the Richland Towers matter, the trial court denied the employer’s motion for the Court to enter a temporary injunction, and determined that because the former employer had not properly paid bonuses, the contractual non-competition agreement was unenforceable.  The appellate court reversed.  Based on the “Covenants Independent” paragraph discussed above, the appellate court found that ˗ whether or not the former employer properly paid bonuses ˗ the fact that the parties had contractually agreed that the restrictive covenants and non-competition agreements were “independent covenants” rendered them enforceable.

And the moral of the story is:  be careful out there.  In this case, the inclusion of a “Covenants Independent” clause allowed a former employer to retain the right to seek an injunction against former employees trying to compete within the same markets.  Without that clause, the allegation that the former employer failed to properly pay bonuses may have also led to the unenforceability of the non-competition agreement to which the employees freely agreed.  The scenarios can get complicated, and the litigation that results from these situations can put a financial burden on all parties involved.  Bottom line: if you need advice on how to draft your non-competition agreement, or with an issue attempting to enforce your non-competition agreement, be sure to seek legal advice from a professional familiar with this area of the law.

Burr & Forman LLP has offices throughout the Southeast with attorneys very familiar with these issues.

Peter Vilmos, is a Partner in Burr & Forman LLP’s Orlando office.

Filed Under: Florida, Non-Compete Agreements Tagged With: , ,

Former Events Coordinator Challenges Non-Compete Agreement

August 22, 2012 by

A former employee of Event Logistics, Inc. recently filed suit in the Davidson County Chancery Court challenging her employer’s non-compete agreement signed two years after her employment began.  In Veit v. Event Logistics, Inc., Davidson County Chancery Court Docket No. 12-945-III, Falon Marie Veit (“Veit”) alleges her employer, Event Logistics, Inc. (“ELI”), asked her to sign a “Non-Competition, Non-Solicitation, and Confidentiality Agreement” (the “Agreement”) on November 28, 2007 after she was promoted to a vice president position.  After completing a high profile event for the 2012 Iroquois Steeplechase, Veit resigned her employment with ELI on May 15, 2012.

The Agreement prohibits Veit for a period of two years from (1) engaging in activities competing with ELI within a 50 mile radius of ELI’s office in Nashville; (2) soliciting ELI’s customers with whom Veit had contact while employed by ELI; and (3) soliciting any of ELI’s employees to terminate his/her employment with ELI.

In her Complaint, Veit asks the Court to determine that the Agreement is not enforceable and that she is free to resume her activities as an events coordinator with clients with whom she worked while employed by ELI.  Veit argues ELI is not at risk of unfair competition because (1) event planning does not involve technical skills learned through specialized training provided by ELI; and (2) potential consumers of event planning services are not confidential or proprietary to ELI, but are individuals and commercial businesses that may need such services at any time and any location.

Veit also argues there is no adequate consideration supporting the Agreement.  Veit alleges she signed the Agreement because she was promised she would become an owner of ELI.  She ended her relation with ELI when it became apparent ELI would not give her an ownership interest in the company.

The Court recently denied Veit’s Motion for a temporary injunction enjoining the enforcement of the Agreement.  The Court found there were significant disputes as to whether ELI invested in Veit’s training, whether Veit had access to confidential and proprietary information, and whether Veit had developed into the “face of the company” with respect to ELI’s customers.  However, the Court temporarily modified the Agreement to allow Veit to engage in certain limited event coordinating activities so she could make a living.

This will be an interesting case to watch. Veit’s challenge to ELI’s non-compete agreement goes to the heart of balancing between the desire for free trade and prohibiting a former employee from unfairly competing against her employer.  It also demonstrates the Court’s authority to modify or “blue pencil” a non-compete agreement to achieve this balance.

Watch for updates on Veit v. Events Logistics, Inc. in the near future.

Filed Under: Non-Compete Agreements, Tennessee Tagged With: , , , , , , , , , , , ,