Non-Compete Clause Unenforceable?

Florida appellate court strikes down negotiated liquidated damages provision for violation of non-competition clause.

When the courts rule a non-compete clause as unenforceable and they require an evidentiary hearing on the breaching party’s actual damages, it certainly gets some attention. It doesn’t happen very often.

The Florida Third District Court of Appeals recently invalidated the liquidated damages provisions of parties’ duly negotiated non-competition agreement.  In the December 28, 2011 opinion Goldblatt v. C.P. Motion, Inc., (Fla. 3rd DCA 2011), the appellate court examined the parties’ non-competition clauses and liquidated damages sections of a post-dispute settlement agreement. The parties had negotiated an agreement to terminate their business relationship with a termination agreement that included cash payments, debt forgiveness, future indemnification, ownership relinquishment, a five-year restrictive covenant, a non-solicitation agreement and a per breach liquidated damages clause.

In short order, both parties claimed the other breached the agreement, resulting in a lawsuit and cross-motions for summary judgment.  The lower court awarded liquidated damages and entered judgment.  The appellate court reversed the ruling as it pertained to the liquidated damages holding:

●          Because the award per breach was the same regardless of what harm (if any) actually befell the non-breaching party, it was conceivable that the non-breaching party could collect more in liquidated damages than the actual harm suffered.

●          This possibility leads to a potential windfall to the non-breaching party.

●          The appellate court determined that the possibility of a resulting windfall was “unacceptable and unenforceable as it constitutes an award that is disproportionate to the actual harm.”

●          The court concluded that because the actual damages were “readily ascertainable,” the liquidated damages clause constituted a penalty.

Despite the fact that the parties negotiated the liquidated damages clause and agreed to apply the damages to either party equally, the appellate court found the non-compete clause unenforceable and remanded the matter for an evidentiary hearing on the non-breaching party’s actual damages.

Contact Burr Forman for more insights on the enforceability of non-compete clauses.