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.

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.