What Every Business Owner Should Know about Florida Noncompete Agreements

Business owners have insurance to protect their business assets in the case of liability loss or accidents. They create business entities—LLCs or corporations—to protect their personal assets. It makes perfect sense that they would also want to protect the business’ services and products from unfair competition by a former employee.

Noncompete and other “restrictive covenant” agreements are contractual agreements wherein an employee promises not to compete with an employer’s business during employment or for a specified time and in a specified location post-employment. They are your way to prevent employees, contractors, licensees, and distributors from learning your business at your expense, then becoming your direct competition.

If your employees leave only to open up a new shop knowing your prices, customers, and way of doing business, they gain an unfair competitive advantage—that you paid for!

Noncompete and other restrictive covenants take four primary forms:

1. Non-compete agreements that prohibit competing business activities.
2. Non-solicitation agreements that prohibit marketing and selling to your customers.
3. Non-piracy agreements that prohibit soliciting your employees and vendors.
4. Non-disclosure agreements that prohibit disclosure and use of your company’s secret information.

Some generalities apply across businesses, but noncompete agreements cannot be truly effective, and may actually be deemed unenforceable, if a one-size-fits-all approach is adopted. You can (and should) tailor your agreement to protect your business.

A Bad Choice, Corp.

ABC Corp. (not its real name) sold and installed industrial products that were manufactured overseas. Mr. Jones (not his real name) was an experienced sales manager from a different industry. He claimed that he could significantly grow the ABC business. The owner was convinced and hired Mr. Jones.

As part of the normal hiring process, Mr. Jones was presented with a noncompete agreement for his signature. He refused, but ABC hired Mr. Jones anyway.

The owner of ABC taught Mr. Jones ABC Corp.’s business, showed him the ABC prospecting and sales processes, introduced him to the manufacturer’s U.S. representative, and gave him the ABC customer list. But just six months after joining ABC Mr. Jones quit to pursue “another opportunity.”

While ABC’s owner was looking for his replacement, a long-time ABC customer stopped buying from them. Soon, others followed suit. Not long after that the overseas manufacturer terminated its relationship with ABC. Within three months of Mr. Jones quitting, ABC was on its knees and had to lay off most of its employees.

What happened? Unprotected business interests and unfair competition.

Once Mr. Jones learned the ABC business (all while receiving his ABC salary and benefits), he set up his own company, became a direct representative of the manufacturer, and began directly soliciting ABC’s customers. With very little overhead, Mr. Jones was able to underbid ABC Corp. ABC simply couldn’t compete at those price points.

The simple mistake: Allowing a key employee to be employed without a restrictive covenant.

The Current Noncompete Statute

Until 1996, noncompete agreements were generally considered improper restraints on trade in Florida. However, in 1996, the noncompete statute was entirely rewritten, and no substantive modifications have been made to date. Florida has a very pro-employer noncompete statute and the basic precepts are fairly straightforward. However, it’s important to understand the legal standards and enforcement considerations so you don’t end up with an agreement that’s not worth the paper it’s printed on.

Under current Florida law (F.S. §542.335) restrictive covenants are acceptable and enforceable so long as they meet certain requirements:

• The agreement must be in writing and signed by the employee or contractor.
• The business must prove it’s protecting a legitimate business interest such as trade secrets, confidential information, customer relationships, goodwill, or specialized training.
• The restriction must be for a reasonable time. The time frames change depending on the type of relationship the person has to your company. For employees or independent contractors, a restriction period of 6 months or less is reasonable but more than 2 years is unreasonable. Between 6 months and 2 years is a gray area that is a battle ground for litigation.
• The restriction must also be reasonable geographically. It can apply only in those areas where you are doing business or have begun to expand. If your client relationships are local, a multi-county restriction in the area is probably reasonable, but not the entire country.
• The restriction must be related to your type of business. Say you sell billing software to dentists, your restriction will generally be practice management software or even healthcare practice management software. But, your restriction can’t be all software. Also, be sure to provide a catch-all just in case your business changes.

Common Missteps with Noncompete Agreements

Despite noncompetes being generally enforceable, many employers find themselves in difficult situations when it comes time to enforce a noncompete agreement. Below we’ll look at some of the most common mistakes that business owners and employers make when dealing with noncompete agreements.

A “Legitimate” Problem

When navigating the “legitimate business interest” provision, all too many businesses run their noncompete agreements aground. Much of the litigation and case law on noncompete agreements has been on exactly this question: What exactly is a legitimate business interest?

The statute itself doesn’t limit the acceptable business interests to those explicitly listed in the statute. The facts and circumstances of the case should be used in determining what counts as a legitimate business interest.

For instance, the Florida Supreme Court recently ruled in White v. Mederi Caretenders Visiting Services of Southeast Florida, LLC, 226 So. 3d 774 (2017) that referral sources are not excluded from being a legitimate business interest since “the statute was never designed to be an exhaustive list.”

Does this mean your referral sources are legitimate business interests for a noncompete agreement? Not necessarily. The Supreme Court’s ruling reaffirmed the need for the trial courts to adjudicate on a case-by-case basis whether something was a legitimate business interest.

This means your legitimate business interests must be identified as precisely as possible to ensure that, should litigation be necessary, your noncompete agreement will be found enforceable.

Everybody and Their Mom

In order for a noncompete agreement to restrict an employee, that employee must actually be in position to disrupt your business. Put another way, an employee must be privy to whatever you have identified as your legitimate business interests if you want to bind her with a noncompete agreement.

Some employers will have every employee, regardless of status or position in the company, sign a noncompete agreement. This says to the court one of two things:

• You play fast and loose with your legitimate business interests because every single employee in your company has access to truly proprietary business information, from the most entry-level position to the most senior staffer, or
• What you called legitimate business interests really weren’t that “legitimate” if every single employee has access to them.

Either way, such widespread access to supposedly protected information calls into question the legitimacy of your legitimate business interest and limits the likelihood of enforceability.

Avoiding this issue is easy. First, you must accurately and specifically define the legitimate business interest(s) that you want protected by the noncompete agreements. Documentation is key in this regard.

Second, when you’ve identified the legitimate business interests, you then identify which employees in your company structure will have access to that information. Those key employees, and only those key employees, should be bound by noncompete agreements.

Everybody Else v. Florida

As I said above, the noncompete statutes differ from state to state, and Florida has a very pro-employer noncompete statute. Other states, like California, are at the other extreme of the spectrum and don’t allow noncompete agreements at all except in the context of business sales.

When a company does business in multiple states, they will include in their contracts a “choice of law” or “venue” provision, which says that, should litigation arise, it will take place in the location of their choosing.

The problem is that courts in a number of states—New York, Illinois, Alabama, and Georgia—have refused to enforce the choice of law provision because of the pro-employer bias in Florida’s noncompete statute.

In Brown & Brown, Inc. v. Johnson, 34 N.E. 3d 357 (2015) the New York Court of Appeals called Florida’s noncompete statute “truly obnoxious.” An Alabama court in 2001 ruled that Florida’s noncompete statute was contrary to Alabama public policy and that Alabama law would apply in that case instead of Florida law. In 2008 in Illinois and in 2012 in Georgia there were similar outcomes: Florida’s noncompete statute was found contrary to public policy and local law was applied in the lawsuit.

In each of these cases, the courts pointed to the same culprit: F.S. §542.335 (1)(g)(1). This paragraph of the noncompete statute says that in determining the enforceability of a restrictive covenant, the court will not take into account any economic hardships or other impacts the agreement might have on the employee.

If you will have employees outside of Florida with whom you will have noncompete agreements bound by choice of law provisions to Florida, this issue could arise for you as well. Courts in other states are often resistant to enforce Florida law on noncompete agreements because of the focus on the employer’s interests in the statute.

This means you must be extra cautious in your construction of the agreements if they are intended for interstate employees. Obviously, using a free contract template or fill-in-the-blank form from an online legal service like LegalZoom or RocketLawyer will not result in restrictive covenant agreements that are carefully crafted with your specific business in mind.

Consistency Is Key…and Expensive!

Like other restrictive covenants, the strength of a noncompete agreement is partially dependent on a company’s ability and willingness to enforce it. Doing so takes time and resources for attorneys and potentially expensive litigation. Moreover, consistency is vital to ensure that your agreements retain their enforceability.

Smaller companies or startups sometimes overlook the need for consistency when deciding whether to have its employees sign noncompete agreements. These companies may have a harder time finding the resources to prosecute noncompete agreements consistently.

Remember, if a noncompete agreement is in place and a breach occurs, regardless of the circumstances under which the employee left your company, a failure to take action can expose future attempts at enforcement to claims of retaliation or discrimination.

Furthermore, a company with a consistent history of noncompete enforcement can potentially forestall litigation by promptly notifying an employer who poaches your employee of the noncompete agreement.

Protect Your House

Your business can and should protect itself against loss of legitimate business interests that could harm the company by implementing noncompete agreements. Such agreements are specifically provided for by Florida law, and employers are given a fairly wide berth in what the agreement can say. Restrictive covenants are a legitimate and effective tool to protect your business and the livelihood of your employees. Your agreement must be carefully drafted to meet the legal requirements as well as your particular business needs.

However, employers who don’t take care to construct their noncompete agreements properly with the advice of professional legal counsel often find that their agreements are unenforceable. You will not only lose the time and money spent on the litigation to enforce the noncompete agreement, but you’ll also lose whatever aspects of your business you were trying to protect in the first place.