Ice Storms, My Secret Internet and Other Myths

Winter is around the corner.  On the calendar, however, it’s not yet here.  Surely Mother Nature is aware of this.  Still, an ice storm currently engulfs large swaths of our nation and is leaving many of us without power or heat.  If your new business was recently served with a lawsuit seeking an injunction against it to stop allegedly unlawful competition, then you can probably relate to those in the grips of the current storm.

The situation:  A successful closely held corporation sues a new competitor in its industry.  The complaint alleges that the new competitor hired a former employee with knowledge that the former employee and former employer had executed a non-competition agreement.  The complaint against the new competitor seeks an injunction.  If you’re familiar with this column, then you know that this scenario is rather commonplace.  Sometimes, however, the former employer/plaintiff can seek relief that a court deems unreasonable.  One such instance occurs with internet-based companies, or even with internet-reliant companies.

Here’s an example:  You own a company that sells goods over the internet.  You discover that your former employee is working for a new competitor seemingly in violation of his non-competition agreement.  Although there is no evidence that your business is damaged or will suffer damages as a result of the new competitor’s entry into the marketplace, your lawsuit seeks to enjoin the former employee from working for the competitor.  Your lawsuit also includes a claim against the new competitor for tortuous interference with your contract with the former employee.  So far, this legal action presents relatively straightforward issues.  Then you decide to make matters more complicated.

We often see former employers attempt to overreach when seeking damages.  You might, for instance, sue for alleged violation of trade secrets (claiming that the employee gave protected information to the new competitor).  Or you might sue for unfair and deceptive trade practices.  While this aggressive approach could potentially force the new competitor to agree to willingly close its business, it’s more likely than not that you’ve created a situation in which litigation (and associated litigation costs) could escalate.  Particularly with internet-based businesses, the capability to drive business to a particular website is seldom a secret.  While there are certainly professionals who claim that they can use unique search engine optimization (SEO) techniques to increase your exposure, many businesses discover that they can directly pay the search engines themselves to increase their traffic.  And that information is essentially available through the search engines for companies willing to pay for it.

As a result, your new competitor may actually get significant traffic to its website without ever attempting to steal your “trade secrets” in its efforts to do so.  Even if challenged, a “trade secret” that is dependent on information a search engine would otherwise make publicly available is difficult to uphold in court.  To some ˗ if your company is more financially capable of bearing the financial costs and personnel strain of the litigation storm ˗ this fight might seem worthwhile.  Consider, on the other hand, the possibility that if you lose in your efforts to prove unfair and deceptive trade practices you may actually have to pay prevailing party attorney’s fees and costs to the new competitor.  Why?  Because “deceptive and unfair trade practice” statutes usually contain clauses that allow courts to award prevailing party attorney’s fees and costs.  In other words, if the new competitor can hold on long enough to defeat your claim for deceptive and unfair trade practices, your company could end up paying your competitor’s legal bill (even if the court finds grounds to enter the injunction you sought).

Does that scenario denude or devalue your carefully drafted non-competition agreement?  No, it does not.  What the above scenario is intended to provide is a cautionary warning that when dealing with a pest, sometimes a fly swatter gives you a better result than a grenade.  Many times your well-pled motion for injunctive relief will achieve your business goals without having to prove the elements of the additional allegations.  Less cost to you, same effect on your newly-enjoined former-competitor.

Navigating the many laws and difficult language in the area of non-competition agreements can perplex even the most sophisticated business professionals.  This is the point in the blog when you are urged to seek refuge from this complexity with an attorney experienced in these issues and capable of both advising and litigating, if necessary.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

When Planning and Football Go Hand-in-Hand

As summer winds down and the temperatures cool, many parts of our economy and the business world tend to heat up.  The heat typically starts on the gridiron, where rabid fans of college football begin to analyze every important snap of every important play for their very important team.  The analysis continues for every snap of the rivals of their very important team (and perhaps some snaps of other conference foes or even – dare we suggest – the snaps of teams in other conferences).  My law firm opened its first office in Birmingham, Alabama more than 100 years ago and now has offices through the southeast.  Trust me on this: the heat starts on the gridiron.

College football aside, companies often want to conclude deals before the close of their fiscal year, or before the end of the calendar year.  Bank of America Merrill Lynch recently reported (amid questions of whether anticipated rising healthcare costs would impede growth) that “Economic optimism is the highest in five years, and global business abounds…”  Many companies assess their cash positions and take the opportunity whenever possible to purchase items at the close of the year in order to use the capital expenditure to reduce income taxes.  In the world of commercial litigation, summer schedules (and the inevitable summer vacations) give way to longer hours, increased numbers of evidentiary hearings and trials, and an array of settlement conferences and other forms of alternative dispute resolution intended to clear the slate of 2013 in preparation for the new business ahead.

Our clients typically take this opportunity to plan for the upcoming year.  Budgets are in the works.  Forecasts are made.  Among the forecasts is often the question: “Who will take over my business when current management decides to retire?”  And thus we segue into succession planning and the value of non-compete agreements to this discussion.

While a non-compete agreement is intended to ensure that a departing employee does not steal away to a competitor to the detriment of the former employer, it also provides an excellent opportunity to secure strong leadership in succession planning.  It goes without saying that an excellent employee who perceives little opportunity for future advancement is more likely to seek opportunities elsewhere than an employee who genuinely has an opportunity to advance within the company’s leadership.  When an employee’s contract limits the ability to compete within certain industries or within a certain geographic area for a defined period of time, the knowledge of that possible restraint can make the open door to advancement appear all-the-more attractive.

It is important, therefore, to regularly review your non-competition agreements.  Are there employees within your organization who are ready for more involved leadership positions?  Consider whether or not these employees are so vital to the business that their departure would immediately have a negative impact on the company’s bottom line.  Consider also whether the company would benefit from a planned, informed and intentional transition from current leadership to future leadership.  Although having a non-competition agreement in place is certainly no guarantee for a smooth transition from the existing regime to a company’s new leadership, the argument certainly exists that having a carefully drafted and impactful non-competition agreement in place can allow you to initiate important conversations without the fear that current employees will prematurely head for the doors.

Yes, the economy is heating up.  As is the football season.  If your company is also experiencing growth, consider this a good time to do some planning of your own.  If you believe it is important for your favorite football team to put together a game plan intended to defeat its weekend opponent, then you surely must also recognize the importance of planning for your own business.  This is the part of the blog where you are encouraged to seek a professional’s advice to discuss non-competition agreements and how they could impact and benefit your own business planning.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

It’s Not the Heat, It’s the Humidity

When you live in Florida, you tend to hear that expression for far too many months of the year.  Even during the winter, weather reports often include information on the “sun index” indicating the level of sunscreen you might need in order to survive your next trip to the local grocery store.  Visitors from the southwest, where temperatures earlier this month reached over 100°F, are quick to inform Floridians that it’s hot in Phoenix, “but it’s a dry heat.”

Well, if you’re looking for things other than the weather to make you sweat, you might take a look at your company’s policy on whether or not a departing employee can go to work for a competitor.  Presumably, your direct competitor will now reap the benefit of the many hours and significant financial commitment your business expended.  And as a business owner, you might ask: “What can I do?”  In many circumstances, your best business move is to protect your businesses’ interests with a carefully crafted non-competition agreement.

The rules for non-competition agreements vary from state to state.  Some states basically do not allow them (or greatly disfavor them).  Other states have no legislation concerning non-competition agreements, choosing instead to allow the legal system to define the issue on a case-by-case basis.  Indiana, for instance, recently allowed a five-year non-competition agreement, concluding that both the length of time (five years), and the restriction (a two county area) were reasonable.    See Mayne v. O’Bannon Publishing Co. d/b/a Corydon Instant Press.  In Florida, the legislature has created a statute that specifically defines the basic structure of contracts that Florida law allows to validly restrain trade.  Key among the allowed restraints of trade are non-competition agreements and limitations on the use of a company’s trade secrets after an employee leaves the company.

Although defined in the statutes, Florida law also requires that the courts interpret non-competition agreements in favor of the employee in those circumstances when the agreement is vague or missing terms.  Even when parties are careful to define terms in a non-competition agreement, the contract cannot confine future employment beyond the statutory guidelines, nor are non-competition agreements immune from legal challenges regarding their breadth, their validity, or their applicability to particular circumstances.

In the real world, employees leave for new positions every day.  They pursue opportunities at other companies.  They perceive opportunities to start companies of their own.  They move on.  Nonetheless, thoughtfully crafted non-competition agreements can significantly help a business retain key employees, or – at the very least – make it far more difficult for departing employees to immediately join a competitor or start a competing business.  As in most contracts, the more specific the limitation (and the more reasonable the limitation relative to the possible damage a departing employee might cause your business), the more likely a court will uphold the contract.  If, for instance, your business is confined to a particular county, then restricting a departing employee from working in an entirely different State makes little sense.  After all, how would that departure negatively impact your business?  So take care to have your attorney tailor your non-competition agreement in a manner that reflects your business and that provides you the protection you deserve for those inevitable situations when an employee critical to your bottom line decides to see if the grass is greener elsewhere.

Which takes us back to the heat and the humidity.  While it’s tough to argue that the humidity can turn your Florida summer from a sauna to a steam bath, it’s also tough to deny that – if nothing else – the rain and the humidity do an excellent job of keeping our lawns green year-round.  If keeping critical employees around makes sense to the financial health of your company, consider hiring an attorney familiar with drafting non-competition agreements.  Under certain circumstances, it could literally save your business.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Why Go to the Movies?

Summer has arrived.  The Hollywood blockbusters are here.  New animated features hit the big screens this week.  Superman is flying once more.  Sure, if the movies are your cup of tea, then summer is your annual thirst quencher.  However if you’re looking for drama, you need only scan the internet to find your daily dose of serious corporate espionage and the criminal theft of trade secrets from American corporations.

Just yesterday the San Francisco Chronicle ran a story of a scientist working on solar cell technology who pled guilty to several counts of wire fraud in an indictment claiming he stole trade secrets from his employer “and tried to take them to a competitor in China.”  The prosecutors in the case “estimate the total loss from the theft of trade secrets at nearly $22.7 million.”  The Telegraph – a British newspaper – reported this week that cyber espionage is rampant in the UK with “foreign hackers” secretly working in some companies for up to two years “discreetly stealing intellectual property.”  American newspapers recently published articles that our government systems are under constant attack not only from rogue hackers but also from foreign governments utilizing sophisticated programs and systems in an effort to steal American secrets and military information.  Same thing for recent stories of Chinese manufacturer Sinovel and two if its executives, recently indicted for alleged theft of wind turbine trade secrets.  Alleged financial loss to the owner of the trade secrets: approximately $800 million according to SecurityInfoWatch.com.

The problem is rampant and unlikely to go away.  Nor is this something new.  Corporate espionage likely began soon after the first business incorporated.  Of course, victimized businesses take little comfort knowing that others victims also exist.  So what can your company do to avoid, eliminate or minimize this potential loss?  First line of defense, of course, is education.  Educate the people in charge of monitoring the transmission of technical data on the best means to detect the “discreet stealing.”  Depending on the value of the intellectual property (and the potential loss to your business if a competitor was to receive the trade secret information without a license or without compensation), the potential losses could justify the investment in employees whose role is to oversee the data transferred to and from your company’s system.

As most of you who read this post already know, Florida employment is at will.  While termination for a discriminatory purpose is unlawful, termination for violation of company policies (or termination for violation of State or federal law) is common.  However, as these events (and the dozens of other recently reported events) indicate, the most difficult task for American companies lies in screening employees so as to minimize the possibility of trade secret theft, while at the same time ensuring that all potential employees are given an equal opportunity to apply for a position for which they are potentially qualified.

If your company faces a patient, technically savvy and stealthy employee, like the ones described who steal trade secrets with stealth for two years before they are discovered, a well-written policy is not likely to act as a significant deterrent.  On the other hand, Florida law specifically allows employers to create written policies regarding the protection of its trade secrets and to enforce those policies against its employees as appropriate.  In most circumstances, employee education (and continuing acknowledgement) of the employer’s policies, in concert with a method for your business to monitor activity and to “police” itself, can deter most of the individuals who might consider trade secret theft.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Florida Court Reverses Preliminary Injunction on Restrictive Covenant

If you have followed this blog, then you likely already know that restrictive covenants are legal and enforceable in Florida.  You should also know that – although enforceable – restrictive covenants are strictly construed both with regard to their specific wording and with regard to the restraints set forth in Florida Statutes § 542.335.  Because of this, parties often initiate litigation to enforce restrictive covenants.  In many instances, heated proceedings lead courts to issue preliminary injunctions enforcing parties’ agreements to either keep a former employee from competing against a former employer for a limited period of time, or to keep a former employee from using the former employers’ trade secrets.

As usual with these restrictive covenants, the devil is in the details.  Which leads us to the recent decision of Zodiac Records Inc., et al. v. Choice Environmental Services (Fla. 4th DCA 2013).  The facts in Zodiac, although perhaps not unique, offer some insight into the often complicated analysis a restrictive covenant matter requires.  In a nutshell, Zodiac Records entered into a one-year consulting agreement with Choice Environmental in April 2008.  As part of the agreement, Zodiac agreed that for 36 months after the agreement terminated, Zodiac “would not compete with Choice by soliciting or influencing any of Choice’s customers to discontinue or reduce the extent of their relationships with Choice.” (See Zodiac.)  Zodiac also agreed to a 36 month confidentiality period to protect Choice Environmental’s trade secrets after the agreement terminated.

Zodiac’s principal consulted for Choice Environmental until he resigned in June 2011, at which point he formed a competing company and solicited Choice Environmental’s customers, among others.

Choice Environmental sued, claiming:

  • That Zodiac and its principal agreed to a 36-month restrictive covenant after termination;
  • That at the latest the one-year agreement terminated on its own terms (April 2009); and
  • That as a result Zodiac and its principal was subject to the terms of the agreement until April 2012.

Here’s the twist:  at the hearing on the motion for preliminary injunction, Choice Environmental stipulated that it would not rely on a misappropriation of trade secrets to support its motion for preliminary injunction.  The trial court enjoined Zodiac, its principal, and the competing company that the principal formed.  In April 2013, Florida’s Fourth District Court of Appeal reversed.  Among its analysis, the appellate court reasoned:

Generally, where “a restrictive covenant [is] sought to be enforced against a former employee” or independent contractor, “a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.” § 542.335(1)(d)1., Fla. Stat. (2011). However, “[i]n determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less.” § 542.335(1)(e), Fla. Stat. (2011). In the present case, the consulting agreement expired on April 7, 2009. Therefore, unless the restrictive covenant was “predicated upon the protection of trade secrets,” the restrictive covenant was not enforceable beyond April 7, 2011—a date prior to [Zodiac’s principal’s] alleged violations of the non-solicitation provision. By contrast, if the restrictive covenant was “predicated upon the protection of trade secrets,” the postterm duration of thirty-six months was enforceable, which would allow Choice to enjoin appellants pursuant to the non-solicitation provision through April 7, 2012.

At the preliminary injunction hearing Zodiac argued that if Choice Environmental abandoned (or otherwise failed to prove) its claim that the customer list – and, therefore, the solicitation of customers – was a protected trade secret, then Choice was limited to a two-year enforceability period for the non-compete provisions of the parties’ agreement.  If the two-year period applied, Zodiac argued, then the non-compete provisions expired before Zodiac and its principal formed the new, competing company.  Choice Environmental argued that because the written agreement contemplated both 1) the enforcement of the restrictive covenant and; 2) the protection of trade secrets, the contractual three-year limit was statutorily reasonable, rendering the restrictive covenant was enforceable.  Based on the parties’ stipulation, the trial court received no evidence on the issue of whether Zodiac violated Choice Environmental’s trade secrets.

The appellate court’s reversal notes some interesting points for our clients to keep in mind:

  • A trial court may not grant a former employer’s motion for a temporary injunction against a former employee without first permitting the former employee “to put on its evidentiary case.” JonJuan Salon, Inc. v. Acosta, 922 So. 2d 1081, 1085 (Fla. 4th DCA 2006).
  • [T]he trial court could have determined that the customer relationships Choice sought to protect under its non-solicitation agreement were not trade secrets, and that the restrictive covenant was therefore unenforceable past April 7, 2011.1 See Estetique Inc. USA v. Xpamed LLC, 2011 WL 4102340, at *10 (S.D. Fla. Sept. 15, 2011) (rejecting movant’s argument that the five-year postterm restriction of section 542.335(1)(e) applied because movant “failed to show a substantial likelihood of success that its confidential customer information rises to the level of a trade secret”); Zupnik v. All Fla. Paper, Inc., 997 So. 2d 1234, 1238-39 (Fla. 3d DCA 2008).
  • The trial court also noted that “a former employer’s customer relationships do not automatically qualify as trade secrets, even if a party’s restrictive covenant attempts to characterize them as such. East v. Aqua Gaming, 805 So. 2d 932, 934 (Fla. 2d DCA 2001). To qualify as a trade secret, there must be evidence that a customer list “was the product of great expense and effort, that it included information that was confidential and not available from public sources, and that it was distilled from larger lists of potential customers into a list of viable customers for [a] unique business.” Id.

This case illustrates several important facets of the complexity of litigating restrictive covenants and violation of trade secrets cases in Florida.  First, as always, the parties’ written agreement will define whether and under what circumstances the restrictive covenant or agreed protection of trade secrets is enforceable.  Second, when litigating these cases, the nuances of the Florida statutes present complex issues that can result in a reversal of an injunction, even after a successful and lengthy evidentiary hearing at the trial court.  This is the point in the blog when I suggest that you contact me or any of the other qualified Burr & Forman LLP attorneys to assist you in drafting, reviewing or otherwise to discuss a restrictive covenant or agreement to protect a trade secrets and your business.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Protecting Your Closely Held Business

A client recently came to me with a problem lawyers often hear: the client’s family-owned business needed to hire new employees to keep up with the growth. In particular, the company needed additional sales force and additional operators in the field. The problem was that in order to train and then oversee these new employees, the client had to disclose to them both its pricing guidelines and its field techniques. This particular business (which was highly regulated and dealt with restricted and often dangerous chemicals) kept its customer base because – like most successful businesses – it provided excellent customer service combined with very competitive pricing.

The owner feared that once his customers became acquainted with the new sales personnel and/or the new field technicians, the new employees could use their knowledge of the company’s pricing guidelines and field techniques in order to start a competing business. Fortunately, under Chapter 542, Florida Statutes, we were able to craft a document that lawfully restricted the new employees’ ability to quickly begin a competing company and that gave the client peace of mind to continue the company’s expansion.

A primer on Chapter 542, Florida Statutes

The short title for Chapter 542 Florida Statutes is “Florida Antitrust Act of 1980.” So basically it’s a statute “to complement the body of federal law prohibiting restraints of trade or commerce in order to foster effective competition.” See 542.16. Fla. Stat. However within the statute is the current language in 542.335 Fla. Stat., entitled Valid restraints of trade or commerce.

Within this section, Florida law allows restrictive covenants, “so long as such contracts are reasonable in time, area, and line of business”. It is important to note, however, that Florida law strictly construes restrictive covenants, all of which are unenforceable unless set forth in writing signed by the person against whom enforcement is sought. It is also essential that the restrictive covenant itself is only valid if the party seeking enforcement can demonstrate a “legitimate business interest” worthy of protection. Examples of legitimate business interests include:

1. Trade secrets;
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
3. Substantial relationships with existing or perspective clients, patients or customers;
4. Good will associated with a trade name, a trademark, a service mark, or “trade dress,” a specific geographic location, or a specific marketing or trade area;
5. Extraordinary or specialized training.

As you might imagine with any strictly interpreted statute, failure to prove the legitimate business interest will render a restrictive covenant unlawful, void and unenforceable. The statute also shifts the burden from the entity seeking to enforce the restrictive covenant to the person opposing enforcement upon prima facie showing that the restraint is reasonably necessary. Defenses to these actions include that the restrictive covenant is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests.”

If the court determines that one of these defenses exists, then the statute directs the court to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

Fortunately, Florida law also sets forth some parameters to help both drafters of restrictive covenants and parties seeking to enforce or defend enforcement actions with some guidelines as to the validity of any particular restriction. As one might expect, the more vital the need to protect a “legitimate business interest,” the longer the period Florida law will deem as reasonable. For instance, as long as the restrictive covenant does not deal with the sale of a business or professional practice or an equitable interest in any other type of business or professional practice (including a partnership or limited liability company), then as to a former employee, agent, or independent contractor the court shall presume reasonable in time any restraint that is six months or less in duration and shall presume unreasonable in time any restraint that is more than two years in duration. If a party seeks to enforce a restrictive covenant against the distributor, dealer, franchisee, or licensee of a trademark or service mark (not associated with the businesses listed above) then the court increases its timeframes and will presume reasonable any restraint of one year or less and shall presume unreasonable any restraint more than three years in duration. On the other hand if the restrictive covenant does specifically deal with an action against the seller of all or part of the assets of a business or professional practice, the shares of a corporation, partnership interest, a limited liability company membership or any equity interests of any other type in a business or professional practice, then the court shall presume reasonable a restraint of three years or less and increases its tolerance for reasonability to a period from three years to more than seven years in duration.

The statute also deals with trade secrets and specifically states that a “post term restrictive covenant predicated upon the protection of trade secrets” is presumed reasonable if the restraints are for five years or less and unreasonable if the restraint is for more than ten years. However, all of those presumptions are rebuttable.

Florida law in this area has many nuances. It is quite possible that your valid, written restrictive covenant was drafted to narrowly protect a line of business or a geographical area in which your company no longer has an interest. In such cases, the courts can consider these facts as a defense even in the face of an argument that future damages could arise.

Getting back to the client whose inquiry prompted this post, his closely held corporation sought both legal protection and peace of mind. After a series of successful hires, all signs so far indicate that the client has achieved an effective and enforceable restraint of trade. Because that client services nearly every county in the State of
Florida, the written restrictive covenant bars the new employees from working for a period of two years in the same line of business in all of those counties. To the extent any of the techniques that the client utilizes and/or developed for its field technicians constitutes a trade secret, the document also restricts the use of that trade secret for a period less than five years. Most critical for enforcement, however, is the fact that the business owner never allows a new sales person or field technician to begin work until he or she executes the restrictive covenant. The business owner even goes one step further, having all prospective employees to whom the restrictive covenant applies initial the section of the restrictive covenant indicating that the prospective employee was given the documents in advance of the employment and had the right to seek his or her own legal counsel prior to executing the restriction. If carefully drafted and thoughtfully implemented, a written restrictive covenant can successfully protect the business owners of small, closely held companies just as well as they can protect mid-sized or large corporations.

This is the point in the blog where I tell you to seek legal advice in the drafting or enforcement of your restrictive covenant. The Burr & Forman legal team has qualified attorneys throughout its footprint with significant experience in these issues.

Florida Appellate Court Says: “Independent Contractor” Still an Employee for Purposes of Enforcing Non-Compete Agreement

You hire an employee and pay her a salary.  In order to earn more money at your business, she voluntarily chooses to transition to “independent contractor” status.  Question:  Does that transition trigger the non-compete agreement executed at the time the employee started at the company?  Broadly interpreting the employer/employee employment contract, a Florida Appellate Court recently held that the employer could argue that the transition did not negatively affect the otherwise valid restriction.  This employer friendly decision ‒ a reversal of the trial court’s findings ‒ involved the following basic facts:

  • Employee signed a seemingly valid non-compete agreement restricting future employment for a 2 year period within a 100 mile radius of “any store, office, or facility of the company.”
  • During training, the former employee held a salaried position;
  • Once trained, the employee chose to act as an “independent contractor” allowing her to earn a commission and subjecting her to payments for her share of the business’s rent, supplies, utilities and insurance.  She was also responsible to pay taxes on her commissions;
  • The agreement contained the clause “Any subsequent change or changes in my duties, salary or compensation, will not affect the validity or scope of this Agreement . . . ;”
  • More than two years after her transition to “independent contractor,” the former employee started a competing business approximately 5 miles from the company’s offices.

In the employer’s suit to enforce its non-compete agreement it cited Florida Statute §542.335(1)(b) claiming that it had a legitimate business interest justifying the restrictive covenant.  The motion properly alleged that the restrictive covenants were reasonably necessary to protect the company’s established business interests pursuant to Florida Statute §542.335(1)(c).  Also included in the employer’s motion were the 4 elements required for a temporary injunction (irreparable harm, lack of an adequate remedy at law, substantial likelihood of success on the merits, and a public interest favoring entry of the injunction.)

In response, the former employee argued that even if valid, the 2 year restrictive period began to run when the former employee chose to become an independent contractor and was no longer salaried.  See Anarkali Boutique, Inc. v. Ortiz (Fla. 4th DCA 2012).

The appellate court reversed noting that Florida courts are required to construe a contract as a whole and to broadly give effect to every provision of the agreement.  Using that more broad interpretation of the contract, the appellate court held that the change in the former employee’s status from an employee to an independent contractor “did not cause the 2 year non-compete period to begin running.  Instead, the two year non-compete period did not begin running until the worker left the company.”  Id. Ultimately the Anarkali Boutique Court remanded the matter to allow the trial court to make factual findings as to whether or not the employer had proven the requirements set forth in Florida Statute §542.335.  Nonetheless, this case was a clear victory for the employer whose decision to allow employees to earn a larger salary and build a client base was not manipulated to undermine an otherwise duly negotiated restrictive covenant.

Practitioner’s Note:  Although the employer was able to pursue its arguments upholding its restrictive covenant, this case demonstrates another example of the importance of tailoring your non-compete agreement to the specific situation your business faces.  Had the non-compete agreement in this case ‒ where the employer knew in advance that it would offer salaried employees an opportunity to work on a commission-only basis ‒ it could have included in its non-compete agreement language broad enough to specifically address that situation.  Had the contract contained that language, the employer may have more easily retained its customers and would have, almost assuredly, limited the costs of litigation and enforcement.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

U.S. Supreme Court Rules That Arbitrators, Rather Than Courts, Determine The Enforceability Of Non-Compete Covenants In Arbitrable Agreements

Because non-compete agreements are governed by state law, it is rare that the U.S. Supreme Court issues a ruling affecting such contracts. This week’s decision in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. __ (2012)(decided Nov. 26, 2012), however, announces a rule of which non-compete disputants and their counsel nationwide must necessarily take notice.

The Court held that when a non-compete agreement contains an arbitration clause that is subject to the Federal Arbitration Act (FAA), 9 U.S.C. §1 et seq., “it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law.” Id. (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-6 (2006)).  In so holding, the Court vacated an Oklahoma Supreme Court decision that declared the non-compete agreements to be against Oklahoma public policy and thus void and unenforceable.

The Court based its decision on the FAA’s “national policy favoring arbitration” and on the established rule of law that “when parties commit to arbitrate contractual disputes, . . . attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’” Id. (quoting Preston v. Ferrer, 552 U.S. 346,349(2008)).  The Court also cited the supremacy clause from the US. Constitution, Article VI, cl. 2.

BURR POINTThis decision goes in the “win” column for employers everywhere (except those who hire employees with non-competes), because it removes the ability of an employee to obtain relief in the court system when an employer seeks to avail itself of an arbitration clause in connection with the enforcement of a non-compete covenant.  The ruling makes a definite difference in jurisdictions in which the governing law often results in Courts voiding or modifying non-compete agreements for overbreadth.  Arbitrators have much more latitude than trial courts in how they apply the law (and arbitrator’s decisions are extremely difficult to get overturned) and are thus much less likely to void a non-compete covenant that was agreed upon by the parties.

Does Bird’s Eye View Render Executive Non-Compete Unenforceable?

So here’s a good one for employers to ponder.  Let’s say you have an executive subject to a valid and seemingly enforceable non-compete agreement.  Because the agreement concerns an executive, we would normally presume that a court is likely to strictly read the terms of a non-compete agreement and enforce it accordingly.  Well, the Second Circuit Court of Appeals recently affirmed a decision that an executive whose level of seniority limited his knowledge of the details rendered him not subject to the terms of his otherwise-valid non-compete agreement.

In the typical case, an employee with specific knowledge – let’s use the example of an engineer – enters into a non-compete agreement that states, for instance, that he will not work for a competitor within the same geographic area of his current job responsibilities for one year after his departure, regardless of the reason for his departure.  If the agreement is otherwise enforceable, a Florida court would typically view the above-described restriction as valid.  After all, the engineer has specific knowledge the details of which could, in theory at least, give a competitor an advantage over the former employer.

Taking this analysis one step further, however, led at least one court to determine that the senior executive was so far removed from the mundane specifics of the actual work product, he was actually no longer subject to the non-compete agreement he voluntarily executed.  Which brings us to IBM v. Visentin, 2011 WL 672025 (SDNY 2011), aff’d 437 Fed Appx 53 (2d Cir. 2011).  I’ll keep the facts short, although the somewhat unique nature of the facts obviously resulted in a seemingly unexpected opinion.  Visentin worked at IBM, very successfully, for over a quarter of a century.  So successfully, in fact, that at the time he departed IBM for competitor Hewlett Packard he was in charge of a multi-billion dollar business unit.  He had executed a non-compete with a one year work restriction that on its face appeared to encompass his prospective employment with Hewlett Packard.  The agreement Visentin executed included a relatively standard three-year look-back stating that the agreement only pertained to those areas of IBM’s business in which Visentin worked in the three years prior to his departure.

When Visentin left, IBM sued, seeking injunctive relief based on Visentin’s alleged violation of the non-compete described above.  The federal district court denied the motion for a preliminary injunction.  (In cases to enforce non-compete agreements, denial of the preliminary injunction usually ends the dispute… unless the former employer appeals.)  IBM appealed, only to have the 2nd Circuit Court of Appeal affirm the lower court’s ruling.

While the denial of the preliminary injunction motion in Visentin presents a unique situation due to Visentin’s high level executive position, the district court’s lengthy holding contains some valuable insight in the analysis of non-compete issues.  Among the points raised was that the high level of the former employee’s position allowed him a supervisory capacity (he was a manager of a business line with expertise in making operations “efficient”), and yet insulated him from the specific technological goings-on and to detailed data potentially protected as a trade secret.  So in essence, because he maintained a bird’s-eye view of operations, rather than a position with direct creative input or a position “on the line,” he was insulated from information that would negate his former employer’s presumed competitive advantage.

The district court opinion went even further, at one point discussing that among known competitors with significant resources, the open flow of intelligence in the marketplace rendered the probability of harmful disclosure somewhat remote (if even possible).  Also interesting was the emphasis that success on a motion for preliminary injunction was challenging in the absence of known instances of disclosures of detailed information that clearly violated the non-compete agreement, or detailed information that the employee’s new position would require improper disclosure.  Given the bird’s-eye view Visentin had over the IBM business unit, pointing out specific instances of wrongful disclosures proved difficult.

So where does that leave employers seeking to enforce these agreements?  Certainly in Florida, there a many instances in which the courts uphold these agreements.  What is important to keep in mind, however, is the necessity of providing either enough detail in your non-compete/non-disclosure agreement to make enforcement easier, or to allege with enough specificity the actual information or trade secrets the disclosure of which could cause actual harm.  The case discussed in this article also points out that despite possible factual similarities, each non-compete rests on its own merits and brings to the dispute its own facts.  It is the nature of the information the employer seeks to protect and the factual circumstances surrounding the former employee’s duties and experience that will form the foundation of any successful argument regarding enforcement.

This is the part where I counsel you to get counsel.  Better yet, make sure you get counsel familiar with these issues.

Author Peter C. Vilmos, Esq. works in the Orlando office of Burr & Forman LLP, 407-540-6600.  Contact Peter or any attorney in Burr & Forman’s Non-Compete and Trade Secrets group for more information or for further inquiries.

Sometimes Hiring a New Employee Can Invite an Unwanted Lawsuit

Let’s set the scene:  Your search for an employee with the required job skills and experience results in your Florida-based company’s decision to hire someone presently working for your competitor.  During the salary/benefit negotiations, you learn that your prospective employee executed a non-compete agreement with her present employer.  “Not to worry,” you tell her.  “If your present employer sues you to enforce the non-compete we will pay for your defense.  In fact, we’ll make it part of your contract if you come for us.”  Bad move.

Many prospective employers believe non-compete agreements only have legal consequences for prospective employees.  However if ─ as in the example above ─ the prospective employer is aware of the agreement before hiring the employee, then the prospective employer runs the risk of liability to the former employer for tortiously interfering with the non-compete agreement. While the past employer will have to prove the new employer had knowledge of the non-compete agreement as part of a tortious interference claim, a new employer makes this task easier when it includes a provision agreeing to indemnify the employee for any litigation over non-compete agreements.

To prove tortious interference with a non-compete, Florida courts apply a four-prong test:  1) existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the defendant; and (4) damage to the plaintiff as a result of the breach of the relationship.  Tamiami Trail Tours, Inc. v. Crosby, 463 So. 2d 1126 (Fla. 1985).

How then does a prospective or subsequent employer protect itself from the former employer’s tortious interference claim?  For starters, avoid agreements to indemnify the new employee and/or pay for legal defense costs associated  with possible breach of the non-compete agreement.  As recently as May 2012, a Florida federal court reasoned that the plaintiff was “substantially likely to prevail on the claim of tortious interference” in large part because the new employer “expressly acknowledged the Agreement between [the employee] and [the plaintiff] and the restrictive covenants contained therein.”  The new employer, as part of its agreement with the employee, “agreed to assume [the employee’s] defense in the event she [was] sued by [the plaintiff] over the terms of the Agreement, and indemnify her from any and all expenses, fees, damages, judgments, and amounts incurred by her in connection with the action.” The court held that this express knowledge of the non-compete agreement was evidence that the new employer caused the employee to breach the non-compete agreement. See Electrostim Medical Services, Inc. v. Lindsey, (M.D. Fla. 2012).

And this isn’t the first time a federal court in Florida found that a former employer could sue a subsequent employer for tortious interference.  In a 1998 federal court opinion the  employee testified that he had informed the new employer about his employment agreement with the plaintiff without actually providing a copy.  When coupled with testimony that the new employer hired the employee to essentially recreate the former employer’s products, the court found enough evidence to reason that “the facts . . . support a substantial likelihood that Plaintiff [would] ultimately prevail on the claim of tortious interference.”  See Stoneworks, Inc. v. Empire Marble & Granite, Inc. (S.D. Fla. 1998).  In 2009 a court found that the new employer had knowledge of the non-compete agreement with the plaintiff because it “expressly acknowledged the existence of that agreement in the employment contract signed with [the employee].”  The result: an opinion that the plaintiff had “shown a substantial likelihood of success on the merits of its claim that [the new employer] tortiously interfered with the . . . contract for [the employee] not to compete with [plaintiff].”  See The Continental Group, Inc. v. KW Property Management, LLC (S.D. Fla. 2009).

Similar findings appear in Florida appellate courts.  In 2010, Florida’s First District Court of Appeal held that allegations that 1) the employee gave a copy of the plaintiff’s employment contract to the new employer and; 2) that the new employer “devised a plan to allow [the employee] to quit her employment with [the plaintiff] and to . . . work for [the new employer] . . . without compensating [the plaintiff] as required under [the contract]” stated a cause of action for tortious interference against the subsequent employer.  See  Southeastern Integrated Medical, P.L. v. North Florida Women’s Physicians, P.A. (Fla. 1st DCA 2010).

What now?  Well, if you’re subject to a non-compete agreement, read it carefully.  They are often narrowly tailored.  As we discussed in previous posts, even valid non-compete agreements can prove ineffective to stop future competition.  On the other hand, because Florida allows non-compete agreements, it is important to understand the restrictions of a particular agreement and the risks of violating it.  Do you have the right to employ someone seemingly subject to a valid non-compete agreement?  Of course you do.  Just keep in mind that knowingly hiring someone subject to a non-compete agreement can result not only in additional legal fees and costs resulting from the employee’s breach, it may also subject the new employer to substantial damages resulting from a claim for tortious interference with the former employer/employee relationship.  Remember that courts have determined that prima facie evidence of tortious interference exists when a subsequent employer agrees to indemnify the new employee and/or pay defense costs if the former employer files an enforcement lawsuit.

This is the part of the blog where we suggest you seek competent legal counsel when you face these issues.  The nuances of this area of the law and the specific factual circumstances surrounding each situation deserve a sound initial legal opinion. Our Burr & Forman attorneys would be happy to assist you in these matters.