Employment agreements often contain a non-compete/non-solicitation provision known as a restrictive covenant. Legal disputes involving this type of provision may occur when a former employee sets up a new business or starts a new job with a new employer and the former employer commences a breach of contract lawsuit invoking the restrictive covenant.
The enforcement of restrictive covenants in Florida is governed by Florida Statute 542.335 entitled “Valid Restraints of Trade or Commerce.” The employee-defendant in a lawsuit involving restrictive covenants will generally argue that the covenant is unenforceable. Florida law concerning restrictive covenants, however, is generally viewed as being very employer friendly. For example, the statute specifically states that “[i]n determining the enforceability of a restrictive covenant, a court “[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” Our emphasis. Fla. Stat. 542.335(1)(g)(1).
What does this wording mean for a former employee who is accused of violation of a restrictive covenant in Florida? That Florida courts will generally construe restrictive covenants in favor of protecting the employer’s interests. Pursuant to the statute, they will not engage in a balancing test. For example, on July 15, 2015, Florida’s Second District Court of Appeals invoked the wording of the statute to find that the restrictive convent at issue was enforceable in the case of Florida Digestive Health Specialists, LLP [FDHS], et al. v. Colina and Intercoastal Medical Group, Inc. [IMG].
Defendant Colina, a physician, had been a solo practitioner prior to joining FDHS. Upon joining FDHS, Dr. Colina executed a Partner Professional Services Agreement (“PPS Agreement”) which included a provision stating that “Dr. Colina would not without prior consent of FDHS, directly or indirectly “ ‘divulge, furnish or make accessible to any person, or copy, take or use in an manner any of the Confidential Information.’ ” Slip opinion @ 2. Confidential Information was defined and ranged from internal organization documents and business methods to patient names and patient lists.
The PPS Agreement also included a provision stating that “[F]or a period of two years following the termination of this Agreement, for any reason . . .Physician will not without the approval of [FDHS’s] Board, practice medicine in the field of gastroenterology in Sarasota, Charlotte, or Manatee Counties, Florida or any other county in Florida where [FDHS] at the time of termination conducts or owns a medical practice, other than individually through an entity owned solely by the Physician or otherwise consistently with his or her “Prior Pattern of Practice.” Slip opinion @ 3.
Upon resigning from FDHS, Dr. Colina joined IMG, a large medical group practice with locations in Sarasota and Manatee Counties. FDHS filed an action for a temporary injunction to enjoin Dr. Colina from employment by IMG or any other employment inconsistent with the terms of the Agreement and from “using in any sense or disclosing in any way, any aspect of its Confidential Information, trade secrets or proprietary information.” Slip opinion @ 4.
The trial court found that Dr. Colina breached the PPS Agreement by joining IMG but that he had only limited knowledge of FDHS’s trade secrets and had not divulged any of FDHS’s trade secrets .
Under provision (1)(c) of Florida’s restrictive covenant statute, FDHS had to “plead and prove that restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction.” Although FDHS had not proffered evidence that it had lost patients, the trial court found that FDHS did have a legitimate business interest in “keeping a group of physicians together in a medical group as contemplated in a business agreement signed by those same physicians and that there is a legitimate business interest in ‘ “preventing a mass exodus of some of those physicians who may feel that there are no ramifications in ignoring the terms of a signed written agreement binding those physicians in said medical group. ‘ “ Slip opinion @ 4.
Once FDHS established reasonable necessity, Dr. Colina and IMG then had the burden of establishing that the “contractually specified restraint [was] overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests.” Fla. Stat. 542.335(5)(c). It is noted that Florida’s restrictive covenant statute requires the court to presume “unreasonable in time any restraint more than 2 years in duration” when the restrictive covenant sought to be enforced is against a former employee as was the case here. 542.335(5)(d)(1). Therefore the “2 year” reference within FDHS’s PPS Agreement was within the confines of Florida’s restrictive covenant statute.
The trial court then found that “ ‘threatened injury to [Dr. Colina] outweighs the possible harm to [FDHS].’ ” As such, Dr. Colina could remain with IMG, but “ ‘shall not divulge any business practice methods or trade secrets.’ ’’ However, the temporary injunction was granted as it applied to the defendants’ obligation to refrain from using FDHS’s Confidential Information.
The Appeals Court held that the trial court had abused its discretion in denying the temporary injunction in full because its balancing of harm test was in conflict with Florida Statute 542.335(1)(g)(1). It instructed the trial court to grant the temporary injunction prohibiting Dr. Colina from violating the “employment limitation” terms of the Agreement. It is noted in this case that the employment agreement did not forbid Dr. Colina from practicing his specialty in specified Florida counties in his own right but forbade him from joining another practice.
It is not clear whether the trial court was refusing to enforce the otherwise enforceable restrictive covenant on the ground that FDHS’s employment agreement violated public policy. If so, under the statute, the trial court had the obligation of articulating specifically any the court’s findings that the specified public policy requirements substantially outweighed the need to protect FDHS’s established legitimate business interest. Florida Statute 542.335(1)(i). Instead the trial court focused its balancing test on the impact on Dr. Colina himself and not how this impact translated into a specific articulated public policy.
That Florida’s statute favors employers is not an overstatement. The statute further forbids a court from “employing any rule of contract construction that requires the court to construe a restrictive covenant narrowly against the restraint, or against the drafter of the contract.” In employment law cases, it is generally the employer who drafts contracts to be signed by employees. Fla. Stat. 542.335(1)(h).
What does the statute mean for Florida employers who are expanding into less employer friendly states and have employee agreements with restrictive covenants in their employee agreements based on Florida law?
Most contracts, including employer-employee agreements, contain a choice of law provision stating that the law of the specified state shall apply in the event of a legal dispute. It is axiomatic that most courts are generally favorable to enforcing choice of law clauses included in contracts and agreements. However, there are exceptions to this approach particularly where a provision may be violative of the law of the state where court proceedings involving a breach of contract are actually taking place.
When expanding into another state, it is therefore important that Florida companies understand that Florida law may not be applied by an out-of-state court if it is asked to determine the enforceability of the at-issue agreement’s restrictive covenant. This is so even if the agreement includes a “Florida law applies” provision. Indeed, Florida’s restrictive covenant statute has been found to be violative of the public policy of other states and therefore non-enforceable. In such a situation, the courts will likely apply their own state’s more employee friendly “restrictive covenant” law.
By way of example, the New York Court of Appeals recently held in the case of Brown & Brown, Inc., et al. v. Johnson, et al. that applying “Florida law on restrictive covenants related to the non-solicitation of customers by a former employee would violate the public policy of [New York].” The restrictive covenant at issue in Brown & Brown was part of an employment agreement containing a choice of law provision stating that Florida law was to apply in the event of a legal dispute.
Brown & Brown, Inc. (BB) is a Florida corporation with a subsidiary in New York (BBNY). BBNY had recruited the defendant to leave her former job at Blue Cross/Blue Shield. One her first day of employment, the defendant was asked to sign an employment agreement containing a Florida choice-of-law provision and a non-solicitation provision precluding her for two years following her termination of employment, from directly soliciting, accepting, or servicing any person or entity that is a customer or account of the New York offices during the term of the employment agreement as well as certain prospective customers.
The defendant ‘s position was terminated several years later, and she went to work for one of BBNY’s competitors. Her work involved providing services to some of BBNY’s former customers. B&B subsequently initiated a lawsuit against the former employee and her new employer for enforcement of the restrictive covenant.
The Brown & Brown court recognized that courts in all states generally recognize that contracting parties are free to reach agreements and will uphold choice of law provisions. New York courts will not, however, “enforce agreements . . .where the chosen law violates some fundamental principle of justice, some prevalent conception of good morals, or some deep-rooted tradition of the common weal.” (citations omitted from this blog). This public policy exception is reserved “for those foreign laws that are truly obnoxious.” Slip opinion at 2 citing Welsbach Elec. Corp. v. Mastec N. Am., Inc., 7 NY3d 624, 629 (2006).
The Brown & Brown court then discussed Florida law on restrictive covenants, noting that it nearly exclusively favors the employer’s interests, prohibits against narrowly construing the restrictive covenant, and refuses to consider harm to the employee. New York’s law governing restrictive covenants, on the other hand, requires courts to strictly construe restrictive covenants and balance the interests of the employer, employee, and the general public. The defendants in Brown & Brown succeeded in meeting their heavy burden of proving that the application of Florida law to the contract’s restrictive covenant provision would “be offensive to the fundamental public policy of New York State.” Therefore, the restrictive covenant had to be interpreted under New York law. Slip opinion at 7.
It is noted that New York law, as it pertains to restrictive covenants, recognizes that employers often have the dominant bargaining power, which may be viewed as anti-competitive behavior. Factors that may be important in making this determination are whether the employee understands the agreement, whether the employer actually explains or discusses the restrictive covenant, the extent of the discussion, and whether the employee has any opportunity to negotiate the terms of the covenant or seek legal counsel before signing. Slip opinion at 9.
The plaintiffs argued that even if the restrictive covenant was overly broad, at least partial enforcement was proper as that partial enforcement would relate to prohibiting “the defendant only from soliciting any of the plaintiffs’ customers with whom she interacted or whose files she had encountered while in the plaintiff’s employ. “ Slip opinion at 8.
The Brown & Brown court held that the restrictive covenant may be subject to partial enforcement if the part to be enforced represents good faith actions on the part of the employer in protecting a legitimate business interest, consistent with reasonable standards of fair dealing. Slip opinion at 8. It is noted that the restrictive covenant in Brown and Brown prohibited the defendant from working with any of the plaintiff’s New York customers even if the defendant had never met them or previously done any work for them. This was apparently the reason the court found the restrictive covenant, as written, to be a restraint on trade.
Contracts drafted by legal counsel generally include a severability clause to handle the situation where a provision of the contract is found to be unenforceable. These severability clauses may request that the court modify the unenforceable provision to the smallest extent possible to comply with the law. In Brown and Brown, the plaintiffs requested that the court enforce the provision according to more limited circumstances, i.e., sever the unenforceable portion and then consider the remaining provision/agreement under breach of contract principles.
What can Florida employers learn from the above Florida and New York cases? First, the factual scenario is very important. Although Florida’s restrictive covenant statute clearly favors employers, it still requires that employers establish a legitimate business interest. There is no question that protecting confidential information from usage and dissemination is a legitimate business interest. In fact the trial court in FDHS had actually partially enforced the restrictive covenant at issue by directing the defendants to refrain from using the plaintiffs’ trade secrets and confidential information.
The bigger issue, as the FDHS and Brown & Brown decisions show, may be the impact of the restrictive covenant on a former employee’s employment opportunities. For example, in the FDHS case, had the restrictive covenant at issue stated that Dr. Colida could not work in his profession in any capacity in any of the specified counties, it is likely that the employer would have had a hard time establishing a legitimate business interest in such a requirement. Even without a court’s considering the employee’s own interest as the statute directs, an employee may be able to amount a public policy argument that basically preventing a former employee from working violates Florida’s public policy. It is further noted that in the FDHS case, the employee had resigned from his position and joined a new practice. In Brown & Brown, the employee’s position was terminated.
As for Florida companies expanding into other states, these companies need to understand the laws of these other states which relate to employment matters. It is always a good idea whether in an employer or employee friendly state to have a formal procedure in place for explaining any and all agreements/contracts to employees and documenting that the procedure was followed for the specific employee. Such an approach may help overcome any later allegations that the employee did not know what he/she was signing. For example, in Brown & Brown, there were factual disputes over just what transpired when the defendant was presented with the employment agreement on her first day of employment.
It may also advisable to let prospective employees know of the business’s requirements for employment before the employee shows up on his first day of work, e.g., during the interview process or in a formal employment offer letter. Employment is often contingent upon the employee’s signing of an employment agreement presented on the first day of work. Under such circumstances, employee friendly states such as New York and California may well find that the employer ‘s conduct was coercive because of its dominant bargaining power and because the employee may have no other immediate viable options. That is, the employee was presented with a “take it or leave it” agreement with no opportunity for negotiation.
In conclusion, employers clearly have a legitimate business interest in preventing a former employee and his/her new employer from gaining an unfair competitive advantage because of the Confidential Information the former employee may have been privy to. Florida employers having employees in other states should, however, have an understanding of the restrictive covenant laws of these other states so that that their interests will be protected contractually to the fullest extent of the applicable law.
THE FOREGOING IS FOR INFORMATIONAL PURPOSES ONLY AND NOT LEGAL ADVICE. YOUR READING OF THIS BLOG DOES NOT CONSTITUTE ANY ATTORNEY-CLIENT RELATIONSHIP WHATSOEVER. IF YOU ARE CONTEMPLATING AN ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSULT WITH AN ATTORNEY OF YOUR CHOOSING.
© 2015 by Troy and Schwartz, LLC
