ADDITIONAL ELEMENTS A PLAINTIFF MUST PLEAD AND PROVE TO ENFORCE RESTRICTIVE COVENANT

Posted on March 21, 2021March 21, 2021 by Edward Garber

Florida Statute s. 542.335 is a statute that deals with restrictive covenants in contracts that impose a restraint on trade. It is an important statute to determine invalid restraints on trade that unreasonably or unfairly prevent competition. Any invalid restraint on trade is unenforceable. Restrictive covenants–or covenants in agreements that restrict you or prevent you from doing something–may unsuspectingly be included in contracts or the impact of the restrictive covenant may not be appreciated at the onset.

A party seeking to enforce a restrictive covenant in a contract has the additional burden of PROVING the validity and reasonableness of the restrictive covenant:

Under section 542.335, three requirements must be satisfied for a restrictive covenant to be enforceable: (1) the restrictive covenant must be “set forth in a writing signed by the person against whom enforcement is sought”; (2) the party seeking to enforce the restrictive covenant “shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant”; and (3) the party seeking to enforce the restrictive covenant “shall plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction.”

“Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.” However, “[s]ection 542.335 commands courts to modify, or blue pencil, a non-competition agreement that is ‘overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest,’ instructing courts to ‘grant only the relief reasonably necessary to protect such interest.’ ”

Rauch, Weaver, Norfleet, Kurtz, & Co, Inc. v. AJP Pine Island Warehouses, Inc., 46 Fla.L.Weekly D591a (Fla. 4^th DCA 2021) (internal citations omitted).

For instance, in a non-construction case, a real estate broker entered into a six-month exclusive listing agreement to sell commercial property. The broker reached out to a prospective buyer (a neighbor of the seller) but asked the buyer to enter into a confidentiality agreement. The confidentiality agreement provided that the prospective buyer would not disclose financial information to any other person and would not negotiate with the owner (seller) of the property, i.e., a restrictive covenant. The prospective buyer made an offer but the seller rejected the offer. Subsequently, the exclusive listing agreement expired and the seller engaged a new broker. The new broker reached out to the same prospective buyer and, after further negotiation, the prospective buyer made another offer that the seller accepted.

When the original broker learned of the transaction, it sued the buyer for breaching the confidentiality agreement. The buyer argued that section 542.335 applied to render the confidentiality agreement unenforceable. The trial court and appellate court agreed that section 542.335 dealing with restraints on trade applied to govern the enforceability of the restrictive covenant – “The threshold requirements of section 542.335 [referenced above] are essential elements in any cause of action [that a party must plead and prove] concerning enforcement of a restrictive covenant.” Rauch, Weaver, Norfleet, Kurtz, & Co, Inc., supra.

Here, the confidentiality agreement was not signed, which was problem number one. Other problems included that its restrictive covenant was indefinite in time. While the court could modify this, any reasonable length of time would be the original broker’s six month listing agreement and the buyer did not violate the confidentiality agreement during this period. Putting all of this aside, when dealing with a restrictive covenant, it is imperative to consider the requirements of s. 542.335 and the additional burdens a party must plead and prove to enforce a restrictive covenant.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

PROTECTING THE INTEGRITY OF REFERRAL SOURCES UNDER FLORIDA STATUTE s. 542.335

Posted on September 24, 2017April 24, 2020 by Edward Garber

Referral sources are generally important for all businesses. Due to their importance, certain businesses require employees to execute non-solicitation or even non-compete agreements to protect the integrity of their referral sources. Now, whether referral sources for a particular business constitutes a legitimate business interest (very important words) is a question where the context must be examined. Nonetheless, in a case that is certainly important for businesses, the Florida Supreme Court held that referral sources can serve as a legitimate business interest. While this case dealt with home health care companies, the rationale would be the same no matter the business, provided that referral sources are contextually a legitimate business interest for that business. For more information on this case, please check here.

The term “legitimate business interest” is a specific term used in Florida Statute s. 542.335, a statute I have discussed in other articles dealing with valid restraints on trade, such as restrictive covenants contained in non-compete or non-solicitation agreements. These are the types of agreements that a business would require an employee to execute as a condition of employment to protect the integrity of referral sources. Again, the restrictive covenant language –such as language precluding the employee upon leaving from competing or utilizing referral sources–needs to actually serve a legitimate business interest based on the particular business’ strategies, relationships, and objectives.

REFERRAL SOURCES CAN CONSTITUTE LEGITIMATE BUSINESS INTEREST TO SUPPORT NON-COMPETE AGREEMENT

Posted on August 21, 2015August 21, 2015 by Edward Garber

I previously discussed the validity of non-compete agreements as well as tips for drafting such agreements.

Recently, in Infinity Home Care, L.L.C. v. Amedisys Holding, LLC, 40 Fla.L.Weekly D1929a (Fla. 4^th DCA 2015), the Fourth District Court of Appeal discussed the requirement of a “legitimate business interest” pursuant to Florida Statute s. 542.335, which governs the enforcement of non-compete agreements. Specifically, the court was looking at whether referral sources constitute a legitimate business interest. The reason being is that there needs to be a legitimate business interest to enforce a restrictive covenant such as a non-compete agreement. The statute gives examples of legitimate business interests (e.g., trade secrets, confidential business information that does not qualify as trade secrets, substantial relationships with specific prospective or existing customers, patients or clients, etc.) but is NOT limited to the criteria or examples set forth in the statute. See Fla.Stat. 542.335(1)(b) (“the term ‘legitimate business interest’ includes, but is not limited to:…”).

As it pertains to what constitutes a legitimate business interest, the Fourth District held:

Section 542.335, however, clearly states that the legitimate business interests listed in the statute are not exclusive. This allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection.

***

In sum, we hold that referral sources are a protectable legitimate business interest under section 542.335, Florida Statutes.

Infinity Home Care, supra.

If you are drafting or enforcing a non-compete agreement, it is important to consult with counsel. This way your legitimate business interests can appropriately be protected as you move to enforce the non-compete agreement—the restrictive covenant—by moving for injunctive relief. This case, however, supports the argument that the legitimate business is broader than the criteria and examples in the statute and based on the business’s “plans, strategies, and relationships.”