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

 

shutterstock_407527927Referral 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.  

 

 

 

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.

 

 

OBTAINING TEMPORARY INJUNCTION TO ENFORCE NON-COMPETE AGREEMENT

imagesWhen a party breaches a non-compete agreement (with a non-solicitation clause), the non-breaching party typically moves for a temporary injunction.   The breaching party is the party that signed the non-compete agreement, such as a former employee or consultant that agreed not to solicit its employer’s customer lists or referral sources upon leaving.  The non-breaching party or the party moving for the temporary injunction is the party that is looking to protect its trade secret customer lists or referral sources, such as the employer. 

 

 

In order to obtain a temporary injunction…[the non-breaching party is] required to establish (1) the likelihood of irreparable harm, (2) the unavailability of an adequate remedy at law, (3) a substantial likelihood of success on the merits, and (4) that the injunction will serve the public interest.”  Smart Pharmacy, Inc. v. Viccari, 41 Fla. L. Weekly D1274a (Fla. 1st DCA 2016).  Again, a party moving to enforce a non-compete agreement will and should move for a temporary injunction. 

 

In the recent case, Smart Pharmacy, an employer regarded its referral sources to be confidential trade secrets. The employer had its employee sign a non-compete agreement that precluded the employee from competing against its employer in a certain geographic area for two years upon the employee’s departure from the employer.  The non-compete agreement prevented the employee from soliciting its employer’s referral sources upon leaving (a non-solicitation clause).  The employee left and started soliciting the referral sources in violation of the non-compete agreement.  The employer sued the employee and the employee’s new employer and moved for a temporary injunction preventing them from soliciting the referral sources.   

 

In analyzing the four temporary injunction factors set forth above:

 

(1) Likelihood of Irreparable Harm

 

The violation of a non-compete agreement creates the presumption of likelihood of irreparable harm.  Thus, this factor is established.

 

(2) Inadequate Remedy of Law

 

An employer has an inadequate remedy at law for the irreparable harm because money damages in this context are difficult to prove with a reasonable degree of certainty and would not fully compensate the employer for a violation of a non-compete agreement. Thus, this factor is established. 

 

(3) Substantial Likelihood of Success

 

Soliciting customers of a business is a legitimate business interest.  An employee breaches a non-compete agreement that contains a non-solicitation clause when the employee solicits the customers or sources of his or her former employer, meaning the employer has a substantial likelihood of success. Thus, this factor is established. 

 

(4) Injunction will Serve the Public’s Interest

 

An injunction will serve the public’s interest since it would protect an employer’s legitimate business interest in protecting its customer lists and referral sources. Thus, this factor is established.

 

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.

 

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

imagesI 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. 4th 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.” 

 

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.

 

 

 

 

 

 

DON’T MESS WITH THE GENERAL AGREEMENT OF INDEMNITY

untitledI have previously posted articles about the all mighty General Agreement of Indemnity (“Agreement of Indemnity”) that a surety requires a contractor bond-principal and designated guarantors to execute before issuing payment and performance bonds to the contractor. In cases forming the basis of the articles, the surety demands rights under the Agreement of Indemnity such as the right for collateral security to protect the surety from anticipated or pending claims and the contractor bond-principal refuses. In these cases, the surety files a lawsuit and moves for an injunction which, among other things, requires the principal to post the very collateral security it refused to post to begin with. As reflected in these cases, the surety gets the injunction granted because the Agreement of Indemnity is designed to protect the surety’s interests. In other words, don’t mess with the Agreement of Indemnity because the surety will typically get the recourse it pursues.

 

Recently, another opinion came out further supporting the rights of a surety under the Agreement of Indemnity and why it is beneficial to figure out an avenue to work with the surety instead of against it. In this case, Travelers Casualty and Surety Co. of America v. Design Build Engineers and Contractors Corp., 2014 WL 7274803 (M.D.Fla. 2014), the contractor bond-principal was working on two public projects. On one project, a dispute with a subcontractor resulted in a claim that the surety paid plus substantial attorney’s fees awarded to the subcontractor by the court. Although the contractor reimbursed its surety for the principal amount of the claim, it refused to reimburse the surety for the substantial attorneys’ fees awarded to the subcontractor. And, on the other project, the contractor was terminated resulting in pending performance bond and payment bond claims against the surety.

 

The contractor, in furtherance of trying to shield major property and assets, did some creative asset transfers forming holding companies, etc. This did not work.  The surety filed a lawsuit against the contractor and guarantors under the Agreement of Indemnity and moved for a preliminary injunction to require the contractor to post collateral security and to prevent the contractor from disposing of assets. Guess what? The surety prevailed on its motion for an injunction and the Middle District Court ordered that the contractor post the requested collateral that included properties the contractor tried to shield and prevented the contractor and certain holding companies it formed from disposing or encumbering of assets (inclusive of the real property is was ordered to post as collateral).

 

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.