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.

 

 

 

 

 

 

VALIDITY OF NON-COMPETE AGREEMENTS

imagesThe validity of a non-compete agreement (also referred to as a restrictive covenant since it imposes a restriction on trade or commerce) will be governed by Florida Statute s. 542.335.  (A copy of this statute is set forth below).  Written and signed non-compete agreements or clauses are presumptively valid if they are reasonable in time (the non-compete time period), area (geographic limitation), and line of business; these clauses cannot be overbroad.

 

Even if the non-compete agreement is in writing and signed by the employee, it still needs to be supported by a proven legitimate business interest justifying its enforcement (e.g., learning of trade secrets or confidential business information, relationships with customers or clients, customer or client goodwill associated with the business). Stated differently, the employer seeking to enforce the non-compete agreement against a former employee still needs to establish that the enforcement of the non-compete is reasonably necessary to protect its legitimate business interests.

 

To enforce non-compete agreements, a party (typically, the former employer) moves for injunctive relief.

 

The case of Ankarli Boutique, Inc. v. Ortiz, 2014 WL 6674727 (4th DCA 2014) held that a two-year non-compete agreement, to the extent valid, applied from the time the former employee left the company.  The case also maintained that the non-compete period could not be “nullified because the non-compete period was devoured by the time it took to appeal an erroneous ruling on the interpretation of the [non-compete] clause.Ankarli Boutique, supra, at *1.   In other words, if there is a delay in entering a ruling (i.e., an injunction) enforcing the non-compete clause, or the non-compete time period is consumed during the pendency of an appeal, the employer or party enforcing the clause is still entitled to reap the benefit of a valid non-compete clause.  Thus, any delay tactic by litigating the issue or appealing the issue should not nullify an otherwise valid non-compete clause.

 

 Florida Statute s. 542.335

(1) Notwithstanding s. 542.18 and subsection (2), enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant:

(a) A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.

(b) The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant. The term “legitimate business interest” includes, but is not limited to:

1. Trade secrets, as defined in s. 688.002(4).

2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.

3. Substantial relationships with specific prospective or existing customers, patients, or clients.

4. Customer, patient, or client goodwill associated with:

a. An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;

b. A specific geographic location; or

c. A specific marketing or trade area.

5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.

(c) A person seeking enforcement of a restrictive covenant also shall plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction. If a person seeking enforcement of the restrictive covenant establishes prima facie that the restraint is reasonably necessary, the person opposing enforcement has the burden of establishing that the contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests. If a contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest or interests, a court shall modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

(d) In determining the reasonableness in time of a postterm restrictive covenant not predicated upon the protection of trade secrets, a court shall apply the following rebuttable presumptions:

1. In the case of a restrictive covenant sought to be enforced against a former employee, agent, or independent contractor, and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

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.

2. In the case of a restrictive covenant sought to be enforced against a former distributor, dealer, franchisee, or licensee of a trademark or service mark and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 1 year or less in duration and shall presume unreasonable in time any restraint more than 3 years in duration.

3. In the case of a restrictive covenant sought to be enforced against the seller of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.

(e) In 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 and shall presume unreasonable in time any restraint of more than 10 years. All such presumptions shall be rebuttable presumptions.

(f) The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:

1. In the case of a third-party beneficiary, the restrictive covenant expressly identified the person as a third-party beneficiary of the contract and expressly stated that the restrictive covenant was intended for the benefit of such person.

2. In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.

(g) In determining the enforceability of a restrictive covenant, a court:

1. Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.

2. May consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.

3. Shall consider all other pertinent legal and equitable defenses.

4. Shall consider the effect of enforcement upon the public health, safety, and welfare.

(h) A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement. A court shall not employ 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.

(i) No court may refuse enforcement of an otherwise enforceable restrictive covenant on the ground that the contract violates public policy unless such public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interest or interests established by the person seeking enforcement of the restraint.

(j) A court shall enforce a restrictive covenant by any appropriate and effective remedy, including, but not limited to, temporary and permanent injunctions. The violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. No temporary injunction shall be entered unless the person seeking enforcement of a restrictive covenant gives a proper bond, and the court shall not enforce any contractual provision waiving the requirement of an injunction bond or limiting the amount of such bond.

(k) In the absence of a contractual provision authorizing an award of attorney’s fees and costs to the prevailing party, a court may award attorney’s fees and costs to the prevailing party in any action seeking enforcement of, or challenging the enforceability of, a restrictive covenant. A court shall not enforce any contractual provision limiting the court’s authority under this section.

(2) Nothing in this section shall be construed or interpreted to legalize or make enforceable any restraint of trade or commerce otherwise illegal or unenforceable under the laws of the United States or of this state.

(3) This act shall apply prospectively, and it shall not apply in actions determining the enforceability of restrictive covenants entered into before July 1, 1996.

 

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.