Restrictive Covenants: Florida Returns to the Original “Unfair Competition” Approach for the 21st Century
” Is this noncompete agreement enforceable?” Few lawyers in Florida have not confronted that question. Yet, up until the 1996 Legislature, even fewer lawyers were willing to hazard a guess. What is “reasonable”? What is the test for “reasonableness”? What do the statutes say? What do the courts say the statutes say? Without question, the rules governing enforcement of such agreements were in hopeless disarray and conflict. As a result, the judicial system generated inconsistent and unpredictable results, and Florida businesses and employees suffered from that unpredictability.
The 1996 Florida Legislature, working with a model statute developed by the Business Law Section of The Florida Bar, addressed these issues, amended the Florida Antitrust Act, and established a comprehensive framework for analyzing, evaluating, and enforcing “restrictive covenants” in Florida.1 This article, co-authored by the legislation’s Senate sponsor and by the Bar’s principal drafter, provides a brief history of Florida’s statutes and Supreme Court opinions on restraints of trade, discusses the problems that gave rise to the 1996 legislation, explains the philosophical underpinnings of that legislation, and highlights its key provisions.
A Brief Historical Perspective
Early on, Florida courts displayed an extreme distaste for agreements that restricted competition, especially agreements between employers and employees.2 At the same time, though, Florida courts recognized that some such agreements ought to be enforced as pro-competitive, under the “ancillary restraints” doctrine.3
In 1953, Florida enacted F.S. §542.12, the first Florida statute to explicitly authorize contractual restrictions upon competition. In two key early decisions applying §542.12, the Supreme Court of Florida declared that the purpose of the statute was to “protect the legitimate interests of the employer”4 and to protect employers from unfair competition: “The statute is designed to allow employers to prevent their employees and agents from learning their trade secrets, befriending their customers and then moving into competition with them.” Miller Mechanical, Inc. v. Ruth, 300 So. 2d 11, 12 (Fla. 1974).
In the late 1970s and throughout the 1980s, the Florida courts lost sight of the original purpose of the statute and increasingly employed a judicial approach to such agreements that emphasized a “contract-oriented” methodology and that abandoned the original “unfair competition” theory of analysis and enforcement. Although the “contract oriented” approach seemingly offered a high level of certainty of enforcement, in reality it led to a hodge-podge of conflicting and unprincipled decisions. Specifically, the judicial emphasis upon contract concepts i) provided no principled way for the courts to decline to enforce contractual restrictions upon competition that were not justified by the need to protect any substantial “legitimate business interest”5 and ii) lent itself to distortion by result-oriented courts.6
In reaction to the excesses produced by the judicial emphasis upon the “contract- oriented” approach, the Florida Legislature in 1990 amended §542.33.7 But that amendment created more ambiguities than it resolved. That amendment created a standardless “unreasonableness” defense; it created a standardless “contrary to the public health, safety or welfare” defense; it shifted the focus of enforcement to “irreparable injury”; it erroneously suggested that a “customer list” need not be a trade secret to be granted a measure of protection by contract; and it specified narrow instances of presumptive “irreparable injury.”
Moreover, in Hapney v. Central Garage, Inc., 579 So. 2d 127 (Fla. 2d DCA), rev. denied, 591 So. 2d 180 (Fla. 1991), the Second District Court of Appeal in 1990 revived the “unfair competition” approach to evaluating contractual restrictions upon competition and articulated a detailed “legitimate business interest” test for such restrictions. Other district courts of appeal, though, questioned Hapney’s revival of the “legitimate business interest” approach,8 thereby creating the very real possibility of different results on the same facts in different districts and encouraging forum-shopping within the state.
1996, then, the “rules” governing the enforcement of contractual restrictions upon competition were in hopeless disarray, and the resulting lack of predictability made it very difficult for Florida lawyers to advise their clients with any certainty about business transactions and employment relationships involving such restrictions.
Problems with the Prior Statute
The fundamental problem with F.S. §542.33 (the statutory successor to §542.12 and the statute that continues to govern restrictive covenants entered into after June 28, 1990, and before July 1, 1996) is that it nowhere specifies any objective standard for the courts to use in determining the “reasonableness” of a restriction upon competition. This deficiency permitted the development of differing judicial views of how contractual restrictions upon competition should be evaluated and enforced, and that difference in viewpoints generated unclear, inconsistent, and oftentimes inexplicable results.
In addition to failing to articulate a workable objective standard for determining “reasonableness,” §542.33 (and the decisions interpreting and applying it) presented these subsidiary problems for the courts:
1) Does §542.33 really mean what it says? Section 542.33(1) declares that, except to the extent authorized in §542.33(2), all restraints of trade are illegal and unenforceable. Some courts have applied that wording literally;9 other courts have read into the statute a “rule of reason” exception.10 and what role, if any, does §542.1811 play in the enforcement analysis? No reported Florida appellate court opinion addressed the issue of overlap or conflict between §§542.18 and 542.33, let alone harmonized the two statutory sections.
2) To what extent should courts apply contract rules in analyzing and evaluating contractual restrictions on competition? Must the courts enforce every restriction, even if it is a “naked restraint of trade,” or must a restraint have a “legitimate business purpose” to merit enforcement?
Apart from its structural problems, §542.33 also contained no provision authorizing an award of attorneys’ fees to the prevailing party in actions involving enforcement of restrictive covenants. Unless the contract itself had such a provision, the parties had to bear their own litigation expenses. And this deficiency encouraged abusive litigation strategies and tactics.
The Guiding Principle of the New Statute
“Legitimate Business Interests”
In adopting §542.335, the 1996 Legislature expressly rejected a “contract approach” to the enforcement of contractual restrictions on competition. Instead, the legislature declared that, for a restriction to be enforceable, it must be “reasonably necessary” to protect one or more “legitimate business interests” of the party seeking enforcement. But, if the proponent of the restriction demonstrates that it is necessary to protect one or more “legitimate business interests,” then, absent a strong defense, the court must accord such interest or interests an appropriate measure of protection.
What is a “legitimate business interest”? Section 542.335(l)(b) specifies a number of such interests as examples, making clear that other unspecified interests also may merit protection. A review of those examples confirms that a “legitimate business interest” is an identifiable business asset that constitutes or represents an investment by the proponent of the restriction such that, if that asset were misappropriated by a competitor ( i.e. , taken without compensation), its use in competition against its former owner would be “unfair competition.” Put another way, a “legitimate business interest” is a business asset that, if misappropriated, would give its new owner an unfair competitive advantage over its former owner.
From an enforcement standpoint, then, the proponent of a restrictive covenant should be entitled to enforcement if it can demonstrate that the defendant has misappropriated (or threatens to misappropriate) identifiable assets of the proponent’s business. But, if no such misappropriation (or threatened misappropriation) can be proven, there is no unfair competitive advantage and enforcement must be denied.
Key Provisions of the New Statute
1) All-Encompassing : Section 542.335(1) adopts, and uses throughout, the term “restrictive covenants.” That term is all-inclusive and includes all contractual restrictions upon competition. Noncompetition/nonsolicitation agreements; confidentiality agreements; exclusive dealing agreements; and all other contractual restraints of trade: all are governed by §542.335. Every complained- of contractual restriction upon competition in Florida, then, must be evaluated in a three-step analysis:
a) Is it per se illegal under §542.18?
b) If it is not per se illegal, is it nevertheless illegal under the “Rule of Reason” under §542.18?
c) If it is not illegal under §542.18, does it pass muster under §542.335?
2) “Legitimate Business Interest” : Section 542.335(l)(b) flatly declares that “[a]ny restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.” That same section also makes clear that a mere contractual acknowledgment or stipulation of such an interest will be insufficient: The proponent of the restriction must “plead and prove” the interest.12
For example, if the proponent contends that the restriction is necessary to protect proprietary information, then it will have to “plead and prove” i) that it has such information, ii) the specific content of that information,13 iii) that it disclosed that information to the defendant, and iv) that the defendant threatens to use or disclose that information in competition with the proponent.14 Similarly, if the proponent asserts that the restriction is necessary to protect customer relationships, it will have to “plead and prove” i) that the defendant developed “substantial relationships with specific prospective or existing customers, patients, or clients” while employed by the proponent, and ii) that the defendant threatens to do business with those same customers in competition with the proponent.
3) Burden of Persuasion : Sections 542.335(l)(b) and (c) require the proponent of the restriction to “plead and prove” i) “the existence of one or more legitimate business interests justifying the restrictive covenant,” and ii) “that the contractually specified restraint is reasonably necessary to protect” such interest or interests. Once the proponent establishes a prima facie case of these elements, though, the burden shifts to the defendant to show that the restriction is “overbroad, overlong, or otherwise not reasonably necessary to protect” the established interest or interests. This section reaffirms and extends prior Florida decisional law.15
4) Reasonable Relief : Section 542.335(l)(c) makes plain that relief must be limited to that which is “reasonably necessary”16 to protect the interest or interests established and that, if the restraint is “overbroad, overlong, or otherwise not reasonably necessary,” the court must modify the restriction. This directive reaffirms prior Florida decisional law authorizing application of the “blue-pencildoctrine.”17
5) No “Contract Rules” : Section 542.335(l)(h) reaffirms that, in restrictive covenant cases, the court’s primary focus must be upon the “legitimate business interest or interests.” This section requires courts to construe restrictive covenants “in favor of providing reasonable protection to all legitimate business interests,” and it prohibits courts from employing rules of contract construction requiring construction of contractual restrictions “narrowly, against the restraint, or against the drafter of the contract.” This section legislatively discards prior Florida decisions that invoked and applied such doctrines in restrictive covenant cases.18
6) No “Individualized Hardship” Defense : Section 542.335(l)(g) settles the conflict between the district courts of appeal as to the invocation of “economic hardship” as a defense to enforcement of a restrictive covenant.19 Such a defense is now barred.
7) Limited “Public Policy” Defense : Section 542.335(l)(i) sharply limits the use of the “contrary to public policy” defense to enforcement of a restrictive covenant. Under that section, a court may not refuse enforcement “on grounds of public policy” unless i) the court articulates the public policy with specificity and ii) finds that the specified public policy requirements “substantially outweigh” the need to protect the interest or interests established by the proponent of the restriction.20
8) Presumption of “Irreparable In jury”: Section 542.335(l)(j) establishes a rebuttable presumption of irreparable injury flowing from the violation of an enforceable restrictive covenant. That is, once the proponent of the restriction establishes one or more “legitimate business interests” justifying the restriction, irreparable injury must be presumed and the burden shifts to the defendant to establish the absence of such injury. This section re-establishes the pre-1990 amendment rule of Capraro v. Lanier Business Products, Inc., 466 So. 2d 212 (Fla. 1985).
9) “Safe Harbors” : In an effort to provide guidance to the courts (and therefore to businesses and employees), the legislature specified a comprehensive system of “safe harbors” for the period of various restrictions. Section 542.335(l)(d) sets forth a number of presumptively reasonable periods of restriction, tied to the nature of the restriction. Thus, for example, restrictions against former employees, agents, and independent contractors, if not predicated upon the protection of trade secrets, are presumptively reasonable if “six months or less in duration” and presumptively unreasonable if “more than two years in duration.” Similar rebuttable presumptions govern the periods of restriction upon i) sellers of business interests, ii) former distributors, dealers, franchisees, or licensees of trademarks or service marks, and iii) recipients of trade secrets. This section should lead to much more uniformity and, therefore, predictability as to duration.
10) “Retroactivity”: Section 542.335 governs only those restrictive covenants entered into or having an effective date on or after July 1, 1996. In light of the Supreme Court of Florida’s decision in Gupton v. Village Key and Saw Shop, Inc., 656 So. 2d 475 (Fla. 1995), practitioners in Florida must pay close attention to i) the effective date of a particular restrictive covenant and ii) the effective date of any arguable subsequent amendment or ratification. There now are three sets of different rules governing the enforceability of restrictive covenants in Florida:
a) Rules governing contracts effective prior to June 28, 1990;
b) Rules governing contracts effective on or after June 28, 1990, but before July 1, 1996; and
c) Rules governing contracts effective on or after July 1, 1996.
The rules governing contracts effective in each period are quite different, and practitioners will continue to find “traps for the unwary” so long as contracts effective before July 1, 1996, continue in force.
A Balanced Statute
Although much of §542.335 is aimed at making enforcement of bona fide restrictive covenants easier and more certain, the legislature made certain that it is a balanced statute that does not unnecessarily impede competition, the ability of competitors to hire experienced workers, or the efforts of employees to secure better-paying positions. Among the provisions that “level the playing field” are:
1) The express adoption of the “legitimate business interest” requirement ensures that, no matter what the written document states, the proponent of the restriction will have to “plead and prove” the interest or interests justifying the restriction.
2) The express adoption of the “reasonably necessary” test for relief ensures that relief must fit the interest or interests established.
3) The express recognition that a defendant may assert “all other pertinent legal and equitable defenses” ensures that courts will continue to consider other appropriate defenses.
4) The express requirement that the court “shall consider the effect of enforcement upon the public health, safety, and welfare” ensures that the courts will continue to consider the public interest.
5) The express requirement that courts must require temporary injunction bonds (and that contractual provisions waiving or limiting such bonds are not to be enforced) ensures that the victim of a wrongfully entered temporary injunction will be compensated for that injury.
6) The express requirement that, even in the absence of a contractual provision, the trial court may award attorneys’ fees and costs to the prevailing party (and that contractual provisions waiving or limiting such attorneys’ fees are not to be enforced), encourages courts to penalize parties who assert unreasonable positions in restrictive covenant litigation.
In enacting F.S. §542.335, the Florida Legislature directed the courts of this state to evaluate restrictive covenants under the “unfair competition” analysis. Accordingly, courts should focus their inquiry primarily on two questions:
1) What is the “legitimate business interest” justifying the restrictive covenant?
2) What is a reasonable, i.e., adequate, measure of protection for that “legitimate business interest”?
If the proponent of the restriction cannot “plead and prove” with particularity the existence of such an interest, enforcement must be denied. But if the proponent carries its burden, then the court must grant a reasonable measure of protection for the interest or interests proven.
1 1 996 Fla. Laws ch. 96-257, (repealing FLA. STAT. §542.33 (1990)).
2 E.g., Love v. Miami Laundry Co., 160 So. 32 (Fla. 1934).
3 E.g., Massari v. Salciccia, 136 So. 522 (Fla. 1931); see also Pensacola Associates v. Biggs Sporting Goods Co., 353 So. 2d 944 (Fla. 1st D.C A. 1978) (applying “ancillary restraints” doctrine).
4 Capelouto v. Orkin Exterminating Co., 183 So. 2d 532, 534 (Fla. 1966); see also Akey v. Murphy, 238 So. 2d 94, 97 (Fla. 1970) (affirming trial court determination that restriction in partnership agreement was “no greater than necessary to protect…legitimate interests”).
5 E.g., Sarasota Beverage Co. v. Johnson, 551 So. 2d 503 (Fla. 2d D.C.A. 1989).
6 E.g., Dunkin v. Barkus & Kronstadt, D.O.’s, 533 So. 2d 877 (Fla. 3d D.C.A. 1988).
7 1 990 Fla. Laws ch. 90-216, 1607.
8 E.g., Jewett Orthopaedic Clinic, P.A. v. White, 629 So. 2d 922 (Fla. 5th D.C.A. 1993).
9 E.g., Flatley v. Forbes, 483 So. 2d 483 (Fla. 2d D.C.A. 1986).
10 E.g., Pensacola Associates v. Biggs Sporting Goods Co., 353 So. 2d 944; see also Herndon v. Eli Witt Co., 420 So. 2d 920 (Fla. 1st D.C.A. 1982).
11 FLA. STAT. §542.18 is the Florida Antitrust Act analogue to §1 of the federal Sherman Antitrust Act, 15 U.S.C. §1.
12 Cf. Spencer Pest Control of Florida, Inc. v. Smith, 637 So. 2d 292 (Fla. 5th D.C.A. 1994) (contractual stipulation of “irreparable injury” insufficient to establish “irreparable injury” under FLA. STAT. §542.33(2Xa)).
13 See, e.g., MAI Systems Corp. v. Peak Computer Co., 991 F.2d 511, 522 (9th Cir. 1993) (“a plaintiff who seeks relief for misappropriation of-trade secrets must identify the trade secrets and carry the burden of showing that they exist”); AMP, Inc. v. Fleischhaker, 823 F.2d 1199, 1203 (7th Cir. 1987) (“courts have warned plaintiffs of the risks they run by failing to identify specific trade secrets and instead producing long lists of general areas of information which contain unidentified trade secrets”).
14 In Dyer v. Pioneer Concepts, Inc., 667 So. 2d 961 (Fla. 2d D.C.A. 1996), the Second District Court of Appeal declared that a plaintiff relying upon “confidential information” to support a restrictive covenant must establish actual unauthorized use of such information. That rule appears unnecessarily strict as well as inconsistent with the requirement of the Florida Uniform Trade Secrets Act (FUTSA). To secure injunctive relief under FUTSA, a plaintiff need show only “threatened misappropriation.” FLA. STAT. §688.003(1) (1988).
15 E.g., Dyer v. Pioneer Concepts, Inc., 667 So. 2d 961; Carnahan v. Alexander Proudfoot Co. World Headquarters, 581 So. 2d 184 (Fla. 4th D.C.A. 1991).
16 The “reasonably necessary” standard is the settled standard used by federal courts in evaluating restraints of trade under the “Rule of Reason” standard of §1 of the Sherman Antitrust Act, 15 U.S.C. §1. See, e.g., United States v. Realty Multi-List, Inc., 629 F.2d 1351, 1375 (5th Cir. 1980) (proponent of restriction must show only that the restriction is “reasonably necessary,” not “narrowly tailored”).
17 E.g., Flammer v. Patton, 245 So. 2d 854 (Fla. 1971); Santana Products Co. v. Von Korff, 573 So. 2d 1027 (Fla. 2d D.C.A. 1991).
18 E.g., Riddick v. Suncoast Beauty College, Inc., 579 So. 2d 855, 856-57 (Fla. 2d D.C.A. 1991) (noncompetition agreements “are in derogation of common law and must be strictly construed against the restraint”); Zimmer v. Pony Express Courier Corp., 408 So. 2d 595, 597 (Fla. 2d D.C.A.), rev. denied, 418 So. 2d 1280 (Fla. 1982) (noncompetition agreements “will not be construed to extend beyond their proper import or farther than the language of the contract absolutely requires”).
19 Compare Hapney v. Central Garage,Inc., 579 So. 2d 127 (Fla. 2d D.C.A.), rev. denied, 591 So. 2d 180 (Fla. 1991) (implying that trial court might consider such hardship under general principles of equity) with Twenty Four Collection, Inc. v. Keller, 389 So. 2d 1062 (Fla. 3d D.C.A.), rev. denied, 419 So. 2d 1048 (Fla. 1980) (temporary injunctive relief mandatory upon showing of “skeletal” prima facie case).
20 For an instructive example of how the courts are tempted to use an all-purpose “public policy” rationale to defeat restrictive covenants, note the Third District’s preliminary opinion in Humana Medical Plan, Inc. v. Jacobson, 18 Fla. L. Weekly D121, 122 n.3 (Fla. 3d D.C.A. 1992) (suggesting that a restrictive covenant that interfered with the doctor/patient relationship was void as being against public policy). The final opinion, published at 614 So. 2d 520, deleted that suggestion.
John A. Grant, Jr., is a capital partner in the firm of Harris, Barrett, Mann & Dew, where he is managing partner of the Tampa office and serves in the firm’s Commercial and Business Law Department. He holds a B.A. in political science from the University of South Florida, an M.S. in government from Florida State University, and a juris doctor degree from Stetson College of Law. He has also received an honorary Doctor of Humane Letters degree from Trinity College of Florida. He is a member and former vice chair of the Florida Senate Judiciary Committee, and currently serves as chair of the Senate Banking and Insurance Committee.
Thomas T. Steele is a senior shareholder in the Tampa office of Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., concentrating his practice in litigating restrictive covenants, trade secrets, antitrust, and other unfair competition claims. He graduated Phi Beta Kappa from Tulane University and with honors from Tulane University School of Law, and he clerked for Judge Paul H. Roney of the former Fifth Circuit Court of Appeals.
This column is submitted on behalf of the Business Law Section, Philip B. Schwartz, chair, and Mindy A. Mora, editor.