Successfully Defending Employees in Noncompete and Trade Secret Litigation
Fierce economic competition and a highly mobile workforce have caused many employers to require, with unprecedented frequency, that their new hires and existing employees execute noncompete agreements.1 Noncompete agreements and their enforcement through litigation involve very high stakes, particularly for the employee who faces a temporary, or perhaps permanent, loss of livelihood. Not only is litigation often unpredictable and time-consuming, but it also becomes emotionally and financially draining for the employee. Needless to say, employees who are presented with noncompete agreements should seek representation with an experienced employment attorney who will review the document carefully and discuss the consequences of possibly being bound by legally enforceable restrictions on future employment in their chosen field. However, most representation of employees with respect to noncompete agreements comes only after the agreement has been signed and the employee must deal with the consequences of the agreement. This article will discuss some of the issues to be confronted in defending employees in noncompete or trade secret litigation, and some strategies that might increase the chances of that defense being successful.
F.S. §542.335 (2003) provides that a court will not enforce a noncompetition agreement unless it is in writing and signed by the employee.2 The employer seeking enforcement of a noncompete agreement must establish the existence of one or more legitimate business interests justifying the noncompete provision. “Legitimate business interests” include, but are not limited to:
1) Trade secrets, as defined in §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.3
The employer must also establish that the language in the noncompete is reasonably necessary to protect the legitimate business interest or interests justifying the restriction.4 The employee may challenge the noncompete agreement by establishing that it is overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests of the employer.5 In such cases, the court may modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.6 These statutory defenses are not the only grounds for challenging a noncompete agreement. Other challenges to noncompete agreements will be discussed below.
Enforcement of Noncompete by Employer
• Temporary Injunctive Relief
Enforcement of a covenant not to compete usually begins with an application to the trial court for temporary injunctive relief, which is governed by Fla. R. Civ. P. 1.610. For the employee, defeating the employer’s application for a temporary restraining order is of the greatest importance. If this pivotal battle is lost, the employee most likely will not have the emotional or financial resources to prosecute a successful appeal of the nonfinal order granting the temporary injunction. Months of being out of work in the employee’s most economically productive occupation will take its toll. Lost contact with former clients eventually results in the permanent loss of those customers. Finally, the “wound” of having lost to the former employer on this critical decision may subsequently be aggravated by the “salt” being rubbed on it in the form of an award of attorneys’ fees to the employer if a final judgment is entered in favor of the employer.7
While the advantages of defeating the application for temporary injunctive relief are obvious in terms of the employee’s short term financial status, a victory also enhances the employee’s long-term litigation position, as it puts the employee in a much better bargaining position to work out a compromise with the litigious employer.
Counsel for the employee defending against a temporary injunction should preface the presentation to the trial court by citing the legal principle that the granting of a temporary injunction is an extraordinary and drastic remedy which should be sparingly granted.8 Second, the employee’s legal memorandum should emphasize that the former employer seeking the temporary injunction must demonstrate that: 1) there is a likelihood of irreparable harm and the unavailability of an adequate remedy at law; 2) the employer has a substantial likelihood of success on the merits; 3) the threatened injury to the employer outweighs any possible harm to the employee; and 4) the granting of a temporary injunction will not disserve the public interest.9
It is submitted that arguing against the existence of irreparable harm at the hearing on the application for temporary injunction is largely futile insofar as the Florida statute regulating noncompete agreements states that the violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the employer seeking enforcement of a noncompete provision.
10 Moreover, the third and fourth requirements cited above as prerequisites for the issuance of a temporary injunction are somewhat nebulous and far too subjective to constitute the primary focus of the employee’s attack. Of the prerequisites that must be established in order to secure the temporary injunction, it is establishing a substantial likelihood of prevailing on the merits where the employer has the most vulnerability.
• Scope of the Order Granting Temporary Injunctive Relief
While defeating the enforcement of the noncompete is always the primary objective of the former employee, limiting the scope of the injunction may be the only result that is realistically attainable.
A Florida Second District Court of Appeal decision provides some examples of issues that may arise regarding the scope of the injunction. In Advantage Digital Systems, Inc. v. Digital Imaging Services, Inc., 2003 WL 22848954 (Fla. 2d DCA 2003), the language of the noncompetition agreements on which the temporary injunction was based stated that the employee:
[W]ill not solicit for sales, service or supplies from Digital Imaging Services, Inc., customers. This noncompete agreement will apply both during employment and for a period of five (5) years after separation from Digital Imaging Services, Inc. This agreement will apply to the State of Florida.
The injunction issued by the trial court went far beyond prohibiting solicitation, enjoining each of the men from “having any contact, whatsoever, with any customers of [Digital] pursuant to the noncompete agreement.”
The appellate court held that the injunction practically rewrote the parties’ agreements by disallowing “any contact” with the employer’s customers.11 The court highlighted the limited scope of a nonsolicitation agreement, and reversed the injunction because it exceeded the actual agreement. While the distinction between a noncompetition agreement and a nonsolicitation agreement seems obvious, the trial court confused them here. If a former customer approached the employee, the district court concluded, that is not solicitation.12
Additionally, the injunction may need to distinguish between customers that existed at the time of defendant/employee’s employment and prospective customers. In Advantage Digital Systems, the employer’s complaint asserted only that the employees had knowledge of its “existing commercial customer relationships” and had contacted “existing customers.” The employer did not plead and prove the necessity of restraining its former employees from soliciting any “specific prospective” customers.13
Common Law Defenses to Noncompete Enforcement
• Look for a Material Breach
While §542.335 contains statutory defenses, a court determining the enforceability of a noncompete agreement must consider all other pertinent legal and equitable defenses.14 Even if the noncompete agreement is a valid contract, there are still defenses to enforcement. For example, the trial court must consider the employee’s allegations that the employer committed a prior material breach of a dependent covenant in the contract in determining whether the employer has a substantial likelihood of success on the merits.
If the employer materially breached the contract between it and the former employee prior to the employee’s alleged breach of the noncompete agreement, the employee’s obligation to comply with the noncompete may be relieved. Florida law holds that an employer’s breach of an employment contract is a relevant factor in determining whether it is entitled to a temporary injunction enforcing the covenant not to compete. In Cordis Corp. v. Prooslin, 482 So. 2d 486 (Fla. 3d DCA 1986), the Third District Court of Appeal affirmed the trial court’s decision to deny a temporary injunction where there was evidence that the employer had breached the underlying contract, casting doubt on whether the employer was clearly entitled to success on the merits. The Prooslin court recognized that if an employer is in breach or default under an agreement or when good cause is given for a former employee’s nonperformance, there is no standing in equity to seek an injunction.
The employer’s failure to pay compensation under a contract of employment is the most common material breach available as a defense to employees who have previously signed noncompete agreements. Florida courts have regularly denied injunctive relief in these situations.
In Benemerito & Flores, M.D.s, P.A. v. Roche, 751 So. 2d 91 (4th DCA 1999), the professional employee presented evidence that her employer breached the employment contract by failing to fully compensate her for services provided. The contract called for the physician/employee not to compete if she left the employ of the professional association. The contract further provided for the payment of a bonus to her equal to the percentage collected in net fees. It was uncontroverted that the professional association violated the terms of the contract by lessening the bonus due to the physician/ employee. The appellate court held that there was competent evidence to support the trial court’s finding that the association materially breached the employment contract by lessening the bonus due to the physician and that the application for injunctive relief should have been denied.
In the case of Troup v. Heacock, 367 So. 2d 691 (Fla. 1st DCA 1979), an insurance agent was employed pursuant to an employment contract to sell life and health insurance policies. The employment contract was subject to termination at the will of the employer and provided that Troup would be paid a draw of $125 per week. The employer unilaterally first reduced the draw to $100 per week and then to $50 per week. The appellate court reversed the trial court’s decision that granted a motion for permanent injunction holding that the reduction of the draw was a material breach of contract having the effect of releasing the employee from his obligations under the noncompete agreement.
In Bradley v. Health Coalition, Inc., 687 So. 2d 329 (3d DCA 1997), the employee was employed as a plasma salesman pursuant to a written contract. In April 1994, the employee’s employment ended. The employer claimed that the employee voluntarily resigned; however, the employee claimed that he was forced to resign after he refused the employer’s instructions to engage in improper business practices. The employer filed an action attempting to enforce a noncompetition agreement signed by the employee. At the injunction hearing, the employee argued that his employer had materially breached the employment agreement, thus releasing him from any further obligation thereunder. He contended, among other things, that after his employment ended, the employer wrongfully refused to pay certain commissions which he had earned. In reversing the trial court’s order entering the injunction based upon the noncompete, the court held that “if the employer wrongfully refuses to pay the employee his compensation, the employee is relieved of any further obligation under the contract and the employer cannot obtain an injunction.”15
Material breaches involving issues other than compensation can also serve to excuse the employee from compliance with the noncompete. In Harrison v. Palm Harbor MRI, Inc., 703 So. 2d 1117 (Fla. 2d DCA 1997), the former employee who signed a noncompete agreement, responded to her former employer’s application for a temporary injunction by raising an affirmative defense of breach of contract stating that the president of the company sexually harassed her resulting in her eventual resignation. While she admitted going to work for a competitor, she considered the noncompete agreement void as a result of employer’s president’s sexual harassment of her. The trial court rejected this argument stating that the sexual harassment claim did not void earlier agreements between the parties, and that, in any event, there were other remedies for sexual harassment. The appellate court reversed the temporary injunction and remanded the case to the trial court for further proceedings to determine the viability of her claim of sexual harassment as a contractual defense. a parity of reasoning, claims of discrimination and retaliation made under Title VII, the ADA and the ADEA, may also be the basis for establishing a material breach of an employment contract.
In Thomas v. Federal Insurance Agency, 51 B.R. 653 (M.D. Fla. 1985), the employment contract stated that it could be terminated by either party by the giving of 60 days notice, or that the employer, without the giving of 60 days notice, could terminate the arrangement if the termination was for cause. In addition to the provision on termination, the contract also set forth a noncompetition clause whereby the employee agreed not to enter into any competing insurance business and not to write any policies for any persons who were clients of the former employer. The employee claimed that his former employer wrongfully terminated the agreement by discontinuing the draw without 60 days notice and without cause, and that he was, therefore, not bound by the terms of the noncompetition clause. The judge ruled that it was clear that the former employer did not give 60 days notice prior to its termination of the draw provision of the Agreement and that it was equally clear that the employee was not terminated for “cause.” The court concluded that the employer committed the first material breach of the contract, permitting the nonbreaching party to treat the breach as a discharge of his contractual liability. Therefore, the court held that the employee was not bound by the noncompete agreement.
One area that is vastly overlooked in terms of establishing a material breach of contract as a defense to an action to enforce a noncompete agreement is a violation of the Fair Labor Standards Act (FLSA). In fiscal 2003, the Wage and Hour Division of the Department of Labor’s Employment Standards Administration recovered more than $212 million in back wages – a 21 percent increase over the record setting amount in fiscal year 2002. During fiscal year 2003, 31,123 complaints were filed with the Department of Labor.16 The point is that the FLSA is violated on a regular basis by employers who have noncompete agreements with their employees.
The starting point for claiming a violation of the FLSA as a material breach of an employment contract begins with the principle that the provisions of FLSA, and other laws in force at the time, must be read into and treated as a part of every employment contract that is subject to it.17 Failing to pay an employee in accordance with the FLSA therefore constitutes a material breach of the employment agreement that incorporates the noncompete provision. One of the advantages of using a violation of the FLSA as the basis for the claim of material breach is that the exemptions are to be construed narrowly and the employer has the burden of proving the exemption by “clear and affirmative evidence.”18
The chances of success in arguing a prior material breach depend on several factors. For example, it is generally easier to convince a court of a prior material breach if the noncompete covenant is part of an overall employment contract which contains compensation and other provisions which were arguably breached, than if the covenant is a stand-alone agreement. It is generally easier to prove the breach of an explicit term of the contract than an implied term, such as a requirement of existing law. However, even if a prior act of the employer is not a prior material breach, it may still be useful in the defense of “unclean hands.”
• “Unclean Hands”
A well-known principle of law that cannot be overlooked by the attorney representing the employee in noncompete litigation is that “[o]ne who seeks the aid of equity must do so with clean hands.”19 In Bradley v. Health Coalition, 687 So. 2d 329 (3d DCA 1997), the employee, in addition to claiming that he had not been fully compensated by his former employer, also attempted to offer the defense that the injunction should be denied under the doctrine of unclean hands. The employee contended that he was forced to resign after he refused to resell certain plasma products that had been returned by a customer. The employee believed the product had been rendered unsafe for medical use because of its handling during shipping. Obviously, the employer took the position that the product was safe for use and ordered the employee to resell it. The employee also contended that he was ordered to alter certain invoices to charge higher prices than the customers had agreed to pay. The employee contended that this constituted a fraud on the customers and that he refused to obey the instruction. The employer denied that any such instruction was given. The trial court declined to consider either of these defenses, ruling that they could not be considered at a temporary injunction hearing. The appellate court reversed and held that the employee was entitled to present these defenses in response to the application for temporary injunction. In the appellate court’s view, if the employer ordered the employee to sell unfit products, or to alter invoices so as to defraud customers, and the employee was forced to resign for refusing to do so, then the employer would have unclean hands and would not be entitled to an injunction.20
One strategy available to an employee faced with the potential of being sued for violating a noncompete is to take the offensive immediately. Tactically, the employee attempts to turn the tables on the employer in order to gain the advantage. Therefore, an employee who may be faced with the threat of imminent litigation through the filing of an injunction for alleged breach of a noncompete may wish to consider a preemptive strike – the filing of a declaratory judgment action – which should seek a determination of the enforceability of the noncompete agreement and a declaration of its invalidity. It may also incorporate other related issues and claims.
It should be kept in mind that the ultimate goal is to declare the restrictive covenant invalid, and, if appropriate, to recover on the employee’s counterclaims. Therefore, that individual must have “clean hands” and be prepared to show the court that no improper actions were committed in connection with his or her former employment. Any arguably wrongful actions by the employee during the course of the litigation must be avoided at all costs.
According to F.S. §688.002(4), the phrase “trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process that:
a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and
b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
In most cases, trade secret litigation is factually intensive, turning on the question of whether the employee did or did not take trade secrets from a former employer. This conflict can be unbearably suspenseful and produce unpredictable results. The better approach is to address the legal issues of whether the subject information qualifies as a trade secret, whether the employer has waived its entitlement to protection of the trade secret and whether the employee has used the trade secret.
Customer lists are the most commonly alleged trade secrets in lawsuits against former employees. These lists may not be as “secret” as the employer alleges. The expansion of the Internet has given access to information that was previously unavailable. Vendors of custom-tailored customer lists are easily accessible by the computer-owning general public, a situation without historical precedent. The availability of these lists has a direct impact on whether a particular company’s customer lists are trade secrets or are in the public domain. Generally, when a company is engaged in business as a manufacturer or wholesaler dealing primarily with retail merchants or jobbers, or sells to members of a readily ascertainable class, the employee’s knowledge of the names of the former employer’s customers is not a “trade secret.”21 Therefore, if a list of customers can be obtained in the open market that can produce a list similar to that sought to be protected by the prosecuting employer, the customer list should not qualify as a trade secret under Florida law. In Thomas v. Alloy Fasteners, Inc., 664 So. 2d 59, 60 (Fla. 5th DCA 1995), the employee developed customer lists by “telemarketing, phones, making calls. . . . You get a list, and start making cold calls, and see what the people need for supplies.” The court stated that:
There is nothing magical or secret about this method. The names are available from public sources and there was no secret as to the class of likely customers. In the absence of a noncompete contract, Thomas is free to contact old customers.22
Customer lists may not qualify as trade secrets unless the employer presents evidence that they are the product of great expense or effort, that they are distillations of larger lists, or that they include information not available from public sources.23 If the information on the lists is easy to obtain merely by looking at the advertisements, magazine, periodicals, in addition to many other sources, local newspapers and the yellow pages, they will not qualify as trade secrets.24
In Templeton v. Creative Loafing Tampa, Inc., 552 So. 2d 288 (Fla. 2d D.C.A. 1989), the court held that a former employee could not be precluded from utilizing contacts and expertise gained during employment as principal contact for the magazine’s advertising clients. The basis for the court’s decision was that the employee knew all the contacts on the advertiser list on a first name basis and the use of a “secret” list to enable him to ascertain their identity was not necessary. No great expertise was needed to gain magazine distribution information. Thus, the list was not a trade secret.
However, in Unistar Corp. v. Child, 415 So. 2d 733 (Fla. 3d DCA 1982), the former employer’s customer list was a distillation of a larger list created from public sources which reflected actual customer interest and activity, requiring considerable effort, knowledge, time and expense to create. As such, the court determined that it qualified as a “trade secret” and could not be used by former employees for their own benefit. They were enjoined from contacting and selling to the former employer’s customers even in the absence of an express agreement not to compete or not to disclose trade secrets.
As the Templeton and Unistar decisions demonstrate, to qualify as a trade secret, an employer’s customer list must be more than a list of potential leads which are available from public sources. Typically, it will be a distillation that contains the names of customers that have actually ordered or conducted business with the employer in the past. In such instances, it is confidential and not readily ascertainable to the public.25
Many employers attempt to claim that their “prospective” customer lists are trade secrets. However, the courts have generally not considered “prospective” customer lists as trade secrets when they are compiled from information readily ascertainable to the public from commercially available materials.26
An employee must contend with many concerns when faced with noncompete and trade secret litigation. The most prudent course for the employee is to consult with experienced counsel early and work out a plan of action before leaving employment. If litigation occurs, in view of the high stakes involved, all defenses to injunctive relief should be investigated and vigorously pursued. Determining whether the former employer materially breached the employment contract is of primary concern to the departing employee. Finally, the employer’s position that certain documents constitute trade secrets should be tested against existing statutory and case law. q
1 For ease of expression, the phrase “noncompete agreement” will be used in this article to refer to the more grammatically correct phrases “noncompetition agreement” and “restrictive covenant.”
2 Fla. Stat. §542.335(1)(a).
3 Fla. Stat. §542.335(1)(b).
4 Fla. Stat. §542.335(1)(c).
7 Fla. Stat. §542.335(1)(k).
8 Cordis Corp. v. Prooslin, 482 So. 2d 486, 489 (3d D.C.A. 1986).
9 Supinski v. Omni Healthcare, P.A., 853 So. 2d 526, 530 (Fla. 5th D.C.A. 2003); In re Estate of Barsanti, 773 So. 2d 1206, 1208 (Fla. 3d D.C.A. 2000); Florida High School Activities Ass’n v. Kartenovich, 749 So. 2d 1290, 1291 (Fla. 3d D.C.A. 2000).
11 Id. See Twenty Four Collection, Inc. v. Keller, 389 So. 2d 1062, 1064 (Fla. 3d D.C.A. 1980); see also Sabina v. Dahlia Corp., 650 So. 2d 96, 100 (Fla. 2d D.C.A. 1995) (noting that an injunction prohibiting “procuring” of insurance when the plain language of the covenant proscribed “calling upon or soliciting” would not be proper).
12 Id. See Lotenfoe v. Pahk, 747 So. 2d 422, 425 (Fla. 2d D.C.A. 1999).
14 Fla. Stat. §542.335(1)(g)3.
15 Id. at 333.
17 Shavers v. Duval County, 73 So. 2d 684 (Fla. 1954); General Development Corporation v. Catlin, 139 So. 2d 901 (Fla. 3d D.C.A. 1962); Florida Beverage Corporation v. Division of Alcohol Beverages and Tobacco, Department of Business, 503 So. 2d 396 (Fla 1st D.C.A. 1987); Roland Elec. Co. v. Black, 163 F.2d 417 (4th Cir. 1947); Northwestern Yeast Co. v. Broutin, 133 F.2d 628 (6th Cir. 1943).
18 Klinedinst v. Swift Investments, Inc., 260 F.3d 1251 (11th Cir. 2001); Evans v. McClain of Georgia, 131 F.3d 957 (11th Cir. 1997).
19 See Pilafian v. Cherry, 355 So. 2d 847, 849 (Fla. 3d D.C.A.), (“One who seeks the aid of equity must do so with clean hands.”) (citation omitted), cert. denied, 361 So. 2d 834 (Fla.1978).
20 See also Gupton v. Village Key & Saw Shop, 656 So. 2d at 478; Cordis Corp. v. Prooslin, 482 So. 2d at 489-90 (temporary injunction must not disserve the public interest); § 542.335(1)(g)4.
21 Renpak, Inc. v. Oppenheimer, 104 So. 2d 642 (Fla. 2d D.C.A. 1958) citing 43 C.J.S. Injunctions §148b, p. 757, and Haut v. Rossbach, 1940, 128 N.J.Eq. 77, 15 A.2d 227, affirmed 128 N.J.Eq. 478, 17 A.2d 165.
23 See Pure Foods, Inc. v. Sir Sirloin, Inc., 84 So. 2d 51 (Fla.1955); Harry G. Blackstone, D.O., P.A. v. Dade City Osteopathic Clinic, 511 So. 2d 1050 (Fla. 2d D.C.A. 1987), review denied, 523 So. 2d 576 (Fla.1988); Renpak, Inc. v. Oppenheimer, 104 So. 2d 642 (Fla. 2d D.C.A. 1958).
24 Templeton v. Creative Loafing Tampa, 552 So. 2d 288 (Fla. 2d D.C.A. 1989).
25 See Sethscot Collection, Inc. v. Drbul, 669 So. 2d 1076, 1078 (Fla. 3d D.C.A. 1996).
26 Sethscot Collection, 669 So. 2d 1076; Creative Loafing, 552 So. 2d 288.
N. James Turner practices in Orlando and concentrates in employment law involving employment contracts and overtime litigation under the Fair Labor Standards Act. He received his J.D., cum laude, and his LL.M. from the University of Miami School of Law. Mr. Turner is board certified in both civil trial law and business litigation law. He is a founding member of the Florida Chapter of NELA and has twice served as chair of the Labor and Employment Law Section of the Orange County Bar Association.
This column is submitted on behalf of the Labor and Employment Law Section, Cathy J. Beveridge, chair, and Frank E. Brown, editor.
© 2004 by N. James Turner, Esq., P.A.