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restrictive covenant

Enforcement of Non-Compete and Non-Solicitation Provision

Posted by David Adelstein on January 12, 2020
Trial Perspectives / Comments Off on Enforcement of Non-Compete and Non-Solicitation Provision

Non-compete provisions are not always fair.  The same can probably be said about non-solicitation provisions.  Typically, these provisions (referred to as restrictive covenants) are included in an employment agreement as a condition of employment.  But, if there is a legitimate business interest for these provisions, and they are limited in scope, they are enforceable and relief, including injunctive relief, can be sought.   

Restrictive covenants in employment-related agreements, such as a non-compete and non-solicitation provision, are governed by Florida Statute s. 542.335

A party (e.g., employer) seeking a temporary injunction against another (e.g., employee) must demonstrate four elements: “(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 a temporary injunction will serve the public interest.”  Picture It Sold Photography, LLC v. Bunkelman, 45 Fla. L. Weekly D74a (Fla. 4th DCA 2020).(citation omitted).

An example of an employer moving to enforce such restrictive covenants can be found in Bunkelman.  

The employer in this case provides photo and video services to the real estate industry (probably for listing purposes).  The employer hired an independent contractor and an independent contractor agreement was executed that included a non-compete and non-solicitation provision:

Independent Contractor agrees that he/she will not directly or indirectly do or attempt to do any of the following during Independent Contractor’s engagement (except in the faithful performance of his/her duties for the Company) or during the period of two years after the date of termination of Company’s engagement of Independent Contractor, within the Florida counties of Palm Beach, Broward, Martin and St. Luciesolicit, employ, engage, hire, call oncompete for, sell to, divert, or take away any customer, supplier, endorser, advertiser or employee, agent, subagent, or independent contractor of Company or aid, assist or plan for anyone else to do so; divert or aid, assist or plan for others to divert from the Company any past or pending sale or exchange of any goods, product or service; entice, aid or cooperate with others in soliciting or enticing any employee, agent, subagent or independent contractor of the Company to leave, modify or terminate its relationship with the Company; participate in planning for any new or existing business that is or would be similar to the business of the Company or that does or would compete with the Company or solicit customers of the Company; accept any other employment or engagement that would call upon Independent Contractor to use, disclose or base judgments on the Company’s trade secrets or confidential information or to utilize the Company’s customer goodwill in making sales or other advantageous business relations for a business similar to or in competition with the Company’s business; compete against the Company for customers, suppliers, employees, agents or independent contractors; or own, manage, be employed by, be engaged by, work for, consult for, be an officer, director, partner, manager, employee, independent contractor or agent of, advise, represent, engage in, or carry on any business which is similar to the type of business engaged in by the Company at this time or on the date of termination of Independent Contractor’s engagement and which competes with the Company.

The independent contractor violated the agreement and solicited and worked for the employer’s customers.  In doing so, the independent contractor, without terminating the agreement, just stopped working for the employer and competed with the employer in the prohibitive areas set forth in the agreement.

The employer filed a lawsuit against the independent contractor for injunctive relief—to force the independent contractor to honor the agreement–and monetary damages.  

An evidentiary hearing was held in furtherance of a temporary injunction in favor of the employer.  The independent contractor testified he felt he was fraudulently induced into entering the agreement because he was promised he would make a certain amount of money and work predominantly in a certain location, neither of which panned out.  He testified that he provided and still provides services to the employer’s customers but introduced testimony from some of the employer’s former customers that said they would never use the employer again for reasons unrelated to the independent contractor. 

The trial court found that there was a legitimate business interest for the restrictive covenants and they were limited in scope (location) but denied the temporary injunction finding that the employer failed to establish it had an adequate remedy at law—element (2).  The trial court further found that the independent contractor’s fraudulent inducement defense had some traction and, therefore, seemed to find that the employer cannot prove a substantial likelihood of success on the merits—element (3).

The appellate court reversed and remanded to the trial court to enter a temporary injunction in favor of the employer.

As it pertained to element (2)—the unavailability of an adequate remedy at law—“[T]he continued breach of a non-compete agreement threatens a former employer’s ‘goodwill and relationships with its customers, and nothing short of an injunction would prevent this loss.’”  Bunkelman, supra (citation omitted).  The evidence established that the independent contractor continued to compete against the employer in violation of his agreement and still does work for and solicits customers he obtained from the employer.

As it pertained to element (3)—substantial likelihood of success on the merits—“Evidence that an enforceable covenant not to compete was breached will support a trial court’s finding of the likelihood of success on the merits.”  Bunkelman, supra (citation omitted).   The trial court was right to consider the independent contractor’s fraudulent inducement affirmative defense.  If there is evidence that the employer breached the agreement, the employer needs to establish it has a substantial likelihood of sucess on the merits of the defense.

In this case, there was no provision in the independent contractor agreement as to the independent contractor earning a particular salary or amount.  Rather, there was a fee schedule and the independent contractor testified he was paid by that fee schedule. Further, there was nothing in the agreement that promised the independent contractor that he would work predominantly in a certain geographic location.  The agreement stated it was the entire agreement between the parties. Thus, even if the independent contractor was promised something orally pre-contract, “a party cannot recover in fraud for oral misrepresentations that are later contradicted in a written contract.”  Bunkelman, supra.    (Finally, the independent contractor did not put on evidence to establish any justifiable reliance on the alleged salary and location misrepresentations to support the defense of fraudulent inducement).

 

 

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.

 

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Considerations when Enforcing or Challenging Restrictive Covenant

Posted by David Adelstein on September 08, 2019
Trial Perspectives / Comments Off on Considerations when Enforcing or Challenging Restrictive Covenant

A restrictive covenant that runs with the land places restrictions on the use of real property.  As a result, “restrictive covenants must be strictly construed in favor of the free and unrestricted use of real property” and, with respect to any ambiguity in the covenant, “must be construed against the party seeking to enforce it.”   Beach Towing Services, Inc. v. Sunset Land Associates, LLC, 44 Fla.L.Weekly D2195a (Fla. 3d DCA 2019).  These are important things to remember when enforcing or challenging a restrictive covenant.

For instance, in Beach Towing Services, the plaintiff purchased property that was subject to a restrictive covenant of land.  The restrictive covenant provided that the property “will not be used as a parking lot, storage yard facility or for a garage or tow truck company.

The plaintiff wanted to build a parking garage on the property.  The defendant contended that a parking garage was restricted by the restrictive covenant.  The plaintiff filed a lawsuit for a declaratory judgment claiming ambiguities with the restrictive covenant, specifically with the word “garage.”  The parties did not dispute that the term “parking lot” referred to a surface parking lot as opposed to a parking garage.  The plaintiff was looking for a declaration from the court that the restrictive covenant did not restrict its use to build a parking garage on the property.  The appellate court, affirming the trial court, agreed.

Given the intent and meaning of ALL of the words in the restrictive covenant, the plaintiff could not use the property to conduct the business of activities of a garage company or tow truck company.  Beach Towing Services, supra (“The question thus becomes how to construe the words ‘for a garage or tow truck company,’ since the parties agree that the only dispute in this case is whether the word ‘garage’ as used in the Covenant prohibits Plaintiff from construction of a parking garage on the Property. Applying the series-qualifier, the Court must read the term ‘company’ as modifying both the term ‘garage,’ as well as the term, ‘tow truck,’ and the Covenant must therefore be read to mean that the Property cannot be used for either a ‘garage company’ or a ‘tow truck company.’  Indeed, there is no determiner before the words ‘tow truck’ that would indicate that the term ‘company’ modifies only ‘tow truck’ and not ‘garage’ (i.e., the Covenant does not say ‘for use as a garage or a tow truck company’).  Moreover, when reading the Covenant’s prohibition on a “garage company” in context, as the Court must do, ‘garage company’ is clearly associated with ‘tow truck company.’”) (internal citations omitted).  But, here, the plaintiff was not looking to engage in the business activities of a garage company or tow truck company.  Thus, nothing restricted the use of the property as a parking garage.

 

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.

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Restrictive Language in Employment Agreement

Posted by David Adelstein on June 04, 2017
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Woo-hoo! I got a real good J-O-B! Great pay. Great benefits. Great location. Doing what I want to be doing with my skillset. My new employer wants me to sign an employment agreement, but I have signed such agreements in the past, so this is no big deal. Or, is it a big deal?

There are many professions that want certain employees to sign an employment agreement that includes a restrictive covenant, i.e., anti-compete or anti-solicitation language. The employer does not want to train the employee, give the employee access to its trade secret information, customer lists, internal marketing material, pricing lists, or other business data only for the employee to leave and use that acquired information to start-up his/her own business or work for a competitor. From a common sense standpoint, this makes sense. No one wants to invest in an employee that leaves and takes what he/she learned to a rival company or to start a competitor.

All too often, the employee does not really understand the implications of the restrictive covenant language he/she is signing. The mindset is if I don’t sign the employment agreement I will not be hired and the money or opportunity or location is way too good to pass up. All of this may be 100% true.  But, this does not mean you should not truly appreciate the implications of such language or try to negotiate the language to more favorable terms (if possible).  The fact that you are in a position asked to sign an employment agreement means you have had other jobs in the past or are viewing this job as a stepping stone opportunity. You know there is a lot that could happen: you don’t like the job, the job isn’t what you thought it was, a better opportunity surfaces, you want to make a job change, you want to start your own business, etc. Life happens which is why the job you are in today may not be the job you are in a few years down the road.

In a recent case example, Collier HMA Physician Management, LLC v. Menichello, 42 Fla. L. Weekdly D1228b (Fla. 2d DCA 2017), a doctor signed an employment agreement with a physician group that operates hospitals that provided during the course of the agreement and for a 12-month period after the agreement is terminated or expired, the doctor agrees not to work for specifically named physician groups or hospitals identified in the agreement (that were within the same geographical area). (Yes, medicine is a business too!).  

The doctor became dissatisfied with his job and went to work at a hospital included in the restrictive covenant language.   His prior employer moved to enforce the restrictive covenant language by filing a lawsuit for injunctive relief – to prohibit the doctor from working for the hospital identified in the restrictive covenant language in the employment agreement.

As often is the case, and many times justifiably so, the doctor challenged the enforceability of the restrictive covenant language. Restrictive covenants in employment agreements in Florida are governed under Florida Statute s. 542.335 to ensure that the language is reasonable in time, area, and business, and they don’t operate to unreasonably restrain competition or trade. (Check out this statute here.)  

At first blush, the restrictive covenant at-issue does not appear to be unreasonable. It was for a period of 12-months, was limited to a geographic area, and made specific reference to those hospitals or physician groups the employee could not work for during this restrictive period.

The doctor, however, argued that the agreement should not be deemed enforceable because of a change in the corporate structure of the employer, particularly due to a parent company merger.

The doctor made this argument because s. 542.335(1)(f) provides:

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.

The doctor claimed that the restrictive covenant could not be enforceable because the corporate change in ownership meant that the agreement was being enforced by a successor entity and the employment agreement states that no third-party beneficiaries could enforce the agreement. The appellate court shot down this argument because the entity enforcing the agreement was the doctor’s former employer (the physician group). The corporate change (merger) regarding the parent company did not impact the validity of the restrictive covenant. The parent company was not enforcing the employment agreement, nor could it.  And, the name of the employer did not change—the parent company’s merger did not result in a new successor entity being formed for the employer.

From an employee’s perspective, there are many reasons and circumstances to challenge the enforceability of restrictive covenant language in an employment agreement.  This does not mean, however, that you should ignore any risk associated with this language when signing the employment agreement.

From an employer’s perspective, there are many reasons and circumstances to enforce the restrictive covenant language in an employment agreement.  This does not mean, however, that you should ignore any restrictive language that may be unreasonable or contrary to Florida Statute s. 542.335.

 

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.

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Strict Construction of Restrictive Covenants

Posted by David Adelstein on April 29, 2017
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Restrictive covenants are to be strictly construed.   Restrictive covenants show up in Declarations or Covenants recorded in the public records that restrict a landowner’s (or unit owner’s) use to do something with his/her property.   Just keep in mind that a restrictive covenant will be strictly construed in favor of the landowner. See Leamer v. White, 156 So.3d 567, 572 (Fla. 1st DCA 2015). Hence, the precise language of the restrictive covenant is important because of the requirement of strict construction.

An example of such strict construction can be found in the recent opinion of Santa Monica Beach Property Owners Association, Inc. v. Acord, 42 Fla. L. Weekly D984a (Fla. 1st DCA 2017).   This case dealt with property located in a subdivision near the beach. A restrictive covenant was recorded in the public records relating to the subdivision that provided:

“Said land shall be used only for residential purposes, and not more than one detached single family dwelling house and the usual outhouses thereof, such as garage, servants’ house and the like, shall be allowed to occupy any residential lot as platted at any one time; nor shall any building on said land be used as a hospital, tenement house, sanitarium, charitable institution, or for business or manufacturing purposes nor as a dance hall or other place of public assemblage.”

Owners of property within the subdivision were advertising and using their property for short-term vacation rentals (so others could rent their residential property). The governing association contended that this violated the restrictive covenant because this was a business purpose and not a residential purpose. The problem, however, was that the restrictive covenant stated nothing about vacation rentals or that such rentals constituted a prohibited business purpose. Since the restrictive covenant is to be strictly construed, the court stated:

Finally, even if the restrictive covenants were susceptible to an interpretation that would preclude short-term vacation rentals, the omission of an explicit prohibition on that use in the covenants is fatal to the position advocated by the Association in this case because “[t]o impute such a restriction would cut against the principle that such restraints ‘are not favored and are to be strictly construed in favor of the free and unrestricted use of real property.’ ”  Indeed, the need for explicit language in the covenants is particularly important where the use in question is common and predictable, as is the case with short-term rentals of houses near the beach to vacationers.

Santa Monica Beach Property Owners Association, supra (internal citation omitted).

 

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.

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