1. A covenant not to compete which prohibits competition per se violates public policy and is void.
2. A condition precedent to the validity of a covenant not to compete entered into by an agent, independent contractor or employee is the existence of a legitimate business interest of the employer to be protected.
3. It is the employer’s burden to plead and prove the underlying protectable interest.
4. Trade secrets, customer lists, and the right to prevent direct solicitation of existing customers are, per se, legitimate business interests subject to protection.
5. Other business interests, such as, but not limited to, extraordinary training or education, may constitute protectable interests depending upon the proof adduced.
6. Chapter 90-216, section 1, Laws of Florida, shall apply to and control all actions.
7. The right created by section 542.12, and carried forward in section 542.33(2)(a), is applied prospectively.
ABC, Inc. (“ABC”) operates an automobile repair shop. [While employed by ABC, John Doe (i) received no significant training in the installation and repair of automobile air conditioning systems, beyond the knowledge and skill that he possessed when he began work with ABC (ii) he received significant training in the installation of cruise controls and cellular telephones in automobiles, (iii) he had no significant contacts with ABC’s customers and developed no significant relationships with ABC’s customers, and (iv) he acquired no trade secrets or confidential business information of ABC.
Under the common law of England, a contract restricting a person’s right to pursue his trade or occupation was deemed void as against public policy. Medieval concepts that a person could not pursue a trade in which he had not been apprenticed made the rule necessary, because prohibiting a person from working under the supervision of one other than his original employer would leave the person in involuntary servitude or unable to provide for himself and his dependents.
With the passage of time, the ancient rules of apprenticeship were abandoned, and it became recognized that in special circumstances limited restraints of competition were both necessary and proper to protect an employer’s proprietary rights. Thus evolved the distinction between contracts prohibiting competition per se, which were prima facia invalid, and contracts protecting an employer from unfair competition from a former employee who had obtained trade secrets, or other confidential information, or special relationships with customers during the course of his employment. It is a settled principle of law that no man may, per se, contract with another that the other will not follow a calling by which he may make his livelihood. These basic concepts are embraced in the law of Florida.
Other states which permit employee noncompetition agreements reveals an overwhelming majority requiring, at a minimum, that such contracts be reasonably related to the protection of a “legitimate business interest” or “protectable interest” of the employer. The rule, generally stated, is that an employer may not enforce a post-employment restriction on a former employee simply to eliminate competition per se; the employer must establish its legitimate business interest to be protected. See Bryceland v. Northey, 160 Ariz. 213, 772 P.2d 36 (Ct.App. 1989).
The Supreme Court of Tennessee expressed the rule as follows: ” [A]ny competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete, the employee would gain an unfair advantage in future competition with the employer.”
The rule is an expression of common sense which both protects the employer from unfair competition and recognizes the right of an individual, in a free and competitive society, to earn an honest living and better his status along the way. In a broader sense, all consumers benefit from the availability of goods and services, the quality and price of which are determined by fair competition, unfettered by artificial monopolistic practices.
In 1953 the Florida legislature enacted section 542.12, Florida Statutes (1953) (renumbered in 1980 as section 542.33), which acknowledged the common law principle that contracts in restraint of trade are void. The statute provides an exception which includes, in general terms, that an employee may agree with his employer, to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer. The statute is silent on the issue of whether for such contracts to be valid they must relate to the protection of a proprietary interest of the employer. However Florida courts have determined that such requirement is to be implied in the statute. Florida’s supreme court addressed the constitutionality of section 542.12 (the predecessor of 542.33), and in upholding the statute, observed: “[T]he fact that such contracts may be lawfully made and enforced under the statute does not ipso facto make every such contract enforceable as written. The restrictive provisions of such contracts will generally be enforced in such way as to protect the legitimate interests of the employer…” The same court held “that there was a `reasonable interest’ to be protected by the restraining covenant.” Later, the it explained that section 542.12 “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.”
Most fundamental to these decisions is that “[t]he right to work, earn a living and acquire and possess property from the fruits of one’s labor is an inalienable right.” Implicit in this right is the opportunity to move freely within the labor force in the quest for advancement in position and economic productivity. Certainly the common law of this state recognized and jealously guarded this freedom in condemning and restricting contracts of the kind here considered.
A plain reading of section 542.33(2)(a) dispels any notion that the legislature intended to dispense with the bedrock requirement that covenants of this nature must relate to a legitimate business interest of the employer in order to restrict or impinge upon the right to pursue and earn a living guaranteed by our constitution. Therefore, pursuant to section 542.33(2)(a), the existence of a legitimate interest of the employer to be protected is a threshold condition to the validity of a covenant not to compete.
WHAT CONSTITUTES LEGITIMATE INTERES T O THE EMPLOYER TO BE PROTECTED
Generally, three such interests are recognized: (1) trade secrets and confidential business lists, records, and information, (2) customer goodwill, and (3) to a limited degree, extraordinary or specialized training provided by the employer.
Clearly categories (1) and (2), by the expression of the legislature in the 1990 amendment to section 542.33(2)(a), are interests which may be protected. The third category is difficult to define with any degree of precision. Where recognized as a protectable interest, it is generally required that the employer provide more in training than that acquired by simply performing the tasks associated with a job.
In our factual scenario, because John Doe, although thoroughly schooled in the installation and repair of auto air conditioners upon his employment by ABC, did acquire the knowledge and experience necessary to install and repair cruise control units and cellular telephones while in the employ of ABC.
To constitute a protectable interest, however, the providing of training or education must be extraordinary. “Extraordinary” is that which goes beyond what is usual, regular, common, or customary in the industry in which the employee is employed. The rationale is that if an employer dedicates time and money to the extraordinary training and education of an employee, whereby the employee attains a unique skill or an enhanced degree of sophistication in an existing skill, then it is unfair to permit that employee to use those skills to the benefit of a competitor when the employee has contracted not to do so. The precise degree of training or education which rises to the level of a protectable interest will vary from industry to industry and is a factual determination to be made by the trial court. Skills which may be acquired by following the directions in the box or learned by a person of ordinary education by reading a manual do not meet the test.
In our scenario, John Doe extended his air-conditioning installation and repair skills to include cruise control units and cellular telephones. This is not to say that unique training in performing the simplest of tasks cannot be protected when the employer’s methods fall within the category of trade secrets or other confidential information.
In 1990 the Florida legislature enacted chapter 90-216, section 1, Laws of Florida. The impact of this amendment was as follows: first, the presumption of irreparable injury is strictly curtailed; second, a test of reasonableness is injected into the enforcement process because the amendment prohibits the enforcement of an unreasonable covenant. In determining the reasonableness of such an agreement, the courts employ a balancing test to weigh the employer’s interest in preventing the competition against the oppressive effect on the employee. This balancing test has been limited strictly to covenant provisions pertaining to duration and geographic area. The court may not refuse to give effect to a valid noncompetition agreement on the ground that enforcement would have an overly burdensome effect on employee. The only authority the court possesses over the terms of a noncompetition agreement is to determine reasonableness of the time and area limitations. A court is not empowered to refuse to give effect to a covenant not to compete on the basis of finding that the enforcement of the contract’s terms would produce an unjust result by causing an overly burdensome effect upon the employee.
This restriction upon the court’s powers of review flows from the terms of section 542.33(2)(a) that an “employee may agree with his employer, to refrain from carrying on or engaging in a similar business … within a reasonably limited time and area.” Judicial interpretation construed this language as an implied limit upon the court’s authority because it granted no power to extend the test of reasonableness beyond that area specifically defined. This language remains unchanged in the statute as amended. Added, however, is the specific authority to deny injunctive relief as to an “unreasonable covenant.” In this regard, the intent of the legislature to be to authorize the courts to apply traditional equitable principle in cases of this nature to avoid unfair and unjust results.
The legislature has specifically identified and segregated for special treatment covenants which protect trade secrets and customer lists and prohibit solicitation of existing customers, all of which are universally identified as legitimate business interests which may be protected. In such cases, the proof of such an interest to be protected provides the threshold for a presumption of irreparable harm on breach of the contract. All covenants not to compete, however, must be founded on an interest, determined by law, to be the proper subject of protection. That is, the proof of a protectable interest is the threshold to enforcement of such covenants; it is only the degree of proof thereafter which varies depending on the class of interest to be protected.
The right created by section 542.12, and carried forward in section 542.33(2)(a), is applied prospectively.
To learn more about non-compete agreements and other agreements which can protect your business please call attorney Persad at 407-647-7887 or email him at email@example.com.