Keeping secrets Featured

8:00pm EDT October 26, 2009

In today’s competitive market, companies are doing all they can to protect their trade secrets and other valuable confidential business and professional information.

Employers do not want to invest valuable time and money on specialized training for employees, only to have those employees turn around and take that information with them to their new jobs, or, even worse, use it to launch their own competing businesses.

“Therefore, many employers use non-compete agreements to protect their business interests,” says Michael P. Bruning, a litigation associate with Katz Barron Squitero Faust.

Smart Business spoke with Bruning about non-compete agreements.

How is the validity of a non-compete agreement determined?

The validity of an employee’s non-compete agreement depends on the date it was made. Florida non-compete agreements entered into prior to June 28, 1990; from June 28, 1990 until June 28, 1996; and on or after July 1, 1996, are governed by Florida’s Anti-Trust Act. Presently, an employer who enters into a restrictive covenant to prevent its employees from competing with it, or from using the employer’s confidential business information to benefit a competing business, must comply with Florida Statutes Section 542.335.

What is Section 542.335?

Section 542.335 generally permits Florida courts to enforce non-compete and other post-employment restrictive covenants if the agreements are in writing, are signed by the employee, and are reasonable in terms of time, geographic area and the restricted line of business. The agreement must be supported by one or more legitimate business interests that justify the restrictive covenants.

Any restriction of six months or less against a former employee who is competing against the employer is presumed reasonable. Any restriction of more than two years is presumed unreasonable. Restrictions predicated on the protection of trade secrets are presumed to be reasonable if they are five years or less in duration and are presumed unreasonable if they are for more than ten years.

How can an employer enforce a restrictive covenant?

An employer who wants to enforce a restrictive covenant must prove one or more legitimate business interests that justify the restrictive covenant. The protection of trade secrets or other confidential business or professional information is a legitimate business interest. A non-compete can be enforced to protect business relationships and goodwill with specific existing and prospective customers, patients or clients. Goodwill can also be legitimately protected, whether it arises from a business location or market, or trademarks or servicemarks. Protection of an employer’s interest in specialized or extraordinary training of employees is also a legitimate interest that warrants enforcement.

If the employer can present this proof, then the burden shifts to the employee to prove that the restraint is too broad, too long, or is otherwise not really necessary to protect the employer’s business interests.

What do the courts consider when looking at non-compete cases?

Section 542.335 addresses potential defenses that courts may consider in determining the enforceability of a restrictive covenant, and also bars certain defenses. The statute does not allow courts to consider any individualized economic or other hardship that might be caused to the employee. However, the court is permitted to consider the fact that the employer is no longer in business in the geographic area or line of business that is involved in the case. Also, the court must consider the effect of enforcement upon the health, safety and welfare of the public.

Section 542.335 also has a provision allowing for attorneys’ fees to the prevailing party. The legislature added this in the hopes of discouraging frivolous claims by employees, which have sometimes been brought by employees who expect that the employer will settle the case merely to avoid the cost and inconvenience of defending it. The fee provision also enables the court to give a more complete remedy to the employee when the claim is well founded, because the employee will not bear the cost of enforcing its rights.

Did Section 542.335 clear up all the issues surrounding non-compete clauses?

Section 542.335 still leaves several issues unaddressed, leaving the Florida courts to sort through the various issues. Recently, the Eleventh Circuit Court of Appeals released a lengthy opinion in Proudfoot Consulting Co. v. Gordon, which addressed several of these open issues.

Several key points from the court’s decision are noteworthy from an employer’s perspective. First, the court decided that if a non-compete covenant does not contain a geographic limitation, the court can supply a reasonable geographic scope. Second, the employer does not have to prove that the employee intentionally breached the restrictive covenants in order to receive injunctive relief. The employee’s good faith and reasonable belief that he or she did not breach a restrictive covenant is not a defense. Finally, where an employee has access to confidential business information crucial to the success of an employer’s business, the employer has a strong interest in enforcing a covenant not to compete, irrespective of whether the employee improperly retains and uses that information in his new employment. However, it is unclear under Florida case law precisely when confidential information will justify a broad non-compete covenant.

As to damages, the employer bears the burden of proving that it sustained a loss and that its loss was a direct result of its former employee’s breach of the restrictive covenant. It does not matter whether the former employee generates a profit for the new employer. Damages for breach of a non-compete are intended to make the prior employer whole, not to punish employees.

Michael P. Bruning is a litigation associate with Katz Barron Squitero Faust. Reach him at mpb@katzbarron.com.