Archive for the ‘Contract Law’ Category

Nov
28

An Employer’s Referral Sources May Be a Protected Legitimate Business Interest Under Fla. Stat. 542.335 According to Florida’s Supreme Court

Background

This blog discusses the September 14, 2017 Florida Supreme Court’s holding in the consolidated cases of White v. Mederi Caretenders Visiting Services of SE Florida, LLC, et al. and Americare Home Therapy, Inc. v. Hiles.

A previous blog discussed Florida’s restrictive covenant statute which, when compared to similar statutes in other states, is generally quite favorable to businesses when it comes to the enforcement of non-compete agreements.  Many lawsuits involving Fla. Stat. 542.335 involve a former employee who has left the employment of the business and either started a competing business or has gone to work for a competitor.  Generally, the employee has signed a non-compete agreement as a condition for employment with his former employer.  The former employer may commence a lawsuit to prevent the former employee and his new employer from using information associated with the former employer’s  legitimate business interests.  Where the former employee goes to work for a competitor of the former employer, both the former employee and new employer are often named as co-defendants.

Under the Florida statute, a contract providing restrictions on competition must involve a legitimate business interest as defined by statute to be enforceable.  Fla. Stat. 542.335(1)(b).  Both of the above referenced cases involved employees who had worked for businesses that relied on home health referral sources cultivated through extensive personal marketing and relationship building with potential referral sources, primarily physician’s offices.  Section 542.335 does not specify home health referral sources as a legitimate business interest but does provide a non-exhaustive list preceded by the words “legitimate business interest includes but is not limited to:

  1. Trade secretes as defined in s. 688.002(4);
  2. Valuable, confidential business or professional information that does not otherwise 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 on-going business or professional practice, by way of trade name, trademark, service mark, or trade dress; b) A specific geographic location; or c) Specific marketing or trade area;
  5. Extraordinary or specialized training.”

The Florida Supreme Court’s Analysis

In White/Americare the Florida Supreme Court engaged in statutory interpretation to conclude home health referral sources were indeed legitimate business interests for several reasons.  First, the legislature’s stated examples were meant to be just that – examples.  The list was never intended to be exhaustive as clearly indicated by the words “includes but is not limited too.”

Second, the Court refused to interpret the statute in such a way so as to exclude a claimed legitimate business interest in non-identifiable prospective patients.  The Court tellingly stated “[g]enerally, it is improper to apply espressio unius to a statute in which the Legislature used the word include.  This follows the conventional rule in Florida that the Legislature uses the word “including” in a statute as a word of expansion, not one of limitation.” Slip opinion at 13.

Third, the Court noted that for home health care companies (HHCs), there is an “indispensable relationship between referral sources and their undisputed legitimate business interests in relationships with patients protected by the statute”  Furthermore, the Court noted that referral sources are somewhat analogous to customer goodwill which is expressly protected by the statute.  Slip opinion at 20.  It is important to understand the home health referral sources generally do not involve identifiable patients although the home health referral sources will hopefully result in referred patients who then of course become identifiable.

In reaching its conclusion, the Court was careful to point out that the statute does not protect covenants whose “sole purpose is to prevent competition per se because such contracts are void against public policy.  Even under Florida law with its pro-business stance, the courts have held that “[f]or an employer to be entitled to protection,   ‘there must be special facts present over and above ordinary competition such that, absent a non-competition agreement, the employee would gain an unfair advantage in future competition with the employer.’ ”  White/Americare citing Passal v. Naviant, Inc., 844 So. 2d 792, 795 (Fla. 4th DCA 2003).   Slip opinion at 21.

The statute also allows the courts to ameliorate any concern regarding overly restrictive covenants by commanding the courts to modify any non-competition agreement that is not reasonably necessary to protect the legitimate business interest and to grant only the relief necessary to protect such interests.  Fla. Stat. s. 542.115.  Here both non-competition agreements were limited to certain geographical areas – to the counties where the HHCs actually operated for a period of one year.

Conclusively, by finding for the HHCs, the Court was not expanding the reach of restrictive covenants to limit competition.  It was merely finding that the nature of an HHC-based business necessitates the classification of its referral sources as legitimate business interests.

Take-Home Points

After White/Americare, businesses may be able to more easily establish legitimate business interests to protect their interests in non-compete agreements where the alleged business interest is not specifically articulated by the statute.   The decision shows, however, that the analysis will be fact-specific, and that the agreement must still be reasonably tailored to cover a reasonable geographic area and time-frame.  The plaintiff will also need to be able to adequately explain why the subject matter is a legitimate business interest based on the nature of the business.

This commentator notes that the conduct of the employee in Hiles was particularly egregious with respect to her transferring of Americare’s confidential information, including patient information, to her personal e-mail account both before she even gave notice of her resignation and after she was let go a few days after giving notice to Americare prior to her notice’s specified “last day.”

Clearly the technology age has made the wrongful usage/theft of a business’s intellectual property and/or confidential information (intangible assets) easy.  It is up to businesses, no matter how small, to be proactive in protecting their intellectual property and confidential information from this wrongful usage.  As the White/Americare holding demonstrates for cases involving employees, a non-compete agreement does not always prevent problems after an employee resigns or is terminated.   Contact us to obtain a complimentary checklist of suggested steps to take to help protect your business’s intangible assets and thereby try to eliminate the need of future costly litigation to protect your business’s interests.

 

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY.

 

 

 

Nov
21

SELECTING A COMPANY OR PRODUCT NAME – EASIER SAID THAN DONE AGAINST THE BACKDROP OF TRADEMARK LAW

This blog describes approaches to take when selecting a new business or product name to avoid costly trademark infringement disputes down the road.

I.   Introduction

Selecting a company or product name can be a daunting challenge because a “wrong” selection can result in lawsuits where the plaintiff alleges trademark/service mark infringement and unfair competition.   Nor are lawsuits for trademark/service mark infringement are not limited to situations where the plaintiff has a registered trademark/service mark with the United States Patent and Trademark Office (“USPTO”).   The law also protects common law (i.e., unregistered) marks.

Each trademark infringement case is different and involves a detailed inquiry of the facts behind the allegations.  Most plaintiffs will initially seek a temporary injunction by the court ordering the defendant to stop using the mark.   If a temporary injunction is granted, the plaintiff then will likely seek a permanent injunction and possibly even monetary damages.

II.  Cease & Desist Letters

Most infringement lawsuits are preceded by a cease and desist letter to the business owner.  The business owner at that point can take steps to quickly remedy the situation, e.g., by changing the name of the company and refraining from providing any services/products under the previous name.  The business owner will also generally be asked to transfer any domain names which utilize the problematic mark.

Here it may be helpful to hire an attorney to negotiate terms with the sender of the cease and desist letter who will more likely than not be an attorney.  For example, the email addresses of business employees who interact with customers/clients are often linked to the business’s website address (i.e., domain name).   An attorney may be able to convince the cease and desist letter sender to allow a small business owner in particular the right to use the domain name solely to redirect clients/customers to the small business owner’s new website/new domain name for a specified period of time.  Such redirecting is not intended to go on indefinitely and is intended solely to provide the small business owner with an interim time period for ensuring that its existing customer base will be able to “find” the small business owner in cyberspace.

It is important to also emphasize that cease and desist letters do not always accurately reflect the facts.  The recipient should not panic but consider consulting with a trademark attorney who handles trademark disputes and not just trademark application filings.  For example, prior users of a mark (“first-in-time users”) have significant protection under the Trademark Act and common law.   Common law rights may trump any federal registration rights referred to in a cease and desist letter because of the doctrine of prior use.  Prior use establishes a right of priority of common law marks over registered marks providing the date of first use in commerce of the common law mark was commenced before the first use date of the registered mark.

Indeed, all applications submitted to the USPTO for a registered mark must specify the date of first use anywhere and the date of first use in commerce.  The two dates may be the same.   Accordingly, if the recipient of a cease and desist letter can prove prior and on-going use of the mark specified in the cease and desist letter, the recipient may well prevail in any lawsuit.

III.  Doing Your Homework

Even if a cease and desist letter results in an amicable resolution, i.e., no costly lawsuit, the business owner may still end up spending considerable time and money in rebranding itself with a new business name/product name.   It should thus be the objective of any new business owner to minimize the risk of receiving a cease and desist letter and/or a lawsuit by taking upfront steps to select a suitable business/product name.    These steps include the following:

  • When selecting a company or product name, check the records of the USPTO for registered service marks and trademarks that incorporate all or a part of the proposed company or product name. The search should include applied-for marks and also include spelling variations.  If similar names are found, err on the side of caution.  For example, are you considering a business name that is similar to or encompasses a well-known, famous mark?  If yes, understand that the owners of well-known marks in particular routinely monitor the unauthorized usage of their marks and you will be risking the receipt of a cease and desist letter down the road.
  • Sometimes a business will obtain a trademark/service mark that covers only the state in which the business is located and conducting business. Therefore a trademark or service mark search should include a search of your state’s own records.  For Florida, these records can be accessed at sunbiz.org.
  • The business owner should also evaluate the state’s corporate name and fictitious name records to determine if there are already businesses with similar names operating in the state or in the same geographical area. These already-established businesses may have state common law trademark rights in their names.   Florida also provides business owners with the right to bring lawsuits for unfair competition under common law and under Florida’s Deceptive and Unfair Trade Practices Act.  Clearly, the operation of a competing business with a name similar to another business is an example of the type of unfair competition scenario the law is intended to protect.

IV. Will You Be Filing a Trademark Application?

Any searches as described above should also reflect the new business’s long term objectives.  For example, if the new business is going for a national and even international presence, then any name should be selected with an eye towards obtaining registered marks in the U.S. and abroad.   The new business owner may also wish to file an intent-to-use application with the proposed name (after doing a thorough search) to “reserve” the name with the USPTO while the business/product is being developed.  Before filing any trademark or service mark application, a critical analysis should be done to assess the possibility of any of the following rejections by the USPTO:

  1. Is the mark likely to constitute a likelihood of confusion with an existing mark? Click here for a previous blog on a proposed mark that was rejected by the USPTO on likelihood of confusion grounds.
  2. Is the proposed mark generic or merely descriptive of the goods or services listed in the application? Click here for a previous blog on the merely descriptive factor where the USPTO rejected an application on merely descriptive grounds.
  3. Is a domain name incorporating the proposed mark available? Is a similar domain name owned by the owner of a registered trademark?   Domain names may include trademark rights and that is why cease and desist letters often require the transfer of domain name rights.

V. Conclusion

The foregoing demonstrates that trademark law is complex because it is a hybrid of federal and state statutory law and common law.    Business/product names as a result of their usage in commerce involve principles of trademark law.  Be judicious in selecting a business/product name to avoid costly legal problems and to achieve your branding objectives whether at the local level or at the national and even international levels.

 

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING.

 

 

 

 

 

 

Nov
02

CONSENT AGREEMENTS & SECTION 2(d) REFUSALS OF A PROPOSED TRADEMARK

CONSENT AGREEMENTS & SECTION 2(d) REFUSALS OF A PROPOSED TRADEMARK

This blog addresses the Oct. 30, 2017 non-precedential decision by the Trademark Trial and Appeal Board (“Board”) in In re 8-Brewing, LLC where the Board determined that a consent agreement between a registered trademark applicant and a registered trademark owner was insufficient for overcoming a rejection of the applicant’s mark on likelihood of confusion grounds.

The blog is divided into three parts: A) Background on Consent Agreements; B) Discussion of the Board’s Opinion; and C) Take Home Points.

A.  Background on Consent Agreements

A consent agreement is an agreement between the applicant and an existing registered trademark owner that it is OK from their perspective for the marks to co-exist in the marketplace.  That is, the registered mark owner has no “problem” if the USPTO should go ahead and allow registration of the applicant’s mark despite an initial finding of likelihood of confusion by the USPTO.

It is important to understand that such agreements on their face will not always overcome the USPTO’s rejection of an applicant’s mark on likelihood of confusion grounds.  Trademark law is intended to protect the consumer from confusion over the source of the associated goods and services.  From the USPTO’s perspective, the greater the similarity between the goods and services between the applicant’s and the registrant’s mark, the greater the likelihood of confusion over the sources supplying the goods/services.   A consent agreement that is vague as to how the parties are going to limit the likelihood of confusion will generally not pass muster with the USPTO.

B.   Discussion of the Board’s Opinion

During the prosecution of a trademark application, the USPTO determines the likelihood of confusion of an applied-for mark with existing registered marks according to what are commonly known as the Dupont factors as set forth in In re E.I. du Pont de Nemours & Co., 476 F.2d 1357, 1377 USPQ 563 (CCPA 1973).    Here, the applied-for mark was 8-Bit Aleworks in standard letters form.  The examining attorney had found that there was likelihood of confusion with two existing registered marks – 8 bit Brewing Company in standard characters and a design mark including the words 8 Bit Brewing Company.   The application and the two registrations identified the same goods – beer.   The associated international classification is 032.

Having found that the specified goods were identical, the Board emphasized that when marks appearing on goods are identical, “the degree of similarity necessary to support a conclusion of likelihood of confusion declines.”  Slip opinion at 5.  Here, the terms 8 BIT and 8-BIT were identical,  constituted the literal or source-identifying portion of the marks, and preceded disclaimed or highly descriptive or generic terms (Ales and Brewing Company).  The examining attorney had concluded that the commercial impressions of the applicant’s and registrant’s marks were identical.  The Board took the analysis one step further and stated that the “literal portion [8 Bit] of each mark appears first in each mark and thus is more likely to be remembered by consumers.”  Slip opinion at 7.  Furthermore the words “Aleworks” and “Brewing Company” do nothing to distinguish the marks because consumers are accustomed to seeing these terms in others’ marks and are thus unlikely to view this additional wording in either the Applicant’s or Registrant’s marks as distinctive.

Once it found found that the Applicant’s mark and the Registrant’s marks were basically identical,  the Board next determined whether the proffered consent agreement was sufficient to protect consumers who may encounter the marks from confusion.  The Board considered the following factors:

  • Whether the consent shows an agreement between both parties;
  • Whether the agreement includes a clear indication that the goods and/or services travel in separate trade channels so as to minimize confusion as to source;
  • Whether the parties agree to restrict their field of use;
  • Whether the parties will make efforts to prevent confusion and cooperate and take steps to avoid any confusion that may arise in the future; and
  • Whether the marks have been used for a period of time without evidence of actual confusion. Slip opinion at 8.

This commentator finds it inexplicable that the consent agreement did not even refer to the correct applied for mark – 8-Bit Aleworks in standard character form which was the subject of the appeal.  Instead, the consent agreement specified a design mark with the words 8-Bit Aleworks.  A review of the USPTO records shows that the Applicant applied for the design mark in 2017 or after the standard character mark had been rejected.  The USPTO has recently rejected the Applicant’s later applied-for design mark.

The Board thus rightly noted that the consent agreement was ambiguous as to what the Registrant was actually consenting to – the coexistence of the design mark depicted in the consent agreement or the use and registration of the Applicant’s standard character mark with or without the design element.  Slip opinion at 12.

The consent agreement also stated that the parties were unaware of any actual confusion.  However, both the Applicant’s and the Registrant’s marks had only been in use June 2016 and the agreement had been executed in Nov. 2016 or less than 6 months after the start of the claimed usage period   The Board found that this short period of time was insufficient for establishing any actual confusion by consumers.

Furthermore, the consent agreement did little to show how the parties would limit their respective goods to different channels of trade.  For example, the agreement was as to the actual price ranges of the parties’ beer.  Furthermore, the beer purchaser is often an ordinary consumer who will exercise only ordinary care in choosing a brand of beer.  This is not a situation where the consumer will expend considerable time and effort (i.e., a high level of care) in making a purchase decision, e.g., as in purchasing a motor vehicle or a computer.   The agreement also lacked specificity in stating how the Applicant’s and Registrant’s products were going to be distinctively packaged so as help avoid confusion especially where the marks are basically identical.

Finally, the Board addressed the issue of interstate commerce in trademark law. Although the agreement appeared to limit the use of the parties’ marks within their own states, namely California and Arizona respectively, the registration of a proposed mark requires that the proposed mark is being used in interstate commerce.  This does not mean that the goods have to be sold in every state but at least outside of the source’s own state of business or residence.  All trademark applicants must allege that their proposed marks are being used in interstate commerce at the time the specimens are submitted as part of the trademark prosecution application process.  Furthermore, renewal of registered marks also requires that the registrant allege that the mark is still being used in interstate commerce.  The USPTO cannot verify every statement and is relying on the “honest” statements of the applicant.   This consent agreement is thus vague and unclear as to interstate commerce issues.  Registration does not limit the usage of a registrant’s mark to any geographical location but protects the mark in all U.S. states and territories.

The Board noted that an applicant’s right to geographically restrict registration may only be considered in the context of a separate concurrent use proceedingAny geographical restrictions that an applicant and registrant agree to in a consent agreement are irrelevant and are not reflected in any registrations issuing from the involved application(s). 

Based on the equivalency of the Applicant’s proposed mark and the Registrant’s marks and the many deficiencies in the consent agreement, the Board affirmed the examining attorney that the Applicant’s mark cannot be registered.

C.   Take Home Points

       1.   Take the Time to Determine Potential Problems with a Proposed Trademark Before Ever Filing an Application.

First and foremost, the Applicant in this case took a huge risk in applying for the mark at issue.  Now the Applicant has spent considerable legal fees in trying to get the mark registered when trademark law case law clearly indicated that the Applicant would encounter major problems.  Selecting a mark that will not encounter issues from likelihood of confusion to merely descriptive issues is a very difficult endeavor.  Taking the time to do it right by, for example, conducting proper trademark searches at both the federal and common law levels is worth any associated costs with taking such upfront steps.

  1.    If a Consent Agreement Is to be Presented to the the USPTO, Make Sure It Details the Steps to be Taken by the Parties to Minimize Consumer Confusion Given the Nature of the Goods/Services.

Here the consent agreement appeared to have been written by someone who did not understand the principles governing trademark law from interstate commerce issues to establishing to the satisfaction of the USPTO that the parties were taking clearly defined steps to minimize confusion and/or that the goods/services would not involve the same channels of trade.

By way of example, this commentator has worked with attorneys representing the registrant or applicant to draft unambiguous, detailed consent agreements that have been accepted.    It is, however, emphasized, that the “involved” goods in the commentator’s agreements did not encompass precisely the same channels of trade even though the goods/services fell into the same classification of goods and services.   Alternatively, the goods/services were of the nature that the consumer would exercise considerable time and caution beyond ordinary care in the decision-making process because of the cost involved.

The bottom line – each consent agreement submitted to the USPTO will be evaluated on its own merits for compliance with the USPTO’s requirements for trademark registration to prevent consumer confusion.

Copyrighted 2017 by Troy & Schwartz, LLC

The following is not legal advice and is presented for information only.  If you are considering an action that could have legal consequences, you should consider consulting with an attorney of your choosing.  

May
20

ACTUAL USAGE OF TRADE SECRETS NOT REQUIRED FOR A TEMPORARY INJUNCTION!

Background

Trade secrets can be extremely valuable business assets and all states have statutes governing the protection of trade secrets.  Even the federal government recognizes the importance of trade secrets to U.S. companies by enacting the Defend Trade Secrets Act in 2016 which allows a federal civil cause of action against a party accused of trade secret theft.

Lawsuits involving allegations of trade secret theft can arise in the context of employment law.  The typical situation is where an employee has left the employ of a company and the former employer commences a lawsuit for trade secret misappropriation against the employee and possibly the employee’s new employer.   The former employer will generally seek a temporary injunction to prevent the employee and new employer from using the trade secrets and associated confidential information.

What if the employee/new employer has not actually used the confidential information?  In the case of Hughes v. AGE Industries, LTD (No. 04-16-00693-CV) decided March 8, 2017, the Texas Fourth Court of Appeals held that a temporary injunction does not require a party alleging trade secret misappropriation to show actual usage by the defendant(s).   Mere possession of the trade secrets/confidential information may well be sufficient for obtaining a temporary injunction.  Even though the case discussed in this blog is a Texas case, the commentator believes that a Florida state court would have come to the same conclusion based on the facts of the case and the Florida statute governing trade secrets.

Court’s Opinion

The case is an interesting one because of Hughes’ arguments presented in his appeal, all of which the Court found to be specious.   Hughes had been a twenty-year employee of Age Industries, LTD (“AI”) prior to resigning from the board of directors as AI’s general partner in May, 2016 and then from his employment by AI in June, 2016.  He went to work for Diamondback Industries, a newly formed company set up to compete with AI in June, 2016, as its operations manager.

AI sought a temporary restraining order from the trial court which was granted and sometime later the temporary injunction hearing was held.  At the hearing, AI presented a third-party contractor’s report which showed that Hughes had downloaded a large quantity of data from his AI computer to a USB drive.  On granting the temporary injunction, the trial court required Hughes to deliver a list describing all documents belonging to AI or containing proprietary information belonging to AI in Hughes’ possession “including but not limited to [AI’s] customer and prospective customer’s lists and contact information, pricing lists, sales journals, financial reports, vendor lists, engineering diagrams, customer presentation materials, specialized pricing programs, business strategies, and specially developed programs for specific customers.”  The order further enjoined Hughes from directly or indirectly disclosing AI’s proprietary or trade secret information.

Hughes attempted to reverse the temporary injunction order on procedural grounds by first arguing that AI’s petition had not been properly verified with an affidavit from AI’s president.  The appellate court disagreed and stated that “[a] verified petition for injunctive relief is not required to grant a temporary injunction, however, when a full evidentiary hearing on evidence independent of the petition has been held.”

Second, Hughes, argued that the trial court erred in granting the temporary injunction because it did not maintain the status quo as per his relationship with AI as a limited partner. He claimed that as a limited partner, he was entitled to receive information about AI under the terms of the partnership agreement.  Yet, at the temporary injunction hearing, Hughes stated that the only information he received as a limited partner was audited financial reports.

Hughes was also an employee of AI and because of AI’s Employee Handbook, his status quo argument failed. The handbook was very clear that all information regarding AI was confidential and should be treated as such and carefully defined what AI considered as confidential information. The appellate court opined that, because of the limited information Hughes received as a limited partner and the extensive information he received as an employee, the trial court had not erred in granting the temporary injunction. In reaching this conclusion, the court cited several Texas cases including two that stated that a fiduciary relationship arises from an employment relationship forbidding an employee from taking trade secrets and confidential or proprietary information in a manner adverse to the employer.  See, e.g., Mabrey v. Sandstream, Inc., 124 S.W. 3d 302, 316 (Tex. App. – Fort Worth 2003).

Hughes made several more arguments to no avail including one that AI did not produce any evidence of a probable, imminent, and irreparable injury.  Here Hughes’ own conduct thwarted his argument.  The court noted that evidence was admitted at the trial court hearing showing that Hughs had downloaded a large amount of data from his computer the month before he resigned.  This was proven by AI’s third-party contractor who had apparently been hired to “scour” Hughes’ company computer.

Further evidence showed that the financial information he maintained for 2015 and 2016 on behalf of AI could not be located after he left AI.  Hughes even admitted to having confidential information belonging to AI on his home computer and may have also had e-mails that contained confidential information on his home computer.  He could not testify under oath that had had never sent e-mails containing this proprietary information to one of the principals at his new company.  Because the evidence showed that Hughes was in a position to use AI’s trade secrets to obtain a market advantage, the trial court did not abuse its discretion in concluding AI established a probable, imminent, irreparable injury.  AI was not required to show actual use of trade secrets/confidential information.  Based on the evidence showing Hughes’ conduct and his possession of confidential information, he was properly enjoined from using or disclosing AI’s information.

The Hughes case is an example of what could become an employer’s worst nightmare.  The facts showed that the former employee had apparently planned out his resignation from AI including deleting all his e-mail in the deleted folder from his company computer and downloading valuable information onto a USB for ready portability.  Technology has certainly made trade secret theft much easier.  From the appellate court’s written opinion, one can conclude that the judges were not particularly enthralled with Hughes’ conduct.

Useful Take-Home Points for Employers

  1. Even small companies should consider having employee handbooks. AI’s employee handbook helped save the day because AI was able to establish that it had taken precautions in protecting its confidential information and alerting employees as to their responsibilities in protecting that information.
  2. Employees should also be required to sign appropriate agreements emphasizing their obligations as related to protecting confidential information. Exit interviews should be conducted in a cordial manner, non-hostile manner.  At that time, the employee can also be reminded of his on-going obligations under the terms of his previously signed employee confidentiality agreement.
  3. When an employee leaves a job, it may be advisable to have the employee’s company computer(s) checked by a third-party expert to determine if the employee downloaded confidential information onto an external device such as a USB, flash drive, smartphone, or external hard drive especially if there are any red flags concerning this employee. During the temporary injunction hearing, AI presented a third-party contractor’s report which showed that Hughes downloaded a large quantity of data from his company computer onto a USB.
  4. After an employee’s departure, an examination of the person’s e-mail account may be worth-while in particular to determine if the person has been forwarding anything of consequence to his own personal e-mail account. E-mail issues were raised in the Hughes case.
  5. Finally, most employees who are departing on good terms will let their employer know about their new place of employment. If the employee is mum as to where he is going, the employer may want to take some proactive steps to ensure that its confidential information has not been compromised by a departing employee.

Contact Troy & Schwartz, LLC to receive a free checklist of steps to take to protect your valuable confidential information and trade secrets. 

 

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING.

 

 

 

Sep
11

Florida’s Statute on Restrictive Covenants: How Is It Viewed By Other States?

Employment agreements often contain a non-compete/non-solicitation provision known as a restrictive covenant.   Legal disputes involving this type of provision may occur when a former employee sets up a new business or starts a new job with a new employer and the former employer commences a breach of contract lawsuit invoking the restrictive covenant.

The enforcement of restrictive covenants in Florida is governed by Florida Statute 542.335 entitled “Valid Restraints of Trade or Commerce.”    The employee-defendant in a lawsuit involving restrictive covenants will generally argue that the covenant is unenforceable.  Florida law concerning restrictive covenants, however, is generally viewed as being very employer friendly.   For example, the statute specifically states that [i]n determining the enforceability of a restrictive covenant, a court “[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.”  Our emphasis.  Fla. Stat. 542.335(1)(g)(1).

What does this wording mean for a former employee who is accused of violation of a restrictive covenant in Florida?  That Florida courts will generally construe restrictive covenants in favor of protecting the employer’s interests.  Pursuant to the statute, they will not engage in a balancing test.    For example, on July 15, 2015, Florida’s Second District Court of Appeals invoked the wording of the statute to find that the restrictive convent at issue was enforceable  in the case of Florida Digestive Health Specialists, LLP [FDHS], et al. v. Colina and Intercoastal Medical Group, Inc.  [IMG].

Defendant Colina, a physician, had been a solo practitioner prior to joining FDHS.  Upon joining FDHS, Dr. Colina executed a Partner Professional Services Agreement (“PPS Agreement”) which included a provision stating that “Dr. Colina would not without prior consent of FDHS, directly or indirectly  “ ‘divulge, furnish or make accessible to any person, or copy, take or use in an manner any of the Confidential Information.’ ”  Slip opinion @ 2.   Confidential Information was defined and ranged from internal organization documents and business methods to patient names and patient lists.

The PPS Agreement also included a provision stating that “[F]or a period of two years following the termination of this Agreement, for any reason . . .Physician will not without the approval of [FDHS’s] Board, practice medicine in the field of gastroenterology in Sarasota, Charlotte, or Manatee Counties, Florida or any other county in Florida where [FDHS] at the time of termination conducts or owns a medical practice, other than individually through an entity owned solely by the Physician or otherwise consistently with his or her “Prior Pattern of Practice.”     Slip opinion @ 3.

Upon resigning from FDHS, Dr. Colina joined IMG, a large medical group practice with locations in Sarasota and Manatee Counties.  FDHS filed an action for a temporary injunction to enjoin Dr. Colina from employment by IMG or any other employment inconsistent with the terms of the Agreement and from “using in any sense or disclosing in any way, any aspect of its Confidential Information, trade secrets or proprietary information.”   Slip opinion @ 4.

The trial court found that Dr. Colina breached the PPS Agreement by joining IMG but that he had only limited knowledge of FDHS’s trade secrets and had not divulged any of FDHS’s trade secrets .

Under provision (1)(c) of Florida’s restrictive covenant statute, FDHS had to “plead and prove that restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction.”    Although FDHS had not proffered evidence that it had lost patients, the trial court found that FDHS did have a legitimate business interest in “keeping a group of physicians together in a medical group as contemplated in a business agreement signed by those same physicians and that there is a legitimate business interest in ‘ “preventing a mass exodus of some of those physicians who may feel that there are no ramifications in ignoring the terms of a signed written agreement binding those physicians in said medical group. ‘ “  Slip opinion @  4.

Once FDHS established reasonable necessity, Dr. Colina and IMG then had the burden of establishing that the “contractually specified restraint [was] overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests.” Fla. Stat. 542.335(5)(c).    It is noted that Florida’s restrictive covenant statute requires the court to presume “unreasonable in time any restraint more than 2 years in duration” when the restrictive covenant sought to be enforced is against a former employee as was the case here.  542.335(5)(d)(1).   Therefore the “2 year” reference within FDHS’s PPS Agreement was within the confines of Florida’s restrictive covenant statute.

The trial court then found that  “ ‘threatened injury to [Dr. Colina] outweighs the possible harm to [FDHS].’ ”   As such, Dr. Colina could remain with IMG, but “ ‘shall not divulge any business practice methods or trade secrets.’ ’’  However, the temporary injunction was granted as it applied to the defendants’ obligation to refrain from using FDHS’s Confidential Information.

The Appeals Court held that the trial court had abused its discretion in denying the temporary injunction in full because its balancing of harm test was in conflict with Florida Statute 542.335(1)(g)(1).  It instructed the trial court to grant the temporary injunction prohibiting Dr. Colina from violating the “employment limitation” terms of the Agreement.   It is noted in this case that the employment agreement did not forbid Dr. Colina from practicing his specialty in specified Florida counties in his own right but forbade him from joining another practice.

It is not clear whether the trial court was refusing to enforce the otherwise enforceable restrictive covenant on the ground that FDHS’s employment agreement violated public policy.   If so, under the statute, the trial court had the obligation of articulating specifically any the court’s findings that the specified public policy requirements substantially outweighed the need to protect FDHS’s established legitimate business interest. Florida Statute 542.335(1)(i).  Instead the trial court focused its balancing test on the impact on Dr. Colina himself and not how this impact translated into a specific articulated public policy.

That Florida’s statute favors employers is not an overstatement.  The statute further forbids a court from “employing any rule of contract construction that requires the court to construe a restrictive covenant narrowly against the restraint, or against the drafter of the contract.”  In employment law cases, it is generally the employer who drafts contracts to be signed by employees.    Fla. Stat.  542.335(1)(h).

What does the statute mean for Florida employers who are expanding into less employer friendly states and have employee agreements with restrictive covenants in their employee agreements based on Florida law?

Most contracts, including employer-employee agreements, contain a choice of law provision stating that the law of the specified state shall apply in the event of a legal dispute.   It is axiomatic that most courts are generally favorable to enforcing choice of law clauses included in contracts and agreements.   However, there are exceptions to this approach particularly where a provision may be violative of the law of the state where court proceedings involving a breach of contract are actually taking place.

When expanding into another state, it is therefore important that Florida companies understand that Florida law may not be applied by an out-of-state court if it is asked to determine the enforceability of the at-issue agreement’s restrictive covenant.  This is so  even if the agreement includes a “Florida law applies” provision.  Indeed, Florida’s restrictive covenant statute has been found to be violative of the public policy of other states and therefore non-enforceable.   In such a situation, the courts will likely apply their own state’s more employee friendly “restrictive covenant” law.

By way of example, the New York Court of Appeals recently held in the case of Brown & Brown, Inc., et al. v. Johnson, et al. that applying “Florida law on restrictive covenants related to the non-solicitation of customers by a former employee would violate the public policy of [New York].”  The restrictive covenant at issue in Brown & Brown was part of an employment agreement containing a choice of law provision stating that Florida law was to apply in the event of a legal dispute.

Brown & Brown, Inc. (BB) is a Florida corporation with a subsidiary in New York (BBNY).   BBNY had recruited the defendant to leave her former job at Blue Cross/Blue Shield.  One her first day of employment, the defendant was asked to sign an employment agreement containing a Florida choice-of-law provision and a non-solicitation provision precluding her for two years following her termination of employment, from directly soliciting, accepting, or servicing any person or entity that is a customer or account of the New York offices during the term of the employment agreement as well as certain prospective customers.

The defendant ‘s position was terminated several years later, and she went to work for one of BBNY’s competitors.   Her work involved providing services to some of BBNY’s former customers.  B&B subsequently initiated a lawsuit against the former employee and her new employer for enforcement of the restrictive covenant.

The Brown & Brown court recognized that courts in all states generally recognize that contracting parties are free to reach agreements and will uphold choice of law provisions. New York courts will not, however, “enforce agreements . . .where the chosen law violates some fundamental principle of justice, some prevalent conception of good morals, or some deep-rooted tradition of the common weal.”  (citations omitted from this blog).  This public policy exception is reserved “for those foreign laws that are truly obnoxious.”  Slip opinion at 2 citing Welsbach Elec. Corp. v. Mastec N. Am., Inc., 7 NY3d 624, 629 (2006).

The Brown & Brown court then discussed Florida law on restrictive covenants, noting that it nearly exclusively favors the employer’s interests, prohibits against narrowly construing the restrictive covenant, and refuses to consider harm to the employee.  New York’s law governing restrictive covenants, on the other hand, requires courts to strictly construe restrictive covenants and balance the interests of the employer, employee, and the general public.  The defendants in Brown & Brown succeeded in meeting their heavy burden of proving that the application of Florida law to the contract’s restrictive covenant provision would “be offensive to the fundamental public policy of New York State.”  Therefore, the restrictive covenant had to be interpreted under New York law.   Slip opinion at 7.

It is noted that New York law, as it pertains to restrictive covenants, recognizes that employers often have the dominant bargaining power, which may be viewed as anti-competitive behavior.   Factors that may be important in making this determination are whether the employee understands the agreement, whether the employer actually explains or discusses the restrictive covenant, the extent of the discussion, and whether the employee has any opportunity to negotiate the terms of the covenant or seek legal counsel before signing.   Slip opinion at 9.

The plaintiffs argued that even if the restrictive covenant was overly broad, at least  partial enforcement was proper as that partial enforcement would relate to prohibiting “the defendant only from soliciting any of the plaintiffs’ customers with whom she interacted or whose files she had encountered while in the plaintiff’s employ. “  Slip opinion at 8.

The Brown & Brown court held that the restrictive covenant may be subject to partial enforcement if the part to be enforced represents good faith actions on the part of the employer in protecting a legitimate business interest, consistent with reasonable standards of fair dealing.   Slip opinion at 8.    It is noted that the restrictive covenant in Brown and Brown prohibited the defendant from working with any of the plaintiff’s New York customers even if the defendant had never met them or previously done any work for them.   This was apparently the reason the court found the restrictive covenant, as written, to be a restraint on trade.

Contracts drafted by legal counsel generally include a severability clause to handle the situation where a provision of the contract is found to be unenforceable.   These severability clauses may request that the court modify the unenforceable provision to the smallest extent possible to comply with the law.   In Brown and Brown, the plaintiffs requested that the court enforce the provision according to more limited circumstances, i.e., sever the unenforceable portion and then consider the remaining provision/agreement under breach of contract principles.

What can Florida employers learn from the above Florida and New York cases?  First, the factual scenario is very important.  Although Florida’s restrictive covenant statute clearly favors employers, it still requires that employers establish a legitimate business interest.   There is no question that protecting confidential information from usage and dissemination is a legitimate business interest.   In fact the trial court in FDHS had actually partially enforced the restrictive covenant at issue by directing the defendants to refrain from using the plaintiffs’ trade secrets and confidential information.

The bigger issue, as the FDHS and Brown & Brown decisions show, may be the impact of the restrictive covenant on a former employee’s employment opportunities.    For example, in the FDHS case, had the restrictive covenant at issue stated that Dr. Colida could not work in his profession in any capacity in any of the specified counties, it is likely that the employer would have had a hard time establishing a legitimate business interest in such a requirement.    Even without a court’s considering the employee’s own interest as the statute directs, an employee may be able to amount a public policy argument that basically preventing a former employee from working violates Florida’s public policy.   It is further noted that in the FDHS case, the employee had resigned from his position and joined a new practice.  In Brown & Brown, the employee’s position was terminated.

As for Florida companies expanding into other states, these companies need to understand the laws of these other states which relate to employment matters.   It is always a good idea whether in an employer or employee friendly state to have a formal procedure in place for explaining any and all agreements/contracts to employees and documenting that the procedure was followed for the specific employee.   Such an approach may help overcome any later allegations that the employee did not know what he/she was signing.    For example, in Brown & Brown, there were factual disputes over just what transpired when the defendant was presented with the employment agreement on her first day of employment.

It may also advisable to let prospective employees know of the business’s requirements for employment before the employee shows up on his first day of work, e.g., during the interview process or in a formal employment offer letter.   Employment is often contingent upon the employee’s signing of an employment agreement presented on the first day of work.  Under such circumstances, employee friendly states such as New York and California may well find that the employer ‘s conduct was coercive because of its dominant bargaining power and because the employee may have no other immediate viable options.   That is, the employee was presented with a “take it or leave it” agreement with no opportunity for negotiation.

In conclusion, employers clearly have a legitimate business interest in preventing a former employee and his/her new employer from gaining an unfair competitive advantage because of the Confidential Information the former employee may have been privy to.   Florida employers having employees in other states should, however, have an understanding of the restrictive covenant laws of these other states so that that their interests will be protected contractually to the fullest extent of the applicable law.

THE FOREGOING IS FOR INFORMATIONAL PURPOSES ONLY AND NOT LEGAL ADVICE.  YOUR READING OF THIS BLOG DOES NOT CONSTITUTE ANY ATTORNEY-CLIENT RELATIONSHIP WHATSOEVER.  IF YOU ARE CONTEMPLATING AN ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSULT WITH AN ATTORNEY OF YOUR CHOOSING.

 

© 2015 by Troy and Schwartz, LLC