Archive for the ‘Startup Businesses’ 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.

 

 

 

May
02

The Usage of Commas Versus Semicolons in a Trademark Application’s Description of Goods and Services – Does It Matter? Yes, Virginia, It Does!

Although the usage of commas and semicolons in the description of goods and services included in a trademark application may seem to be nothing more than compliance with a  grammatical rule, the fact is that the presence of a comma and/or semicolon can have a substantive law effect.  Section 1402.01(a) of the Trademark Manual of Examining Procedure (“TMEP”) has specific guidelines governing the usage of semicolons and commas:

Semicolons should be generally used to separate distinct categories of goods or services within a single class.  For example, “cleaners, namely glass cleaners, oven cleaners, and carpet cleaners; deodorizers for pets” is an acceptable classification for [International] Class 3.  In this example, the word “cleaners” means the category covering “glass cleaners, oven cleaners, and carpet cleaners.”  The semicolon prior to “deodorizers for pets” indicates that the deodorizers are a separate category of goods from the cleaners. 

Seems straight forward enough, doesn’t it?   Just use the right punctuation in describing the goods and services.  Yet the 2013 precedential opinion by the Trademark Trial and Appeal Board (“Board”) in In re Midwest Gaming & Entertainment, LLC* demonstrates that punctuation can impact the interpretation of the “reach” of the described goods and services.  In Midwest Gaming, the examining attorney had rejected the standard character word mark LOTUS for “bar services located in a casino” under International Class 43 on likelihood of confusion grounds with the previously registered mark LOTUS, also for Class 43 services.  The registrant’s specified services were for “providing banquet and social function facilities for special occasions; restaurant and bar services.” Note the usage of the semicolon in the registrant’s description of services.

In appealing the examining attorney’s rejection, the applicant argued that the registrant’s bar and restaurant services were limited to services involving banquet and social function facilities.   Thus, the registrant was restricting its services to trade channels and purchasers distinct from the applicant’s trade channels and purchasers associated with casinos and casino patrons.  Since the trade channels were distinguishable, any likelihood of confusion among purchasers of the registered mark owner’s services and the applicant’s own services was eliminated.

The registrant’s usage of a semicolon “ruined” the applicant’s argument.  The Board emphasized that under the standard examination practice, a semicolon is user to separate distinct categories of goods and services.  Here, the semicolon separates the registrant’s restaurant services and bar services into a discrete category of services which are not connected to or dependent on the “ ‘providing banquet and social function facilities for special occasions’ ” services set out on the other side of the semicolon.”

Moreover, the services following the semicolon themselves formed an independent basis for the Board’s likelihood of confusion findings under the du Point factors.  The Board held that the registered LOTUS mark owner’s “restaurant and bar services” encompass and are thus legally identical to applicant’s “bar services located in a casino” and the trade channels and purchasers for the respective services likewise are legally identical.  As such, the “simple” semicolon in the registrant’s description of services served to prevent the registration of the applicant’s LOTUS mark.

The outcome may well have been different if the registrant’s description of goods and services had included a comma instead of the semicolon.   Why?  Because then the applicant would have had a stronger argument that the registrant was limiting its restaurant and bar services to banquet and social function facilities.

What is the take-home point from Midwest Gaming?    Even relatively simple descriptions of goods and services should be carefully reviewed by applicants in view of both the TMEP’s rules and the Midwest Gaming decision.  This is particularly important where the applicant’s goods and services fall into the same international classification of the goods and services listed for a similar registered mark and the registered mark’s listed goods/services for the international classification are separated by a semicolon indicating the presence of separate categories of goods/services within the specified international classification.   As the Board stated in Midwest Gaming, services and goods separately set out in the identification of services/goods by means of a semicolon, stand alone and independently as a basis of a likelihood of confusion findings under both the second (similarity or dissimilarity of the services/goods as they are identified in the applicant’s application and in the cited registration respectively) and third (similarity or dissimilarity of the trade channels in which, and the classes of purchasers to whom, the respective services or are would be marketed) du Pont factors.

The applicant in Midwest Gaming may well have “read” the registrant’s description as including restaurant and bar services provided at only banquets and social function facilities.   Under trademark law, the presence of the semicolon in the description of goods and services for the registered mark produced a different interpretation by the Board resulting in rejection of the application.    So yes, punctuation does matter in a trademark application no matter how mundane it may seem at the time.

*If interested in reading the opinion, use 85111552 as the application number when taken to TTABVUE.  See also 106 USPQ 2d 1163 (2013).

 

© 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.

 

 

Jan
19

THINK YOU OWN THAT COPYRIGHT? AVOIDING SURPRISES IN COPYRIGHT OWNERSHIP

Ownership as the Result of a Work Made For Hire

Copyright law seems deceptively simple compared to patent and trademark law.  Where copyright law can get particularly complicated for the unwary, however, is in the area of copyright ownership.  Under U.S. law, the creator or author of the work is the owner of the copyright.  But what happens if the work was created by and employee in the scope of his/her employment or by an independent contractor who was hired or commissioned to create the work?

Regarding an employer-employee relationship, the work is generally treated as a work made for hire wherein the employer (and not the employee) is deemed the author and owner of the work.  The forms for federal registration of a copyrightable work include a section addressing ownership secured on the basis of a work made for hire.

Regarding an independent contractor relationship, the work may qualify as a work made for hire providing two conditions are met pursuant to the Copyright Act (Act).  First, the work must fall into one of the nine enumerated types of works specified in the Act.  Second, the independent contractor and the hiring party must have both signed an agreement agreeing that the work to be created is a work made for hire.  If these two requirements are met, the hiring party is deemed as the owner of the work created by the independent contractor.   17 U.S.C. § 101, et. seq.

Note the difference between works made for hire by an employee versus those made by an independent contractor.  In the latter case, the type of works qualifying as work made for hire are limited by statute and a written agreement is required.

Why the Distinction Between and Employee and an Independent Contractor Is Important

Take the scenario of software developers who are often hired as independent contractors by startup companies.   Software can be copyrighted, but software is not one of the enumerated types of works qualifying as a work made for hire work by Independent Contractors.  Therefore, even with a written agreement stating that the software is to be designated as a work made for hire, the hiring company will not actually own the copyright to the developed software under the work made for hire doctrine even though the software developer (Independent Contractor) was paid to create the software.   That is, the software developer may well still be the owner of the software despite the work made for hire agreement.   On the other hand software development companies such as Microsoft Corporation that have employees dedicated to developing software are the owners/authors of any copyright-related rights in the software under the work made for hire doctrine.   See the U.S. Copyright Office Records for Microsoft Corporation’s registered copyrights where Microsoft is listed as the author of the work as the result of an employer work made for hire.

Copyright ownership issues as they relate to Independent Contractors may remain hidden and only arise when: 1) a business is being sold and the sale involves intellectual property (IP) assets such as copyrights; or 2) in a copyright infringement lawsuit.    The buyer of IP assets will want assurance that the IP assets are indeed owned by the seller so that they may be effectively assigned to the buyer by a written instrument signed by the seller and the buyer.   A deal could fall through if the seller cannot prove to the buyer’s satisfaction that it – the seller – is the owner of the copyrights and therefore has the right to transfer ownership to the buyer.

A defendant in a copyright infringement lawsuit may be able to use “lack of ownership” as a defense if the work was created by an independent contractor and the work does not qualify as a work made for hire under the Copyright Act.  That is, ownership remains invested in the Independent Contractor and plaintiff does not own the copyright it claims is being infringed.

Ensuring the Legally Sufficient Transfer of a Copyright by an Independent Contractor

What steps can be taken to ensure the proper transfer of copyright-related rights from an Independent Contractor?  Where the work(s) to be created clearly fall into one of the nine (9) enumerated classifications specified within the copyright statute, the Independent Contractor and the hiring party need to sign an agreement wherein the work(s) to be created is designated as a work made for hire with all associated copyright-related rights belonging to the hiring party.

Copyright ownership can also be transferred by an assignment of rights and by operation of law (e.g., as the result of a probate proceeding).  For my clients, I include an assignment of rights provision within all work made for hire agreements with Independent Contractors as a precaution to cover the situation where the created work may be found to not qualify as a work made for hire.  Thus if for whatever reason the work should not qualify as a work made for hire because, e.g., it does not fall into one of the nine enumerated categories, the hiring party would still own the copyright as the result of the creator’s assignment of rights to the hiring party.  17 U.S.C. § 101;  17 U.S.C. § 201(d)(1).  Any such assignment needs to be clear as to the rights being conveyed and the nature of the underlying works.  For a good discussion of how important an assignment of rights provision may be where the work made for hire conveyance to an Independent Contractor fails, see Capital Concepts, Inc. v. Mountain Technology Corp., et al., WL 6761880 (W.D. Va. 2012).

THE ABOVE IS FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.

© Troy & Schwartz, LLC

 

Apr
11

A Federal Trade Secret Law Inches Closer to Enactment

To date, the only federal law specific for trade secrets is the Economic Espionage Act (EEA), a criminal statute wherein charges under the EEA must be brought by the U.S. government.  The EEA does not provide for civil jurisdiction in federal court.

Trade secret law involving civil causes of action has historically been a creature of only state law wherein almost all states, including Florida, have adopted some form of the Uniform Trade Secrets Act (UTSA).   Florida’s trade secret law is codified in Fla. Stat. ch. 688.  The definition of subject matter that may qualify as a trade secret as stated in the USTA and the underlying state statues is very broad but can be summed up as information that has independent economic value, actual or potential, because it is not generally known and whose owner reasonably tries to maintain the secrecy.  The statutes protect against misappropriation of trade secrets through procurement by improper means or through disclosure.   Disclosure occurs when someone with access to the trade secret discloses it or uses it without the consent of the owner.

In the event of misappropriation, the general sought remedy is an injunction.  Plaintiffs, however, may also seek damages.   The alleged misappropriation may be threatened or actual.  See, e.g., Fla. Stat.  ch. 688, s. 003(1).

Now trade secrets are well on their way to becoming protectable via actions in either federal or state courts.   On April 4, 2016, the Senate unanimously passed Senate Bill 1890 entitled the Defend Trade Secrets Act of 2016 that would allow businesses to sue in federal court for trade secret theft and potentially seize property used to facilitate the theft.  The bill is now awaiting approval by the House of Representatives.  Upon passage of the bill by the Senate, the White House expressed strong support for the bill.

It is not surprising that many have pushed for a federal cause of action for trade secret theft for several reasons.  First, although the differences between the UTSA and the enacted state trade secret statutes are generally relatively minor, these differences may impact the outcome of a case, i.e., prove case-dispositive, because states have not applied their respective versions of the Act in a uniform manner.   This is particularly true with the doctrine of inevitable disclosure as discussed below.   Application of the inevitable disclosure doctrine by state courts has been intertwined with the states’ underlying public policies governing employer-employee relations.

Second, state laws are generally focused on local activities involving trade secret matters and do not really address the realities of the movement of trade secrets in today’s electronic-based work environment in interstate commerce and across international borders.  The proposed Senate Bill is designed to assist in the swift preservation of evidence and to protect trade secrets from being further divulged, features that the Intellectual Property Owners Association pushed for.  The federal cause of action would not preempt state laws meaning that plaintiffs will have the option of seeking remedies for trade secret theft in federal or state court.

Senate Bill 1890 originally had two controversial aspects that were amended prior to the Senate’s vote.   The most controversial aspect would have allowed a trade secret owner to request government seizure of any property that was used to help facilitate the suspected trade secret theft.   Several Senators expressed concern that this feature could be misused and had potential for abuse.  The bill was changed to add specific limits to the seizure provisions, paving the way for unanimous passage for the bill.  Should the Bill evolve into an actual law, future federal jurisprudence may well determine what facts constitute sufficient grounds for seizure of “any property” and the definition of “any property.”

The original Senate Bill was also criticized for language that could be interpreted as meaning that an employer could prevent an employee who has been privy to an employer’s trade secrets from taking a new job with the employer’s competitor.  This original wording was apparently derived from a doctrine that covers an employer’s right to seek an injunction preventing the hiring of one of its key “trade secret-knowing” employees and is known as the inevitable disclosure doctrine.   The doctrine is grounded in the “threatened misappropriation” wording of the USTA and various state statues as well as the common law that existed before codification of state trade secret law.   It substantially enlarges the reach of trade secret law because the plaintiff only needs to show that that the former employee would be employed in such a capacity that they would “inevitably” close trade secrets.

Due to push back, the amended Senate Bill now requires the employer-plaintiff to provide evidence of threatened misappropriation and not merely seek an injunction barring the employee’s employment with a competitor on the information the employee knows.   Presuming the Defense of Trade Secrets Act of 2016 is signed into law, just how federal jurisprudence evolves for the inevitable disclosure doctrine remains to be seen.  The following provides a brief background on state case law involving this doctrine.

This doctrine has only been adopted by a few states and is often discounted because it is often viewed as hampering many states’ public policies favoring employee mobility.   California and New York are two states where the courts have consistently articulated the public policy of “employee mobility” and have refused to enjoin a former employee from working for a competitor, either temporarily or permanently.  See, e.g., Bayer Corp. v. Roche Molecular Sys., Inc., 82 F. Sup. 2d 1111, 1120 (N.D. Cal 1999).   Such states also generally frown on any employment agreement that has a non-compete provision, because, similar to the inevitable disclosure doctrine, non-compete provisions are viewed as inhibiting an employee’s right to move from one job to another.  Furthermore, such provisions are often deemed as restrictive covenants to be carefully construed by the courts.   See our recent blog on Florida’s highly employer-favorable restrictive covenant statute.

At the same time, such states may enforce a confidentiality agreement signed by an employee as a condition for employment.  Where such an agreement is in place, a court may enjoin the employee from disclosure of the trade secrets pursuant to the employee’s obligations under the employment agreement.   This type of injunction does not necessarily prevent the employee from actually working for a competitor.

Florida’s jurisprudence in the area of the inevitable disclosure doctrine is limited and mixed.  In Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 146 F. Supp. 29 1326, 1335 (S.D. Fla. 2001), the court stated that Florida’s trade secret law does not “prohibit a former employee with knowledge of trade secrets from going to work for a competitor.”    The court opined that Fla. Statute ch. 688 prohibits only misappropriation of trade secrets which means the acquisition, disclosure, and/or use of the information to the disadvantage of the owner of the trade secret.   It does not prevent an employee from working for a competitor.

In a much earlier Florida state court long before the enactment of Fla. Stat. ch. 688, the court upheld an injunction against an employee because “it would seem logical to assume that his employment by a competitor . . . would eventually result in a disclosure of [his former employer’s trade secrets].”  Here, the court determined that the employee’s new job involved activities “were so entwined with his former activities that an injunction simply against disclosure of the trade secrets was not enough.”  Fountain v. Hudson Cush-N-Foam Corp., 122 So. 2d 232, 234 (Fla. Dist. Ct. App. 1960).

The factual scenario in the Fountain case is similar to a seminal post USTA-adoption (by the State of Illinois) case decided by the Seventh Circuit in PepsiCo. Inc. v. Redmond, 54 F. 3d 1262, 1269 (7th Cir. 1995) in that the court found that the employee’s new job activities were “too close” to his activities at PepsiCo.    The court specifically found that the employee “(1) possessed intimate knowledge of PepsiCo’s strategic goals, which were trade secrets; (2) that the respective positions at Pepsico [and new employer Quaker] were similar and therefore the knowledge the employee obtained at Pepsico would influence his position at Quaker; and (3) the employee’s actions “demonstrated lack of candor . . . and proof of [his] willingness to misuse PepsiCo’s trade secrets,” i.e., exhibited bad faith.”   Bad faith was found on the basis of the employee’s lack of candor regarding accepting the position at Quaker.

The Seventh Circuit enjoined the employee from working at Quaker for five months to protect Pepsico’s business strategies for the upcoming year.  Thus, even with bad faith conduct, the employee was not permanently enjoined from working at Quaker.  The imposed injunction is consistent with the USTA and various state statutes concerning the applied time-frame for any imposed injunction.    See, e.g., Fla. Stat. ch. 688, s. 003 (1). The court was silent as to whether it would have reached the same conclusion had it not ascertained that the employee had acted in bad faith.  Certainly the employee’s conduct in Pepsico did not militate in his favor.

The foregoing illustrates that there is still considerable disagreement across states lines as to when the inevitable disclosure document will result in an injunction.  Clearly, the inquiry involves a highly factual inquiry and, depending upon the state, public policy considerations.   Whether or not a future federal law will result in more consistent “inevitable disclosure” decisions remains to be seen.   Public policy considerations may be less influential since federal courts will presumably be under no obligation to consider a state’s public policy concerning employee mobility.   Nevertheless, it is clear that employees should not be enjoined from accepting a new position simply because the employer asserts that the employee is going to disclose valuable trade secrets without more.  Also, the length of time of any imposed injunction related to employment under federal law will presumably be consistent with the specified reasons for the injunction and the imposed time-frame for unemployment and not go on indefinitely.

If the federal trade secret law is enacted, employers may well choose to bring trade secret actions in federal court. To help ensure that they could meet the evidentiary requirements of establishing threatened disclosure in a federal court of law, this commentator recommends that employers: 1) review their current trade secret [and other IP] protection procedures and policies; 2) review non-disclosure agreements and other employee-employer agreement documents and amend as necessary; and 3) review their procedures for maintaining trade secret integrity when an employee resigns.  The steps taken to update existing trade secret protection policies and procedures may be dependent upon the trade secrets involved.

In conclusion clearly Congress considers a federal trade secret law to be an important addition to the legal options available to American companies for addressing trade secret theft.  The push for the new federal trade secrets law recognizes that trade secrets are just as valuable as the other forms of intellectual property and as such warrant the same federal legal protections enjoyed by the other types of intellectual property.  Let’s hope that the current political climate will not delay the passage of the corresponding House bill and timely sign-off of the law by President Obama!

 

THE FOREGOING IS NOT LEGAL ADVICE.  IT IS PROVIDED FOR INFORMATION ONLY.  YOUR READING OF THIS BLOG DOES NOT CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP.

 

© by Troy & Schwartz, LLC

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.

 

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