New Florida Statute on Restrictive Covenants


The Florida Legislature has passed a series of statutes to govern non-compete agreements. The first statute, Section 542.12 was passed in 1953. That statute was subsequently replaced by Section 542.33, which was then replaced by the current statute of Section 542.335.

Sections 542.33 and 542.35 are both still valid statues. Section 542.33 governs restrictive covenants that were entered into before July 1, 1996. And Section 542.335 governs non-compete agreements entered into after July 1, 1996. This article discusses the newest statutes most important features.

Until the most recent statute, Florida law has been ambiguous and Florida courts have been inconsistent in their interpretation of restrictive covenants, with many decisions being limited to the individual facts and circumstances of the case. (See Auto Club Affiliates, Inc. v. Donahey, 281 So. 2d 239 - Fla: Dist. Court of Appeals, 2nd Dist. 1973.) The current Statute, however, attempts not only to clarify decisional law, but also to shore up gaps and inconsistencies in the previous statutes. For example, it codifies a "legitimate business interest" test to be used by a court in evaluating and enforcing restrictive covenants.

Legitimate Business Interests

The legitimate business interests supporting a non-compete agreement are specifically enumerated by the Statute and include, but are not limited to:

  • Trade secrets, as defined in s. 688.002(4);
  • Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
  • Substantial relationships with specific prospective or existing customers, patients, or clients;
  • Customer, patient, or client goodwill associated with:
    • An ongoing business or professional practice, by way of trade name, trademark, service mark, or "trade dress";
    • A specific geographic location; or
    • A specific marketing or trade area.
  • Extraordinary or specialized training.

Reasonableness

In addition, the statute establishes presumptively reasonable and unreasonable time frames predicated on certain types of business relationships, including those business relationships involving employees or shareholders of a professional practice. There are three separate reasonable in time presumptions, which are all rebuttable.

The first presumption is that courts are to presume that any restraint of six months or less is reasonable and any restraint more than two years is unreasonable for a former employee, agent or independent contractor.

The second presumption is for use of a trademark or service mark by a former distributor, dealer, franchisee, or licensee. In this case, the time limit for reasonable is one year or less and unreasonable is more than three years.

The third presumption is three years or less is reasonable and seven years or more is unreasonable for a seller of all or part of:

  • assets of a business; or
  • shares of a corporation; or
  • partnership interest; or
  • limited liability company membership: or
  • equity interest in the business.

Trade Secrets

Trade secrets are afforded extra protection for restrictive covenants. A court is to presume that any restraint of five years or less is reasonable and any restraint more than 10 years is unreasonable. This, again, is also a rebuttable presumption.

Enforceability

To determine enforceability the statute is not to consider any individualized economic hardship that might be caused to the person seeking to enforce the covenant. A court may consider that the person seeking enforcement is no longer in business, but only if the discontinuing of the business was not as a result of the non-compete restraint. The court may also consider any other legal and equitable defenses that it finds applicable.

The court is not to construe the restraint narrowly against the drafter of the contract, but to construe it in favor of providing reasonable protection to all legitimate business interests. The court is not to refuse to enforce the restraint for public policy reasons, unless the court finds the public policy to outweigh the business interest.

Remedies

The restraint is to be enforced by any appropriate remedy, including, but not necessarily limited to temporary and permanent injunctions. The violation of the court's enforcement ruling creates a presumption of irreparable injury. The court is also to require a bond for a temporary injunction. The bond requirement cannot be waived any an agreement among the parties. In addition, a court may now award attorneys' fees to the prevailing party where the contract is silent in this area.

Summary

The statute makes enforcement of bona fide restrictive covenants easier, but the legislature appears to have attempted to strike a balance between protecting an enforcing party's legitimate business interest and an opposing party's interest in practicing his trade, where there is no legitimate reason for a restriction.