New Florida Statute on Restrictive Covenants

The Florida Legislature's recent passage of Section 542.33, Florida Statutes (the "Statute"), has once again swung the pendulum representing the enforceability of non-competition agreements more in favor of employers. This Statute not only affects employees, but it will also affect partners or shareholders in a medical practice who are subject to restrictive covenants in their shareholder or partnership agreements.

The Statute applies to all contracts entered into on or after the effective date, July 1, 1996, that restrict competition. It is worth noting, however, that two other sets of rules continue to govern restrictive covenants entered into prior to July 1, 1996 and prior to July 1, 1990, the effective date of the previous amendment to the statute (the "1990 Amendment"). As a result, knowledge of three different sets of rules, and their differing interpretations by Florida courts, may be required to navigate through the non-competition maze. The Statute does not address which rules apply to agreements that are entered into before, but amended after, July 1, 1996.

Until the most recent amendment, 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. The Statute, however, attempts not only to clarify decisional law, but also to shore up gaps and inconsistencies in the 1990 Amendment. For example, it codifies a "legitimate business interest" test to be used by a court in evaluating and enforcing restrictive covenants. The legitimate business interests supporting a restrictive covenant are specifically enumerated by the Statute and include, bur are not limited to: trade secrets (as defined by statute); confidential business information not qualifying as a trade secret; substantial client, customer, or patient relationships; client, customer, or patient goodwill associated with a trademark, trade name, specific geographic location, or a specific trade or marketing area; or extraordinary or specialized training. In particular, the Statute specifically contemplates the enforceability of physician non-competition agreements by its textual reference to patients.

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. Presumptively reasonable time periods applicable to covenants restricting disclosure of trade secrets are also addressed.

Unlike the 1990 Amendment, the Statute specifically requires a court to modify an overbroad restriction to the extent reasonably necessary to protect the enforcing party's interest (a "blue pencil" rule), rather than permitting the court to declare the entire contract void and unenforceable. The Statute also eliminates other old defenses. The Statute also provides a mechanism enabling third parties to enjoy the benefits of the covenant imposed if the contract expressly states that such third party is an intended beneficiary of the restrictive covenant.

As in the 1990 Amendment, a court may order injunctive relief, but under the Statute the parties may not waive or limit the amount of any surety bond usually required as a prerequisite to seeking such relief. In addition, a court may now award attorneys' fees to the prevailing party where the contract is silent in this area. While much of the Statute makes enforcement of bona fide restrictive covenants easier, 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.

As the health care marketplace becomes more competitive and the players become more sophisticated, non-competition and non-solicitation agreements, confidentiality agreements, and other contractual restrictions on competition will continue to become more commonplace. Now, more than ever, it is critical that health care practitioners understand the law and structure their contractual relationships in order to safeguard their respective interests accordingly.