Are Realtor Referral Sources Protectable Through Non-compete Agreements?
Reading Time: 5 minutes
Enforceability of Non-Compete Agreements
In Florida, non-competition agreements are not enforceable, unless it is supported by the existence of one or more legitimate business interests. Section 542.335, Florida Statutes, governs the enforcement of a non-compete agreement, and it provides a list of business interests that would support enforceability.
Specifically, the term “legitimate business interest” includes, but is not limited to:
- Trade secrets;
- 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; and
5. Extraordinary or specialized training.
Most business, and the employees who work for them, understand the importance of the client relationship and the goodwill as legitimate business interests that should be protected from unfair competition. But what about business interests that are not on the list—like realtor referral sources, for instance?
Referral Sources May be Protected… Depending on the Circumstances
Florida courts have determined that the list of “legitimate business interests” is not exhaustive, and, based on the right circumstances unique to the industry, a business may be able to identify other (unlisted) legitimate business interests that are worthy of protection through non-competition agreements.
As it relates to referral sources this specific issue was recently decided by the Florida Supreme Court. White v. Mederi Caretenders Visiting Services of Southeast Florida, LLC, 226 So.3d 774 (2017) (finding that although “referral sources” is not specifically listed in the statute, “referral sources may be a protected legitimate business interest within the meaning of Section 542.335, depending on the context and proof adduced.”) Our firm published on this very issue shortly after the case was decided. A detailed review of the Mederi case and its implications can be found here.
In Mederi, the court stopped short of making the blanket statement that all referral sources support enforcement of non-compete agreements. “Consequently, the determination of whether an activity qualifies as a protected legitimate business interest under the statute is inherently a factual inquiry, which is heavily industry—and context-specific.” Id. at 786.
In the case of the home health industry, referral sources were deemed protected legitimate business interests, based upon several specific findings, including the importance of referral relationships to the home health care business model, which is dependent on referrals to obtain patients. The Mederi Court acknowledged that the “referral relationships are not exclusive and patients have the ultimate decision with regard to which HHC will be selected.” Id. at 777. Further, the Court noted that the home health care industry is highly regulated at the state and federal level, limiting financial kick-backs for referring patients. Id. Nonetheless, the referral sources were deemed legitimate business interests to support a restrictive covenant against employees “whose primary roles are to cultivate relationships with referral sources in the hope of securing future patient referrals.” Id. at 778.
While the Mederi decision was limited to industry-specific determinations, the Court noted that “[c]ertain industries, such as home health services, present special facts where protecting referral sources may be necessary to prevent unfair competition.” Id. at 776.
Realtor Referral Sources Can Be Protected Business Interests
After the Mederi decision, and as expected, the law is catching up to protect referral sources in other industries, where those referral sources can often be the lifeblood of a business.
For instance, in the real estate industry, there are several professionals who rely heavily upon referral sources throughout every real estate sales transaction. Home inspectors, title companies and mortgage bankers and brokers rely heavily on referrals from real estate agents, who are often in a position to send their buyers and sellers to those various professional for services. In turn, those service providers often spend significant time and money on cultivating and maintaining those valuable referral sources as pipelines to revenue generation. It is no surprise that a mortgage lending company may seek to protect those sources to prevent unfair competition via non-compete agreements.
Certain courts around the country have upheld noncompetition agreements that are designed to protect real estate referral sources as a legitimate business interest. For instance, see Union Home Mortgage Corp. v. Jenkins, 2021 WL 1979517 (N.D. Ohio May 18, 2021) (prohibiting a loan officer from providing services to former customers or taking advantage of personal relationships he developed as an employee of the lender); RHIS, Inc. v. Boyce, 2001 WL 1192203 (Del. Ch. 2001) (enforcing a noncompete agreement against a home inspector and prohibiting business with previous employer’s realtor referral sources: “The trial evidence established both that [Employee’s] employment put him in a position to develop relationships with [Employer’s] ‘customers’ (in this case, the realtors who referred business to it) and that [Employer] has a legitimate interest in protecting those relationships from competition by [Employee].”); and Union Home Mortgage Corp. v. Payne, 2020 WL 4282309 (N.D. Ohio Mar. 9, 2020) (“The Court agrees with plaintiff that it will suffer irreparable harm given that plaintiff has presented evidence that defendant developed goodwill with new referral sources and enhanced goodwill with existing referral sources while employed with plaintiff . . . .”).
Following those trends, certain Florida trial courts are following Mederi’s industry and context-specific analysis, finding that residential mortgage lenders have established protectable interests in realtor referral sources, in support of enforcement of a non-compete against former employees. See Bank of England v. Tatum, Case No.: 16-2021-CA-006760, in the Circuit Court for the Fourth Judicial Circuit, in and for Duval County, Florida, Amended Order Granting Plaintiff’s Emergency Motion for Temporary Injunction, dated May 26, 2022.
Referral Sources in Other Industries May Also Be Protected
Following the holdings above, courts will continue to be faced with non-compete agreement enforcement regarding referral sources in a variety of industries. Employers and employees should continually be cognizant of the preservation of those relationships when assessing the enforcement of a non-compete agreement.