What Staffing Agencies Need to Know About Demonstrating Legitimate Business Interests to Enforce a Noncompete Agreement
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Staffing Agencies that seek to implement, or that otherwise encounter, noncompete agreements need to understand how noncompete agreements work and their typical application in the recruiting industry. This article describes the general principles associated with noncompete statutes and analyzes a case identifying certain “legitimate business interests” (which must be demonstrated to enforce a noncompete agreement in Florida) commonly held by staffing agencies. These principles and considerations are valuable for staffing agencies to understand before they draft and execute noncompete agreements to ensure that they create enforceable noncompete agreements—should enforcement ultimately be required.
Section 542.335, Florida Statutes, prescribes numerous requirements which must be satisfied to enforce a noncompete agreement. First, the noncompete agreement, or “restrictive covenant,” must be “set forth in a writing signed by the person against whom enforcement is sought.” § 542.335, Fla. Stat. Second, the restrictive covenant must be reasonable in relation to “time, area, and line of business.” § 542.335, Fla. Stat. Third, “Under Section 542.335 of the Florida Statutes, restrictive covenants are valid if the employer can prove: (1) the existence of one or more legitimate business interests justifying the restrictive covenant; and (2) that the contractually specified restraint is reasonably necessary to protect the established interests of the employer.” Autonation, Inc. v. O’Brien, 347 F. Supp. 2d 1299, 1304 (S.D. Fla. 2004) (interpreting Florida law) (emphasis added).
What specifically constitutes a “legitimate business interest” changes depending on the industry in which enforcement of the noncompete agreement is sought. Legitimate business interests are defined generally by Florida law to include, but not be 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.
- 542.335(1)(b), Fla. Stat.
Moreover, certain assets not enumerated in Section 542.335 can still constitute protectable legitimate business interests. White v. Mederi Caretenders Visiting Servs. of Se. Fla., LLC, 226 So. 3d 774, 784–85 (Fla. 2017). An unenumerated legitimate business interest warranting protection is simply a business asset that could give a competitor an unfair advantage if it is misappropriated by the competitor:
Beyond the statutory list, section 542.335 provides no specification for what non-enumerated business interests are legitimate. Moreover, the legislative history is not helpful. Still, this Court has some additional direction:
A review of those examples [in section 542.335(1)(b) ] confirms that a “legitimate business interest” is an identifiable business asset that constitutes or represents an investment by the proponent of the restriction such that, if that asset were misappropriated by a competitor (i.e., taken without compensation), its use in competition against its former owner would be “unfair competition.” Put another way, a “legitimate business interest” is a business asset that, if misappropriated, would give its new owner an unfair competitive advantage over its former owner.
Id. (citing John A. Grant, Jr. & Thomas T. Steele, Restrictive Covenants: Florida Returns to the Original “Unfair Competition” Approach for the 21st Century, 70 Fla. B.J. 53, 54 (Nov. 1996)) (emphasis added).
Staffing agencies should pay careful attention to their client information, candidate information, and operational information in order to protect them via enforcement of a noncompete agreement. In All Star Recruiting Locums, LLC v. Ivy Staffing Sols., LLC, No. 21-CV-62221, 2022 WL 2340997, at *1 (S.D. Fla. Apr. 8, 2022), a healthcare staffing company brought suit against former employees and their newly formed company alleging breach of the former employees’ noncompete agreements. Id. at *1-2. The court specifically noted that plaintiff’s company is a “phone-based business” that “must develop relationships with both clients and providers to succeed.” Id. at *2. Additionally, plaintiff utilizes software to store information on clients and prospective candidates, which plaintiff considers to be confidential information. Id. at *3. While working for plaintiff, defendants transferred plaintiff’s business and client information from their work computers to their personal computers, multiple times. Id. at *5-6.
The court held that the noncompete agreements were necessary to protect three (3) legitimate business interests held by plaintiff. The court found that (1) plaintiff’s “self-created database” that it took “reasonable measures” to keep secret qualified as a trade secret. Id. at *10-11. Additionally, (2) the business information containing plaintiff’s billing structures, revenues, and practices, and (3) the information contained in plaintiff’s presentation materials that contained candidate CVs and resume information were also qualified as legitimate business interests justifying protection by the noncompete agreements. Id. at *10-11.
Notably, plaintiff instructed its employees that both sets of information were confidential and not to be shared without permission. Id. at *2. This fact is worth emphasizing, as protection of alleged legitimate business interests usually requires that the enforcing party has taken some action to maintain the secrecy of the information.
There are many factors for staffing agencies to consider when attempting to enforce noncompete agreements. As shown above, the real issue in these cases can be difficult to prove: does enforcement of the noncompete agreement actually protect the business seeking to enforce it? Staffing agencies should ensure that noncompete agreements are drafted reasonably to maintain enforceability, but also that they obtain experienced legal counsel to compile the right documents and advise on effective policies to establish the existence of legitimate business interests before enforcement of a noncompete agreement is sought.