Traditional Contract Principles Impacting Enforcement of Noncompete Agreements in Florida
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Florida law imposes many requirements on parties attempting to enforce noncompete agreements—some of which can be commonly overlooked. As outlined in the article below, Section 542.335, Florida Statutes, imposes the familiar requirements that can take substantial time and resources to satisfy. In that effort to satisfy the statutory requirements, foundational contract requirements established by Florida common law risk being overlooked by less-than-diligent plaintiffs who fail to recall the fundamentals of contract litigation. In the article below, the foundational contract principles of “consideration” and “prior-material-breach” are analyzed to show their impact on the enforcement of noncompete agreements.
For the readers unfamiliar with noncompete agreement enforceability requirements in Florida, below are the most well-known requirements established by Section 542.335, Florida Statutes. 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). 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.
Common Law Contract Requirements
All that said, there are more requirements to enforcing noncompete agreements not expressed in Section 542.335: the agreement’s satisfaction of the basic conditions necessary to form a contract under Florida law. The Florida’s statute of frauds requirement is addressed impliedly by § 542.335’s requirement of a written contract, as noted above. However, other contract principles like capacity, consideration, and prior-material-breach must be satisfied even though they are not directly addressed by § 542.335.
For example, in Coastal Unilube, Inc. v. Smith, 598 So. 2d 200 (Fla. 4th DCA 1992), the court analyzed whether consideration was present to support a noncompete agreement entered into by the employee a week after already joining employer’s payroll and accepting the base salary. For the non-lawyer readers, “consideration” is a term used by the courts to describe “a bargained for exchange,” or the exchange of one promise for another. For example, consideration is present when one party promises to paint a house in exchange for the other party promising to pay the painter $1,000.00. The promise to pay $1,000.00 is the “consideration” supporting the contract and requiring the painter to paint the house.
In Smith, the court recognized that consideration is a necessary element of a noncompete agreement, like any contract, which must be present to support enforcement of the noncompete agreement. See id. at 201. Because the employee had already started working for the employer and agreed to a base salary, it may seem like there was no “bargained for exchange” to sign the noncompete agreement (the employee was already working for the company). However, the court stated that the employer providing the employee with continued employment is “consideration” for the noncompete agreement, as “it is well settled that continued employment constitutes adequate consideration to support a covenant not to compete.” Id. at 201.
As an example of another traditional contract principal applied to noncompete agreements, the “prior material breach” doctrine, consider the case of N. Tr. Invs., N.A. v. Domino, 896 So. 2d 880, 882 (Fla. 4th DCA 2005). In Domino, the employee entered into an agreement with its new employer, Northern Trust, wherein the employee promised not to compete with Northern Trust in exchange for, among other things, compensation from a retention bonus pool consisting of “cash in the amount of $7,000,000.” Id. at 881.
The employee went on to compete against Northern Trust. As a defense, the employee alleged that Northern Trust could not enforce the noncompete agreement because it was in “prior material breach” of the agreement because Northern Trust only contributed $4,000,000 into the retention bonus pool instead of the promised $7,000,000. Id. at 881. The court held in favor of the employee, reasoning that “the company breached the employment contract prior to terminating Domino by refusing to fully fund the Retention Bonus Pool [and therefore the trial court] did not abuse its discretion in denying the temporary injunction to enforce the covenant not to compete. Id.at 882.
Enforcement of noncompete agreements requires a comprehensive understanding of all requirements that must be satisfied under both Florida statutory and common law. Like “missing the forest for the trees,” plaintiffs can run astray by focusing too heavily on preparing proof of the well-known statutory requirements of Section 524.335 and failing to ensure satisfaction of the foundational requirements to form a contract of any kind under Florida law. To avoid these pitfalls, it is critical that competent legal counsel is secured to identify all legal issues at play related to the enforcement of noncompete agreements.