If you have followed this blog, then you likely already know that restrictive covenants are legal and enforceable in Florida. You should also know that – although enforceable – restrictive covenants are strictly construed both with regard to their specific wording and with regard to the restraints set forth in Florida Statutes § 542.335. Because of this, parties often initiate litigation to enforce restrictive covenants. In many instances, heated proceedings lead courts to issue preliminary injunctions enforcing parties’ agreements to either keep a former employee from competing against a former employer for a limited period of time, or to keep a former employee from using the former employers’ trade secrets.
As usual with these restrictive covenants, the devil is in the details. Which leads us to the recent decision of Zodiac Records Inc., et al. v. Choice Environmental Services (Fla. 4th DCA 2013). The facts in Zodiac, although perhaps not unique, offer some insight into the often complicated analysis a restrictive covenant matter requires. In a nutshell, Zodiac Records entered into a one-year consulting agreement with Choice Environmental in April 2008. As part of the agreement, Zodiac agreed that for 36 months after the agreement terminated, Zodiac “would not compete with Choice by soliciting or influencing any of Choice’s customers to discontinue or reduce the extent of their relationships with Choice.” (See Zodiac.) Zodiac also agreed to a 36 month confidentiality period to protect Choice Environmental’s trade secrets after the agreement terminated.
Zodiac’s principal consulted for Choice Environmental until he resigned in June 2011, at which point he formed a competing company and solicited Choice Environmental’s customers, among others.
Choice Environmental sued, claiming:
That Zodiac and its principal agreed to a 36-month restrictive covenant after termination;
That at the latest the one-year agreement terminated on its own terms (April 2009); and
That as a result Zodiac and its principal was subject to the terms of the agreement until April 2012.
Here’s the twist: at the hearing on the motion for preliminary injunction, Choice Environmental stipulated that it would not rely on a misappropriation of trade secrets to support its motion for preliminary injunction. The trial court enjoined Zodiac, its principal, and the competing company that the principal formed. In April 2013, Florida’s Fourth District Court of Appeal reversed. Among its analysis, the appellate court reasoned:
Generally, where “a restrictive covenant [is] sought to be enforced against a former employee” or independent contractor, “a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.” § 542.335(1)(d)1., Fla. Stat. (2011). However, “[i]n determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less.” § 542.335(1)(e), Fla. Stat. (2011). In the present case, the consulting agreement expired on April 7, 2009. Therefore, unless the restrictive covenant was “predicated upon the protection of trade secrets,” the restrictive covenant was not enforceable beyond April 7, 2011—a date prior to [Zodiac’s principal’s] alleged violations of the non-solicitation provision. By contrast, if the restrictive covenant was “predicated upon the protection of trade secrets,” the postterm duration of thirty-six months was enforceable, which would allow Choice to enjoin appellants pursuant to the non-solicitation provision through April 7, 2012.
At the preliminary injunction hearing Zodiac argued that if Choice Environmental abandoned (or otherwise failed to prove) its claim that the customer list – and, therefore, the solicitation of customers – was a protected trade secret, then Choice was limited to a two-year enforceability period for the non-compete provisions of the parties’ agreement. If the two-year period applied, Zodiac argued, then the non-compete provisions expired before Zodiac and its principal formed the new, competing company. Choice Environmental argued that because the written agreement contemplated both 1) the enforcement of the restrictive covenant and; 2) the protection of trade secrets, the contractual three-year limit was statutorily reasonable, rendering the restrictive covenant was enforceable. Based on the parties’ stipulation, the trial court received no evidence on the issue of whether Zodiac violated Choice Environmental’s trade secrets.
The appellate court’s reversal notes some interesting points for our clients to keep in mind:
A trial court may not grant a former employer’s motion for a temporary injunction against a former employee without first permitting the former employee “to put on its evidentiary case.” JonJuan Salon, Inc. v. Acosta, 922 So. 2d 1081, 1085 (Fla. 4th DCA 2006).
[T]he trial court could have determined that the customer relationships Choice sought to protect under its non-solicitation agreement were not trade secrets, and that the restrictive covenant was therefore unenforceable past April 7, 2011.1 See Estetique Inc. USA v. Xpamed LLC, 2011 WL 4102340, at *10 (S.D. Fla. Sept. 15, 2011) (rejecting movant’s argument that the five-year postterm restriction of section 542.335(1)(e) applied because movant “failed to show a substantial likelihood of success that its confidential customer information rises to the level of a trade secret”); Zupnik v. All Fla. Paper, Inc., 997 So. 2d 1234, 1238-39 (Fla. 3d DCA 2008).
The trial court also noted that “a former employer’s customer relationships do not automatically qualify as trade secrets, even if a party’s restrictive covenant attempts to characterize them as such. East v. Aqua Gaming, 805 So. 2d 932, 934 (Fla. 2d DCA 2001). To qualify as a trade secret, there must be evidence that a customer list “was the product of great expense and effort, that it included information that was confidential and not available from public sources, and that it was distilled from larger lists of potential customers into a list of viable customers for [a] unique business.” Id.
This case illustrates several important facets of the complexity of litigating restrictive covenants and violation of trade secrets cases in Florida. First, as always, the parties’ written agreement will define whether and under what circumstances the restrictive covenant or agreed protection of trade secrets is enforceable. Second, when litigating these cases, the nuances of the Florida statutes present complex issues that can result in a reversal of an injunction, even after a successful and lengthy evidentiary hearing at the trial court. This is the point in the blog when I suggest that you contact me or any of the other qualified Burr & Forman LLP attorneys to assist you in drafting, reviewing or otherwise to discuss a restrictive covenant or agreement to protect a trade secrets and your business.
If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.