Without the ability to enforce it, a non-competition agreement can turn worthless, or ? perhaps far worse ? extremely expensive for an employer whose chooses to file litigation against a former employee. One area that can turn tricky is the nuanced difference between a “dependent covenant” and an “independent covenant.” Why does this even matter? A recent Florida decision sheds some light on this issue.
In a scenario that will surprise no one who follows this blog, this story involves two high-level employees who left their former employer to start their own competing business. Their employment agreements contained identical non-compete language. (The differences in the agreements generally dealt with compensation.) When the employees left to form a competing tower business, the former employer filed a multi-count complaint against them seeking an injunction, enforcement of the non-compete agreements, and damages. The individuals and their newly-formed company filed a counterclaim seeking, among other things, a determination that the former employer’s prior breaches of the employment agreement (specifically, whether or not the former employer had properly compensated them during their tenure) rendered the non-competition agreement unenforceable. (Richland Towers, Inc. and Richland Towers, LLC v. Tall Tower Ventures, LLC, et al., Fla. 2nd DCA, March 2014.)
Generally, under Florida law, when an agreement has several components and a variety of obligations from one party to another, one party’s breach of the agreement can cause the entire contractual relationship to terminate. The logical argument, therefore, is that an employer’s breach of an employment agreement can result in the termination of the employment agreement. To carry the logic of this argument one step farther: if the employer terminates the employment agreement, then under certain circumstances the employer would lose its ability to enforce the non-competition agreement against its former employee. Makes sense, right?
As it turns out, whether or not the non-competition agreement remains enforceable is a matter of whether or not the former employer’s alleged breach was a dependent covenant or an independent covenant. What’s the difference? Well, for one thing, when a party breaches a dependent covenant “the entire contract is virtually destroyed.” (See Steak House, Inc. v. Barnett, Fla. 1953)
Whether or not a covenant is dependent or independent is a legal question reserved for the court. The general rule in Florida presumes dependent covenants. That is to say, the entire contract is dependent on parties following each of the contract’s terms. However, Florida law is also flexible in allowing parties to enter an enforceable contract that excludes this general interpretation. In the Richland Towers matter mentioned earlier, the employment agreements contained “an explicit expression of a contrary intention.” In fact, the non-competition agreement actually contained a paragraph entitled “Covenants Independent” that stated that “each restrictive covenant” was “independent of any other covenant or provision” of the agreement.
In the Richland Towers matter, the trial court denied the employer’s motion for the Court to enter a temporary injunction, and determined that because the former employer had not properly paid bonuses, the contractual non-competition agreement was unenforceable. The appellate court reversed. Based on the “Covenants Independent” paragraph discussed above, the appellate court found that ? whether or not the former employer properly paid bonuses ? the fact that the parties had contractually agreed that the restrictive covenants and non-competition agreements were “independent covenants” rendered them enforceable.
And the moral of the story is: be careful out there. In this case, the inclusion of a “Covenants Independent” clause allowed a former employer to retain the right to seek an injunction against former employees trying to compete within the same markets. Without that clause, the allegation that the former employer failed to properly pay bonuses may have also led to the unenforceability of the non-competition agreement to which the employees freely agreed. The scenarios can get complicated, and the litigation that results from these situations can put a financial burden on all parties involved. Bottom line: if you need advice on how to draft your non-competition agreement, or with an issue attempting to enforce your non-competition agreement, be sure to seek legal advice from a professional familiar with this area of the law.