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Florida Non-Compete Agreements & Customer Relationships

Most Florida non-compete litigation ultimately is about customer relationships.  Sure, sometimes you have cases where the plaintiff legitimately is seeking to protect trade secrets or valuable confidential information.  But from where I sit (having been involved in more than 300 non-compete disputes), it is all about the customers.  In the employment context, the plaintiff wants to stop the ex-employee from taking those customers with him to a competitor.  In the sale of a business context, the buyer wants to prevent the seller from recouping those customers.

There is a widespread misunderstanding about Florida non-compete law and customer relationships.  Plaintiffs, lawyers and even many judges believe that the law protects any and all customer relationships.  This is false.  Florida Statutes 542.335 protects only substantial customer relationships.  Unfortunately, the statute does not define what constitutes a substantial customer relationship.  But there is a growing body of case law that provides guidance on this front.

Restraint of Trade vs. Breach of Contract 

Before going any further, I would like to address a broader point about non-compete litigation and non-compete law.  This point ultimately bears upon the customer issue:  Non-compete agreements are restraints of trade.  As such, the facts of a non-compete dispute must be viewed through two entirely separate lenses: (1) the restraint of trade lens and (2) the breach of contract lens.  If the non-compete at issue is not reasonably necessary to protect a legitimate business interest, then the non-compete is an unlawful restraint of trade and is utterly unenforceable.  Full stop.  There are many litigants, lawyers and judges that do not understand this fundamental premise.

In light of this framework, it is reasonable to require the party seeking enforcement of a non-compete agreement to clearly establish the existence of a legitimate business interest.  Further, given that the plaintiffs in these cases almost always are seeking injunctive relief, the burden should be even higher.   Based on the antitrust (technically Rule of Reason) framework, the plain language of Florida’s non-compete law and the burdens associated with seeking a preliminary injunction, I would articulate the requisite showing as follows:  A party seeking a preliminary injunction in a non-compete case must produce substantial evidence establishing the existence of a legitimate business interest and must demonstrate a substantial likelihood of success on the merits.  Unfortunately, Florida trial courts rarely apply this standard.

Instead, Florida trial courts routinely ignore the antitrust component.  I have been a part of many cases where the trial court had no interest in scrutinizing the claimed legitimate business interests.  Instead, the trial court was fixated on the fact that the defendant(s) had signed a contract.  Once the trial court adopts the breach of contract framework, if the plaintiff gives lip service to any legitimate business interest, that is enough for an injunction.  This is the incorrect framework (because the restraint of trade lens always comes first).  The upshot:  Courts should scrutinize claims of substantial customer relationships.  Both courts and litigants should bear in mind the following considerations:

  • Not all customer relationships are protectable.  The analysis here must turn on market realities.  Here’s an example:  Believe it or not, we also have represented plaintiffs in non-compete cases.  But we only do so where there is a clear legitimate business interest (because I have the luxury of only taking the cases I want).   For instance, we represented Trek Bikes in enforcing a non-compete agreement against a former regional manager.  In the Trek case, the defendant had worked for Trek for several years and signed a non-compete agreement (a very reasonable one I might add, with something like a 50 mile restricted territory and only a 1-year term).  He left Trek and went to work for a competitor.  I’m using the Trek case solely to make a point about customers.  Trek has certain long-standing customers who buy all of their bikes and biking gear from Trek.  Some of these folks spend a great deal of money with Trek.  They make big ticket purchases every few months and come back repeatedly.  These are textbook substantial relationships.  Here’s why:  (1) The customers are private individuals who cannot be identified through publicly available means (2) Their relationship with Trek is exclusive or near exclusive (3) Their relationship is a long-term one.   In contrast, consider a staffing industry non-compete case.  There, the customers are big companies seeking to fill open positions.  The customer relationships in a staffing case are of a very different nature and, in my view, not protectable.  Here’s why: (1) The customers are companies that easily can be identified through publicly available means (2) The customers do business with multiple different vendors (3) Purchasing decisions are based on what vendor can supply the desired goods/services quickly.
  • The dollar amount is not dispositive.  I have seen this movie like 600 times.  The plaintiff’s claim of a substantial customer relationship is based on the dollar amounts at issue.  Example:  We had a case up in the Middle District of Florida – Tampa Division involving the medical gas business.  It was a hybrid sale of a business / employee non-compete case.  A big part of the plaintiff’s strategy was parroting the phrase “substantial customer relationships” over and over again.  They also placed tremendous weight on the dollar amounts at issue.  For instance:  They repeatedly hit upon the fact that they had done several hundred thousand dollars worth of business with a particular sub-contractor or hospital.  In other words, because the relationship generated significant revenue for the company, it had to be a substantial, protectable relationship.  Again, this is absolutely wrong and ignores market realities.  The customers were all hospitals and subcontractors, all of which could be easily identified through publicly available means.  And these customers awarded work to vendors based on competitive bidding.  So it doesn’t matter if a particular vendor did $1 million with of business with a particular hospital in a certain year.  That vendor has to compete with all the other vendors for the next project.  And if a different vendor puts in a quality bit at a more competitive price, that vendor probably wins the job.  Bottom line:  The dollar value of business generated from the customer does not dictate whether or not the relationship is a substantial, protectable one.
  • The plaintiff’s conduct toward its customers can be dispositive.  Always look at the quality of the relationship.  It’s not enough to focus on the fact that the plaintiff did business with a certain customer for a certain amount of revenue.  The qualitative factors matter.  Was the relationship a positive one or were there problems?  Was the relationship moving in a positive direction or were things headed south?  These facts can be critically important.  Remember:  The ultimate question here is whether or not the plaintiff had a reasonable expectation that it would continue to receive that customer’s business.   If the customer is dissatisfied and the relationship is experiencing problems, then the answer is probably not.  Especially in a competitive market where there are many other vendors vying for that business.

 

Jonathan Pollard is a trial lawyer and business litigation attorney based in Fort Lauderdale, Florida. He focuses his practice on competition law and has extensive experience litigating non-compete, trade secret and antitrust claims. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380.

 

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