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Nonsensical Independent Covenant Rulings in Florida Non-Compete Cases

Over the past several years, certain Florida courts have perpetuated this nonsensical doctrine that we’ll call the Independent Covenants Doctrine.  Let’s use a hypothetical to demonstrate how it works:  Miami Medical Supply Co. uses a standard employment agreement with all of its employees and sales representatives.  That agreement contains various restrictive covenants, including non-compete and non-solicitation provisions.  That agreement also states that the non-compete and non-solicitation provisions are “independent covenants.”  Here’s what the language looks like:

The restrictive covenants in this Section shall be independent of any other provision of this Agreement or any other agreement by and among the Employer and Employee. The existence of any claim or cause of action of the Employee against the Employer whether predicated on this Agreement, an unrelated action, or otherwise shall not constitute a defense to the enforcement by the Company of these covenants.

A few years back, companies started using this independent covenant language – and provisions like the one above – to guard against any defenses that could prevent enforcement.  For example:  Suppose a sales representative leaves Miami Medical and goes to a competitor.  The sales rep left the Company because the Company failed to pay certain agreed upon bonus compensation.  Miami Medical sues to enforce the non-compete.  Traditionally, the defendant would be able to raise the defense of prior breach.  Basically, the defendant’s argument would be that the Company breached the Agreement first (by failing to pay certain compensation), thereby discharging any of the defendant’s obligations under the restrictive covenants.  In many states, that is a viable defense.  But not in Florida.  Instead, in Florida, all a company has to do is include language like the passage quoted above, and that that insulates them against the prior breach defense.  And you know what?  That makes no sense at all.

Just because a contract makes the ipse dixit assertion that certain covenants are independent does not make it so.  Let’s use another hypothetical:  Someone sells a construction business for $3 million.  There is a sale of a business non-compete.  The first $1 million is paid up front and the remaining $2 million is paid in monthly installments.  For no good reason, the buyer stops paying.  The seller tells the buyer, “You breached the agreement by failing to pay.  I’m getting back in the market and I’m suing you for default.”  Under Florida law, the buyer can say, “Sorry buddy, the non-compete is an independent covenant.  So it doesn’t matter if I breached the agreement by failing to pay.  You still have to honor the non-compete.”

Of course, this is absurd.  Courts should look to the actual substance of a given agreement, not just to superficial labels the parties may use.  Suppose I have a contract to sell a horse and the sale contract says, “This horse shall be considered a unicorn.”  Well the horse is not a unicorn, no matter what the contract says.  Just like these restrictive covenants are not “independent covenants,” no matter what a non-compete agreement may say.

But it gets even worse.  If you actually research the meaning of an independent covenant vs. a dependent covenant, you will learn that an independent covenant is basically a covenant that, if breached, gives rise to money damages but does not discharge the contract.  So certain Florida courts (and many Florida lawyers) are utterly confused when they label a non-compete provision as an “independent covenant.”  They’ve got it all backwards!  What they really mean is that all of the other covenants (agreements to pay compensation, agreements re any performance on the company’s part) are independent covenants and do not discharge the other obligations in the contract.  Under that framework:  If the company breaches a provision regarding compensation, and that provision is an independent covenant, then the rest of the contract (including the non-compete provision) remains intact.

But the problem with this framework, as discussed above, is that parties cannot make a dependent covenant into an independent covenant just by inserting some boilerplate language to that effect.  Just like I can’t make a horse into a unicorn by writing the words “THIS IS A UNICORN” into the contract.

You can’t make this stuff up.  Florida’s 3rd DCA has ruled upon this and ruled incorrectly.  It will ultimately go to the Florida Supreme Court and, hopefully, they will set the record straight.

Jonathan Pollard is the principal of Pollard PLLC, a Fort Lauderdale-based litigation boutique focused on competition law. The firm and its attorneys have extensive experience litigating non-compete, trade secret and antitrust matters. They represent clients throughout the country. Their office can be reached at 954-332-2380.

 

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