- Protecting Your Closely Held Business
- March 8, 2013
- Law Firm: Burr Forman LLP - Birmingham Office
A client recently came to me with a problem lawyers often hear: the client’s family-owned business needed to hire new employees to keep up with the growth. In particular, the company needed additional sales force and additional operators in the field. The problem was that in order to train and then oversee these new employees, the client had to disclose to them both its pricing guidelines and its field techniques. This particular business (which was highly regulated and dealt with restricted and often dangerous chemicals) kept its customer base because - like most successful businesses - it provided excellent customer service combined with very competitive pricing.
The owner feared that once his customers became acquainted with the new sales personnel and/or the new field technicians, the new employees could use their knowledge of the company’s pricing guidelines and field techniques in order to start a competing business. Fortunately, under Chapter 542, Florida Statutes, we were able to craft a document that lawfully restricted the new employees’ ability to quickly begin a competing company and that gave the client peace of mind to continue the company’s expansion.
A primer on Chapter 542, Florida Statutes
The short title for Chapter 542 Florida Statutes is “Florida Antitrust Act of 1980.” So basically it’s a statute “to complement the body of federal law prohibiting restraints of trade or commerce in order to foster effective competition.” See 542.16. Fla. Stat. However within the statute is the current language in 542.335 Fla. Stat., entitled Valid restraints of trade or commerce.
Within this section, Florida law allows restrictive covenants, “so long as such contracts are reasonable in time, area, and line of business”. It is important to note, however, that Florida law strictly construes restrictive covenants, all of which are unenforceable unless set forth in writing signed by the person against whom enforcement is sought. It is also essential that the restrictive covenant itself is only valid if the party seeking enforcement can demonstrate a “legitimate business interest” worthy of protection. Examples of legitimate business interests include:
1. Trade secrets;
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
3. Substantial relationships with existing or perspective clients, patients or customers;
4. Good will associated with a trade name, a trademark, a service mark, or “trade dress,” a specific geographic location, or a specific marketing or trade area;
5. Extraordinary or specialized training.
As you might imagine with any strictly interpreted statute, failure to prove the legitimate business interest will render a restrictive covenant unlawful, void and unenforceable. The statute also shifts the burden from the entity seeking to enforce the restrictive covenant to the person opposing enforcement upon prima facie showing that the restraint is reasonably necessary. Defenses to these actions include that the restrictive covenant is “overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interests.”
If the court determines that one of these defenses exists, then the statute directs the court to modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.
Fortunately, Florida law also sets forth some parameters to help both drafters of restrictive covenants and parties seeking to enforce or defend enforcement actions with some guidelines as to the validity of any particular restriction. As one might expect, the more vital the need to protect a “legitimate business interest,” the longer the period Florida law will deem as reasonable. For instance, as long as the restrictive covenant does not deal with the sale of a business or professional practice or an equitable interest in any other type of business or professional practice (including a partnership or limited liability company), then as to a former employee, agent, or independent contractor the court shall presume reasonable in time any restraint that is six months or less in duration and shall presume unreasonable in time any restraint that is more than two years in duration. If a party seeks to enforce a restrictive covenant against the distributor, dealer, franchisee, or licensee of a trademark or service mark (not associated with the businesses listed above) then the court increases its timeframes and will presume reasonable any restraint of one year or less and shall presume unreasonable any restraint more than three years in duration. On the other hand if the restrictive covenant does specifically deal with an action against the seller of all or part of the assets of a business or professional practice, the shares of a corporation, partnership interest, a limited liability company membership or any equity interests of any other type in a business or professional practice, then the court shall presume reasonable a restraint of three years or less and increases its tolerance for reasonability to a period from three years to more than seven years in duration.
The statute also deals with trade secrets and specifically states that a “post term restrictive covenant predicated upon the protection of trade secrets” is presumed reasonable if the restraints are for five years or less and unreasonable if the restraint is for more than ten years. However, all of those presumptions are rebuttable.
Florida law in this area has many nuances. It is quite possible that your valid, written restrictive covenant was drafted to narrowly protect a line of business or a geographical area in which your company no longer has an interest. In such cases, the courts can consider these facts as a defense even in the face of an argument that future damages could arise.
Getting back to the client whose inquiry prompted this post, his closely held corporation sought both legal protection and peace of mind. After a series of successful hires, all signs so far indicate that the client has achieved an effective and enforceable restraint of trade. Because that client services nearly every county in the State of Florida, the written restrictive covenant bars the new employees from working for a period of two years in the same line of business in all of those counties. To the extent any of the techniques that the client utilizes and/or developed for its field technicians constitutes a trade secret, the document also restricts the use of that trade secret for a period less than five years. Most critical for enforcement, however, is the fact that the business owner never allows a new sales person or field technician to begin work until he or she executes the restrictive covenant. The business owner even goes one step further, having all prospective employees to whom the restrictive covenant applies initial the section of the restrictive covenant indicating that the prospective employee was given the documents in advance of the employment and had the right to seek his or her own legal counsel prior to executing the restriction. If carefully drafted and thoughtfully implemented, a written restrictive covenant can successfully protect the business owners of small, closely held companies just as well as they can protect mid-sized or large corporations.