ENFORCEABILITY OF RESTRICTIVE COVENANTS IN EMPLOYMENT AGREEMENTS

By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, LLC

Contracts that restrict or prohibit competition during or after the employment term are generally enforceable, so long as such contracts are reasonable in time, area, and line of business, and are in writing signed by the person against whom enforcement is sought. A party seeking to enforce a restrictive covenant, such as a non-compete provision in a contract, must prove the existence of one or more legitimate business interests justifying the covenant, and that the covenant is reasonably necessary to protect those legitimate business interests. The case of ThyssenKrupp Elevator Corporation v. Hubbard, 2013 WL 5929132 (M.D.Fla. 2013) analyzed the legitimate business interests that a party must establish in order to justify a restrictive covenant.

In ThyssenKrupp Elevator Corporation, Employee signed an Employment Agreement with General Elevator Sales and Service, Inc. (“GESS”), which subsequently merged with ThyssennKrupp Elevator Corporation (“Employer”).  The Employment Agreement contained restrictive covenants which provide in pertinent part:

“2. I will not during the term of my employment with Employer and for two (2) years hereafter, act as a competitor to Employer regarding customers and/or prospective customers within the following geographic area: Lee County, Collier & Hendry Counties, and Charlotte County.  3. I will not during the term of my employment with Employer and for two (2) years thereafter, individually or in combination with any Competitor, market, produce, solicit orders, sell, deliver, or provide any product, process, or service which resembles or competes with a product, process or service with which I was involved . . .”

In December 2012, Employee resigned from Employer, intending to start a consulting company to assist clients with modernizations by identifying the required equipment, advertising and collecting bids, and overseeing the project once a bid was awarded.  A former employee of GESS, which formed his own company, GES, hired Employee as a mechanic and to “hang” Employee’s Elevator Inspection license to help Employee start his consulting company.

In December 2012, Employee performed a free service audit for a condominium serviced by Employer, as a result of a lead from the condominium’s manager.  The condominium decided not to renew its contract with Employer and now receives service from GES. The condominium manager also recommended GES to all of his clients.

Employer believed that Employee was violating the Employment Agreement by competing with Employer in the prohibited counties; soliciting Employer’s clients and prospects to do business with GES; and aiding, abetting, and assisting others to solicit Employer’s clients and prospects to cease and refrain from doing business with Employer.  Employer sought a preliminary injunction against Employee, a claim for Breach of the Employment Agreement and other claims.

A preliminary injunction is an extraordinary remedy not to be granted unless the movant clearly establishes “the burden of persuasion” as to each of the following elements: (1) a substantial likelihood of success on the merits of the underlying case; (2) the movant will suffer irreparable harm in the absence of an injunction; (3) the harm suffered by the movant in the absence of an injunction would exceed the harm suffered by the opposing party if the injunction is issued; and (4) an injunction would not disserve the public interest.

The Court first analyzed whether the Employer had a substantial likelihood of success on the merits of the underlying case.  The Court looked at whether the Employer could meet its burden of establishing a legitimate business interest in support of the restrictive covenants.  Under Florida law, a party seeking to enforce a restrictive covenant must prove the existence of one or more legitimate business interests justifying the restrictive covenant and that the contractually specified restraint is reasonably necessary to protect those business interests. Legitimate business interests include, but are not limited to, trade secrets, substantial relationships with specific prospective or existing customers, client goodwill and extraordinary or specialized training.

The Employer claimed that the relationships developed with its clients were legitimate business interests, and that it has a substantial relationship with specific clients.  The Court concluded that it was substantially likely that the Employer would be able to establish a legitimate business interest in its client relationships.

Next, the Court analyzed whether there was a substantial likelihood that the Employer will prove that the Employee breached the Employment Agreement.  The Court determined that the restrictive covenants prohibited the Employee from marketing, producing, soliciting, selling, delivering or providing any product, process, or service which resembles or competes with any product, process, or service with which he was involved in any capacity while employed by Employer.  While employed with the Employer, Employee supervised, assisted and evaluated elevator maintenance and worked with customers on decisions regarding repairs and modernization.  Following his resignation, Employee provided service evaluations for two of Employer’s customers, attempted to solicit work as a consultant regarding modernization, and currently works as a mechanic for GES in the prohibited counties.  Based on this evidence, the Court found a substantial likelihood that Employee breached the Employment Agreement.

However, the Court also determined that the Employer’s legitimate business interest in client relationships will not be harmed if the Employee was allowed to work as a mechanic.  It was explained that a restrictive covenant may be unreasonable if it inflicts an unduly harsh or unnecessary result upon the employee. Thus, the Court concluded that it would be unreasonable to enjoin the Employee from acting as a mechanic.  Therefore, the Court held that the Employer showed a substantial likelihood of success on its claim for breach of the Employment Agreement, except for work as a mechanic.

As to the second element (i.e. irreparable harm) of a preliminary injunction, the Court determined that the Employee did not rebut the presumption of irreparable harm. As to the third element (i.e. balance of the harm to the Parties), the Court found that the potential injury to the Employer outweighed the damage an injunction may cause the Employee. As to the fourth element (i.e. public interest), there was no evidence that a preliminary injunction would be adverse to the public interest.

Therefore, Employer’s request for preliminary injunction was granted to the extent that the Employee was restrained from acting as a competitor to Employer regarding customers within the specified county area; and that the Employee was restrained from marketing, producing or providing any product, process or service which resembled or competed with any product, process or service with which the Employer was involved, except for working as a mechanic.

This case demonstrates that Courts will generally construe restrictive covenants in favor of an Employer, if the Employer can prove, in part, the existence of legitimate business interests justifying the covenant, and if the covenant is reasonably necessary to protect the Employer’s legitimate business interests.

About the Author: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].

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