Month: November 2013

NON-COMPETITION COVENANTS: THE EFFECT OF STOCK PURCHASES, MERGERS, AND ASSET PURCHASES UNDER FLORIDA LAW

Parties to contracts with non-competition covenants should take note of the effects that a stock purchase, merger, or asset purchase has on the enforceability of those non-competition covenants.  A company’s ability to enforce a non-competition covenant can be determined by several factors including how the non-competition covenant was acquired by the company seeking to enforce it.

Generally, when a corporation’s stock is sold, the only change is in the corporation’s ownership.  A change in ownership does not, as a matter of law, affect the existence of the corporation or its rights and liabilities.  Furthermore, when a corporation merges with another, both corporations essentially unite into a single corporate existence.  The surviving corporation therefore assumes the rights and liabilities of the merging corporation.  In both scenarios, the surviving corporation generally assumes the right to enforce any preexisting non-competition covenant.

On the other hand, when a corporation’s assets are sold, the buying corporation does not assume the liabilities of the selling corporation unless such assumption is provided for in the parties’ purchasing agreement.  In this scenario, the buying corporation does not, as a matter of law, assume the selling corporation’s non-competition covenants.

The Supreme Court of Florida examined this distinction in Corporate Express Office Products, Inc. v. Phillips, 847 So. 2d 406, 411 (Fla. 2003).  In that case, Corporate Express was attempting to enforce non-competition covenants against former employees.  Corporate Express’ ability to enforce those covenants, however, was determined by how it acquired the covenants.  Corporate Express acquired most of those non-competition covenants by purchasing the stock of another corporation and later merging with that corporation.  However, one of the covenants was acquired by purchasing the assets of a third corporation.

The Court found that, as a matter of law, Corporate Express assumed the right to enforce the non-competition covenants that it acquired through the stock purchase and merger.  However, Corporate Express could not enforce the covenant acquired through an asset purchase unless the employee subject to that covenant consented to assigning the covenant to Corporate Express.

Peter T. Mavrick has successfully represented many businesses in trade secret and non-competition covenant litigation.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

 

 

 

 

 

 

FLORIDA LAW ON NON-COMPETITION COVENANTS AND TRADE SECRETS

To protect trade secrets and other business interests, businesses often enter into non-competition contracts with employees.  In Florida, the duration of non-competition covenants is subject to different “reasonableness” presumptions set forth by statute.  Florida law distinguishes non-competition covenants that, on the one hand, are meant to protect trade secrets from those that, on the other hand, are meant to protect business interests other than trade secrets.

Where trade secrets are not at issue, Florida courts will presume as reasonable a non-competition covenant lasting six months or less.  A duration longer than two years, however, will be presumed unreasonable.  Fla. Stat. § 542.335(1)(d)(1).

By contrast, Florida law is more lenient when trade secrets are involved.  In such cases, courts view durations as long as five years as being presumptively reasonable.  A duration longer than ten years will be presumed unreasonable.  Fla. Stat. § 542.335(1)(e).  However, as a recent Florida case shows, a non-competition covenant designed to protect trade secrets will not automatically enjoy the longer reasonableness presumption.

In the recent case of Zodiac Records, Inc. v. Choice Environmental Services, LLC, 112 So. 3d 587, 589 (Fla. 4th DCA 2013), a former employer, Choice Environmental Services (“Choice”), sought to enforce a three-year non-competition covenant against a company started by its former consultant, Zodiac Records, Inc. (“Zodiac”).  The agreement between Choice and Zodiac included a non-competition covenant that was designed to protect Choice’s trade secrets.  The non-competition covenant restricted Zodiac from soliciting Choice’s customers and had a duration of three years beginning after the expiration of Choice and Zodiac’s agreement.  A little over two years after the agreement expired, Zodiac started a company and admitted to soliciting Choice’s customers.  Choice argued that the non-competition covenant’s three-year duration was presumably reasonable because it was designed to protect trade secrets.  The court disagreed.

During the hearing on Choice’s preliminary injunction, Choice’s attorney stated that he would not proceed under a trade secrets claim.  The court found that because Choice argued that it did not have to prove that Zodiac stole any trade secrets, Choice had effectively surrendered its ability to assert that the five-year term applied.  Thus, Choice’s non-competition covenant, even though it was designed to protect trade secrets, was not subject to the reasonableness presumption of five years.

This case highlights a couple of important points.  First, for the duration to be presumed reasonable, a non-competition covenant that lasts longer than two years must be predicated upon the protection of trade secrets.  Second, even a perfectly-drafted non-competition covenant will not warrant a reasonableness presumption of five years on its own unless there truly are trade secrets as opposed to the mere allegation that trade secrets exist.  The business seeking to enforce the covenant must show that it is protecting a genuine trade secret.  As the Zodiac court noted, customer lists do not automatically qualify as trade secrets.  To qualify as a trade secret, the business must present evidence that the customer list “was the product of great expense and effort, that it included information that was confidential and not available from public sources, and that it was distilled from larger lists of potential customers into a list of viable customers for [a] unique business.”  Zodiac Records, Inc. v. Choice Envtl. Servs., LLC, 112 So. 3d 587, 590 (Fla. 4th DCA 2013) (quoting East v. Aqua Gaming, 805 So. 2d 932, 934 (Fla. 2d DCA 2001)).  Customer lists will not qualify as trade secrets simply because a non-competition covenant characterizes them as such.

Peter T. Mavrick has successfully represented many businesses in trade secret and non-competition covenant litigation.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.