Businesses often execute non-compete agreements separate from but contemporaneously with an employment agreement. When the employment agreement contains an arbitration provision, but the non-compete agreement does not, parties can dispute whether the non-compete agreement is arbitrable. Further, it becomes more complicated if the non-compete agreement contains wording that suggests that disputes must be litigated in court. Peter Mavrick is a Fort Lauderdale non-compete attorney, and also advocates for clients in Miami, Boca Raton, and Palm Beach, Florida. Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.
An example of this occurred in the case of Hedden v. Z Oldco, LLC, 44 Fla. L. Weekly D2631 (Fla. 2d DCA Oct. 30, 2019). Terry P. Hedden, Jr. (Hedden) sold his business to Z Oldco, LLC’s predecessor (Z Oldco) and agreed to become an employee for one year to assist with the transition of the business and maintain customer goodwill. Hedden entered into a Compensation Agreement and a Non-Compete Agreement. The Compensation Agreement governed the terms of the parties’ relationship and provided for the payment of a two-million-dollar bonus, to be paid out in intervals based on the success of the business, with the balance paid upon termination of Hedden’s employment. Payment of this bonus was conditioned upon Hedden’s continued compliance with the Non-Compete Agreement. The Non-Compete Agreement prohibited Hedden from operating a similar business for two years following termination of his employment.
Almost five years after termination of Hedden’s employment, Hedden sent Z Oldco a letter demanding payment of the bonus due under the Compensation Agreement. Z Oldco filed a declaratory judgment action, seeking a determination as to whether: (1) Hedden violated the Non-Compete Agreement (Count I); (2) the bonus was due to Hedden under the Compensation Agreement if he was in violation of the Non-Compete Agreement (Count II); and (3) whether the terms of the Compensation Agreement had been fulfilled such that payment of the Exit Bonus was due to Hedden (Count III). Hedden moved to compel arbitration pursuant to the arbitration clause of the Compensation Agreement.
The Compensation Agreement contained an arbitration provision, but the Non-Compete Agreement did not. The trial court denied the motion and concluded that Count I “related more closely to the Non-[C]ompete Agreement than to the Compensation Agreement, and thus [was] subject to adjudication by the court.” The trial court held that because Counts II and III were dependent upon the resolution of Count I, it “need not decide whether those counts must be severed and stayed pending arbitration.” Hedden immediately appealed.
When ruling on a motion to compel arbitration, the trial court must consider the following: “(1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.” Seifert v. U.S. Home Corp., 750 So. 2d 633 (Fla. 1999). Seifert held that the question of whether an arbitrable issue exists, depends on whether there is a “significant relationship” or “nexus” between the dispute and the contract containing the arbitration provision. “[T]he mere fact that the dispute would not have arisen but for the existence of the contract and consequent relationship between the parties is insufficient by itself to transform a dispute into one ‘arising out of or relating to’ the agreement.” Seifert v. U.S. Home Corp., supra.
A complaint for declaratory relief requires a plaintiff to “allege a present controversy based on articulated facts which demonstrate a real threat of immediate injury.” Apthorp v. Detzner, 162 So. 3d 236 (Fla. 1st DCA 2015). Z Oldco’s three counts for declaratory judgment all asserted the allegation that “[t]here [was] a bona fide, actual, and present dispute between the parties, as stated in the May 24, 2018[,] correspondence of Hedden’s counsel….” It was uncontested that the dispute caused by Hedden’s demand letter was based on the Compensation Agreement. Simply put, Hedden thought he was entitled to get paid something and Z Oldco thought he should not. The Compensation Agreement set forth the terms of compensation and that payment was contingent on, among other things, adherence to the Non-Compete Agreement.
The appellate court held that it did not need to decide if the Compensation Agreement and Non-Compete Agreement comprise one employment agreement, because Z Oldco did not seek to enjoin Hedden from further violation of the Non-Compete Agreement or to obtain damages for prior violations. Rather Z Oldco sought a declaration of past violations of the Non-Compete Agreement to resolve a dispute regarding payment under the Compensation Agreement. The appellate court concluded that even if the Non-Compete Agreement was a wholly separate contract, the “controversy” is still about the Compensation Agreement. All counts of the complaint were expressly intended to resolve a dispute regarding compensation under the Compensation Agreement. The appellate court further held that the Compensation Agreement bore a “significant relationship” to the action as a whole and to each of its counts.
Z Oldco contended that disputes related to the Non-Compete Agreement cannot be resolved through arbitration because the Non-Compete Agreement contained a venue clause that is irreconcilable with the arbitration clause in the Compensation Agreement. The Non-Compete Agreement contained a provision entitled “Governing Law, Jurisdiction and Venue,” which stated the following:
This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Florida and venue of any action hereunder shall lie solely with the courts in and for Hillsborough County, Florida, to which jurisdiction each of the parties hereto agrees to submit for the purposes of any litigation involving this Agreement.
However, the appellate court held that the arbitration and venue clauses did not conflict. The venue clause in the Non-Compete Agreement dictated the forum in the event that a party chose to litigate a dispute involving the Non-Compete Agreement. It did not mandate that all disputes must be heard by “the courts in and for Hillsborough County, Florida.” The provision applied if the parties litigate; it did not provide that the parties must litigate all disputes involving the Non-Compete Agreement.
The arbitration provision, in contrast, was broad, requiring arbitration of “[a]ny dispute, controversy or claim arising out of or relating to” the Compensation Agreement. The appellate court held that both provisions could be given effect without offending the other. The appellate court reversed the denial of the motion to arbitrate and directed the trial court to refer each count of the declaratory judgment claim to arbitration.
Peter Mavrick is a Fort Lauderdale non-compete lawyer who also practices non-compete litigation in Palm Beach, Boca Raton, and Miami. This article does not serve as a substitute for legal advice tailored to a particular situation.