BOCA RATON NON-COMPETE AGREEMENTS: RESTRUCTURING SERVICES MAY NOT CONSTITUTE BEING OUT OF THE “LINE OF BUSINESS”

When a party to a non-compete agreement no longer provides services in that particular “line of business,” they may no longer have a legitimate business interest preventing the other party from competing. However, discontinuance from servicing a specific demographic of customers does not necessary constitute the fact that a party may no longer offer services in that line of business. Peter Mavrick is a Boca Raton non-compete attorney, and also advocates for clients in Palm Beach, Fort Lauderdale, and Miami, 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 USI Ins. Services of Florida Inc. v. Pettineo, 987 So. 2d 763 (Fla. 4th DCA 2008), a seller and buyer entered into an asset purchase agreement (Agreement) for the sale of an insurance agency, along with the seller’s accounts and goodwill. The Agreement structured an employment arrangement for the seller to continue working for the insurance agency for a term and be compensated by a salary and commission. The Agreement contained a non-compete provision, which prohibited the seller from directly or indirectly carrying on a business that provided any insurance-related services within a specified territory for five years. The Agreement also contained a confidentiality provision that prohibited the seller from disclosing confidential information; and a non-solicitation provision that precluded the seller from soliciting or providing services to any client of the buyer.

Because seller’s commissions were considered part of the purchase price, he voiced concern about alleged deficiencies in how the buyer conducted business. The parties executed an amendment to the Agreement with additional consideration, and which reaffirmed the non-compete provision. The amendment removed a provision from the original Agreement, which prevented the buyer from taking action that adversely affected the seller’s ability to earn commissions. The buyer altered its business strategy and no longer issued policies under a certain minimum dollar amount. Those smaller dollar amount policies were referred to other companies.

The seller e-mailed himself his entire “book of business,” to set up his own agency. The seller was subsequently fired by the buyer. The seller filed a lawsuit against the buyer for breach of the employment agreement. The buyer counterclaimed against the seller and filed third-party claims against seller’s new insurance agency and two of seller’s former employees who assisted him. The buyer filed a motion for a temporary injunction, but it was denied by the trial court. The buyer immediately appealed.

On appeal, the seller contended that because buyer stopped servicing clients who were not seeking a policy large enough to meet the new minimum dollar amount, that the buyer no longer operated in the same “line of business.” The seller argued that those clients were former clients of buyer, and there was no legitimate business interest in protecting that customer relationship. Pursuant to Section 542.335(1)(g)(2), Florida Statutes, a court may “consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action…”

The appellate court stated that there is an important distinction between a non-compete provision in an asset purchase agreement and one that is associated with an employment agreement. For an asset purchase agreement, the non-compete is part of the sale of the business. “Parties to the sale of a business are free to forge agreements ‘which have for their object the removal of a rival and competitor in a business.’” USI Ins. Services of Florida Inc. v. Pettineo, quoting Massari v. Salciccia, 102 Fla. 847 (1931). The appellate court held that as the purchaser of the assets and goodwill of a business, the buyer had a legitimate business interest in preventing the seller from servicing even former clients who are currently not seeking a policy large enough to meet the new minimum dollar amount established by the buyer. The appellate court concluded that the buyer’s restructuring of the type of policies it sold and those it referred to other agencies did not remove it from the line of business that the seller agreed to avoid. Even if the buyer did not currently serve that population, it purchased the right to do so.

To establish that the non-compete agreement is lawful and enforceable, a party must “plead and prove the existence of one or more legitimate business interests justifying the [non-compete].” Fla. Stat. § 542.335(1)(b). Once the enforcing party has established that the non-compete is reasonably necessary to protect the legitimate business interest, the burden shifts to the party opposing enforcement of the agreement to establish that it is overbroad or otherwise not reasonably necessary. Fla. Stat. § 542.335(c). According to the terms of the Agreement, the buyer purchased the seller’s former clients along with the goodwill associated with the insurance business. The appellate court found that the buyer established a legitimate business interest in the client relationships and goodwill that it purchased from seller. Because enforcement of the terms of the non-compete provision was reasonably necessary to protect both those interests, the appellate court held that the trial court erred in denying the motion for temporary injunction. The appellate court reversed and remanded the case back to the trial to enter an order a temporary injunction order.

Peter Mavrick is a Boca Raton non-compete lawyer who also practices non-compete litigation in Palm Beach, Fort Lauderdale, and Miami. This article does not serve as a substitute for legal advice tailored to a particular situation.