PALM BEACH NON-COMPETE AGREEMENTS: PRIOR BREACH DEFENSE AND “INDEPENDENT COVENANT”

Prior breach is a common defense to a lawsuit to enforce a confidentiality provision (similar to a non-compete agreement). Generally, a material (essential) breach of an agreement allows the non-breaching party to treat the breach as a complete discharge of his or her contractual liability. In re: Walter M. Thomas, Debtor, 51 B.R. 653 (M.D. Fla. 1985). However, if the material term is considered independent of the other terms of the agreement, the prior breach defense may not apply. Peter Mavrick is a Fort Lauderdale, Miami, and Palm Beach non-compete attorney and business litigation attorney who has substantial experience with non-compete litigation, including injunction proceedings.

An example, in the case of Taylor v. Genesee & Wyoming Inc., 3:13-CV-1250-J-39MCR, 2015 WL 12683821 (M.D. Fla. Sept. 25, 2015), RailAmerica, Inc. (“RailAmerica”) hired Jennifer Taylor (“Ms. Taylor”) to work as a paralegal for the then-new general counsel of RailAmerica. RailAmerica’s private equity owner subsequently commenced in an effort to sell the company. RailAmerica offered Ms. Taylor who was identified as a “key employee,” a transition agreement (the “Agreement”) to induce her to remain with the company.

The Agreement stated that Ms. Taylor would receive certain “special severance benefits” if the company was sold and if Ms. Taylor was “adversely impacted by the transaction within twelve (12) months following the closing date.” The Agreement defines the term “adversely impacted” as Ms. Taylor’s “termination of employment” upon one of several possible conditions, including “any material reduction in title, duties, authorities, or responsibilities.” The “special severance benefits” under the Agreement included a lump-sum severance benefit equal to Ms. Taylor’s annual salary, an annual bonus, COBRA benefits for the period of time that severance benefits were paid, and certain unvested shares (the “Benefits”). The Agreement included a confidentiality provision, which prohibited disclosure of the terms and conditions of the Agreement. It further provided that Ms. Taylor’s breach of the Agreement could have resulted in loss of her Benefits. The Agreement further stated that the “Benefits will expire when [the sale is concluded] or on December 31, 2013, whichever first occurs, although the confidentiality provisions shall survive.” Genesee & Wyoming, Inc. (“GWI”) acquired RailAmerica.

Ms. Taylor asserted that after the acquisition, she no longer had autonomy over any of the functions or initiatives of her position prior to the closing. She asserted that her job duties no longer involved areas in which she had experience, namely real estate and commercial transactions. Ms. Taylor sent her supervisor a letter which stated that she had not received an offer letter from GWI, and she remained unclear on the terms of her employment and job responsibilities. She also stated that her job duties had been materially or adversely impacted. Ms. Taylor requested GWI pay her severance benefits in accordance with the terms of the Agreement. Her supervisor denied that Ms. Taylor’s duties were adversely impacted and denied her request for payment of severance benefits under the Agreement. The supervisor’s response attached an offer letter for Ms. Taylor to sign and stated that GWI would consider Ms. Taylor’s failure to sign the offer as Ms. Taylor’s resignation. Ms. Taylor signed the offer. About one month later, Ms. Taylor believed that there was no improvement in work conditions, so she resigned and accepted a position with another company for less money.

Ms. Taylor filed a lawsuit against GWI and attached an un-redacted copy (no terms blackened out) of the Agreement to her complaint. GWI filed a counterclaim against Ms. Taylor that requested the Court to issue an order declaring that, by attaching the Agreement to her complaint, Ms. Taylor violated the terms of the Agreement by knowingly and intentionally breaching the confidentiality provision. GWI’s Counterclaim also contended that the confidentiality obligation was an independent covenant of the Agreement. GWI filed its motion for summary judgment and contended that it was entitled to judgment because Ms. Taylor breached her confidentiality obligation in the Agreement, which justified GWI’s revocation of Benefits. GWI also contended that Ms. Taylor did not suffer any adverse impact in her job related to the acquisition.

Ms. Taylor did not dispute that she attached the unredacted Agreement to her complaint. She argued, instead, that she was discharged of her contract liability because of GWI’s prior breach of the Agreement. Ms. Taylor argued that GWI breached the Agreement when it refused to provide her with the Benefits required by the Agreement. She further argued that the confidentiality provision was unenforceable because it was an unreasonable restraint on trade in violation of Section 542.335 of the Florida Statutes.

GWI did not dispute this general rule, but instead contended that the confidentiality provision within the Agreement survived any prior breach by GWI because it constituted an “independent covenant.” GWI further contended that the defense of a prior breach only applies to “dependent covenants.” Taylor held that the determination of whether contractual provisions are dependent or independent is made by review of the entire contract to determine the intent of the parties. Taylor further held that the general rule is that covenants are considered dependent unless a contrary intention appears in the document. A contractual provision is considered dependent:

where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted …

SEB S.A. v. Sunbeam Corp., 148 Fed.Appx. 774 (11th Cir. 2005). GWI contends that Ms. Taylor was obligated to comply with the confidentiality provision regardless of any prior, material breach of the Agreement, because it was an independent covenant. GWI based its argument on the fact that the confidentiality provision survived the termination of the Agreement, and therefore indefinitely required Ms. Taylor to honor her confidentiality obligation. The trial court disagreed. The trial court stated that GWI cited no authority in support of its proposition that a perpetual obligation contained within a covenant is sufficient to show an expressed intention by the parties to create an independent covenant. The trial court concluded that GWI failed to demonstrate that the confidentiality provision constituted an independent covenant.

The trial court held that the Agreement did not contain sufficient wording to indicate that the provisions were intended to be viewed as separate or independent of each other. The trial court concluded that GWI did not prove that the confidentiality provision was an indispensable part of what both parties intended that the contract would not have been made without the covenant. The trial court concluded that GWI did not meet its summary judgment burden of proving that no genuine dispute existed as to any material fact and that it is entitled to judgment as a matter of law. GWI’s motion for summary judgment was denied. Taylor v. Genesee & Wyoming Inc., 3:13-CV-1250-J-39MCR, 2015 WL 12732898 (M.D. Fla. Nov. 13, 2015) (report and recommendation adopted).

Peter Mavrick is a Fort Lauderdale, Miami, and Palm Beach non-compete lawyer who has substantial experience with business litigation. This article does not serve as a substitute for legal advice tailored to a particular situation.