Business is business: recognizing referral relationships as legitimate business interests protectable by restrictive covenants in Florida.

• Author: Carlson, Charles A.

Your client has built a medical equipment business from scratch into a successful enterprise, based mainly upon his ability to secure the trust and confidence of a select group of physicians who refer their patients to his company for goods and related services. He secures those continuing referrals by being reliable, dependable, and responsive to those physicians and their patients, and also by carefully cultivating and developing personal relationships with each of those referral sources.

The referring doctors are pleased with your client's services, as well as his wit and charm. They endorse the company to other referring doctors. His business grows to such an extent that he needs to elevate a trusted employee to help him deal directly with the referral sources. He shares with her the particular wants, needs, and pet peeves of the individual referring doctors. The trusted employee gets a raise, more responsibility, and more autonomy as the business grows.

One day, your client comes to work to find that his trusted employee has resigned from the company. A few days later, he discovers that the former employee has started a competing company. Over the next few weeks, he learns that she has treated each and every referral source (and their respective staffs) to lunch, has left behind brochures and magnetic business cards, and has promised a few perks specifically calculated to address particular wants, needs, and pet peeves of the referral doctors. His revenues dip dramatically and soon he discovers that his carefully cultivated referring physicians are now dividing their referrals between his firm and the new company started by the former employee.

Fortunately, he had the foresight to hire you, his Florida lawyer, and had all of his employees sign covenants not to compete. The former employee has breached her contract with the company, and her breach is slowly but surely destroying his business. He regrets having to resort to litigation for relief, but at least he's protected, right?

Currently, the answer is no: Neither that client nor any of the other business owners in Florida who rely upon referral sources for their business are necessarily protected. Whether referral relationships are legitimate business interests protectable by covenants not to compete is entirely unclear in Florida. The Florida Supreme Court recently had a chance to clarify this situation by resolving an apparent conflict between the district courts on this issue in the case of Florida Hematology & Oncology v. Tummala, 969 So. 2d 316 (Fla. 2007). However, following oral argument, the Supreme Court dismissed the case, leaving the matter unresolved. (1)

The Legitimate Business Interest Analysis

Contracts in restraint of trade are unlawful and unenforceable. (2) This basic principle has been established for more than a century. (3) However, this firmly entrenched legal doctrine is in direct conflict with the freedom of contract. (4) Every covenant not to compete is a contract in restraint of trade. Thus, courts have always had to strike a balance between these two competing principles when dealing with restrictive covenants. (5) Traditionally, enforcement of contracts in restraint of trade has been governed by the rule of reason. (6) At common law, determining whether a covenant not to compete is reasonable involved an analysis of whether the proponent of the noncompete had a legitimate business interest in its enforcement sufficient to justify the restraint at issue. (7)

In Florida, the modern analysis of the enforcement of restrictive covenants begins with Hapney v. Central Garage, Inc., 579 So. 2d 127 (Fla. 2d DCA 1991). (8) Hapney holds that the common law's prerequisite of a legitimate business interest for enforcement of restrictive covenants was implied in F.S. [section]542.33. (9) Hapney concludes that a covenant not to compete which prohibits competition per se is void as against public policy, but if the proponent proves that enforcement of the covenant is reasonably necessary to protect a legitimate business interest, then the covenant will be enforced. (10)

Hapney specifically recognizes the following legitimate business interests: 1) trade secrets or confidential information; 2) customer lists and the right to prevent direct solicitation of existing customers and customer goodwill; and, 3) other business interests, including but not limited to, extraordinary or specialized training. (11) In 1996, the Florida Legislature codified the common law notion of legitimate business interest as refined in Hapney by enacting F.S. [section]542.335. Thus, today, a covenant not to compete must pass muster under F.S. [section]542.335 to be enforceable.

This statute, like the common law, balances the two competing principles of law inherent in every covenant not to compete--the prohibition on restraint of trade versus the freedom of contract.

The proponent of the noncompete must prove that enforcement of the covenant is reasonably necessary to protect one or more of the proponent's legitimate business interests. (12) The 1996 statute made enforcement of covenants not to compete somewhat easier by more clearly setting out the requirements necessary to enforce them and by eliminating some traditional defenses, including consideration of employee hardship and construction of the covenant language against the drafter. (13) The statute further simplified enforcement by providing for the presumption of irreparable harm upon the showing of a valid, enforceable covenant not to compete. (14) However, the statute retained the overriding principle of reasonableness by providing that a covenant not to compete cannot be overlong or overbroad, and requiring that relief be narrowly tailored to protect the legitimate business interests proven by its proponent. (15)

F.S. [section]542.335 lists certain legitimate business interests that have historically been accepted by the courts, including trade secrets, confidential information, substantial relationships with existing or prospective customers, customer goodwill associated with a specific geographic area or trade area, and specialized training. (16) However, the legitimate business interests itemized in the statute are not exclusive. (17) This is consistent with Hapney, which recognizes a universe of "other business interests" which may be worthy of protection in restrictive covenants. (18)

Prospective Relationships Must Be With an...