Protecting Goodwill as a Legitimate Business Interest in a Restrictive Covenant Enforcement Action.

• Date: 01 July 2019
• Author: Angerer, Ronald P., II

Given the proliferation of restrictive covenant agreements, practitioners in Florida are likely often confronted by prospective, current, and former employees seeking advice concerning the enforceability of such agreements. (1) And if presented with a situation in which there were no substantial customer relationships, extraordinary training, or confidential or trade secret information, it would likely be safe to presume that most practitioners (in the typical case) would feel confident in the employee's chances of defeating any enforcement action. (2) In conducting this analysis, it also seems likely that many, if not most, practitioners would be unconcerned with the employer's investments generally; after all, it can safely be assumed that most businesses invest in themselves in some way, and certainly Florida law could not make it that easy to permit a party to interfere in the free market.

However, the recent decision of Ansaarie v. First Coast Cardiovascular Institute, PA, 252 So. 3d 287 (Fla. 1st DCA 2018), has shed light on what may be the most misunderstood and misapplied legitimate business interest under F.S. [section]542.335 (hereinafter referred to as "the restrictive covenant statute"): the goodwill business interest. Further, Ansaarie has arguably made it much easier to establish a legitimate business interest in goodwill under the restrictive covenant statute. The possible ease with which a legitimate business interest may now be established presents a very real threat to Florida's workforce and the statutory construct created by the legislature, as explained in this article.

The restrictive covenant statute allows for the protection of customer, patient, or client goodwill associated with three categories: 1) "[a]n ongoing business or professional practice, by way of trade name, trademark, service mark, or 'trade dress'"; 2) "[a] specific geographic location"; or 3) "[a] specific marketing or trade area." (3) However, the restrictive covenant statute is silent as to the meaning of "goodwill." (4) Likewise, John Grant and Thomas Steele did not expressly discuss the meaning of "goodwill" in their seminal article on the restrictive covenant statute. (5)

Despite this silence, goodwill is certainly a term capable of definition. (6) Indeed, when the legislature passed the restrictive covenant statute, it was not writing on a blank slate; the term "goodwill" had come to find meaning in Florida law generally. (7) Nevertheless, and as evidenced by the recent decision in Ansaarie, it is apparent that Florida courts have drifted from the common and proper understanding of goodwill when applying the restrictive covenant statute. (8) This misapplication seems especially apparent in light of White v. Mederi Caretenders Visiting Services of Southeast Florida, LLC, 226 So. 3d 774 (Fla. 2017), where the Florida Supreme Court provided a great deal of insight into the purpose of the restrictive covenant statute. (9)

Accordingly, this article proceeds in four parts. One, a brief examination of how "goodwill" has been defined in Florida law. Two, an examination of Florida caselaw analyzing goodwill as a legitimate business interest. Three, a discussion of why the current caselaw analyzing goodwill runs contrary to the language and purpose of the restrictive covenant statute. Four, and finally, a discussion of the relevant inquiries consistent with the text and purpose of the restrictive covenant statute that courts should be undertaking in analyzing goodwill.

Goodwill Defined

While there have been judicial efforts at defining the term, a precise and uniformly accepted definition of "goodwill" has not developed. (10) While these opinions have refined the definition of goodwill over time, a definitive definition remains to be found, (11) and given the intangible nature of goodwill, such a definition may well never be achieved. (12)

Nevertheless, generally speaking, goodwill is an asset that confers on its holder a reasonable expectation of greater than usual business or earnings. (13) Florida courts are in accord with this general definition, having defined goodwill as the ability of a business to generate supra-normal revenue. (14) A business' goodwill may emanate from any one of a number of potential sources, (15) but is typically evidenced by continued public patronage and supra-normal profits. (16)

It is important to understand in the analysis of the term that "goodwill" has specific reference to the particular business entity at issue. (17) As stated by the Florida Supreme Court, goodwill "attaches to and is dependent upon an existing business entity; the reputation and skill of an individual entrepreneur --be he a professional or a traditional businessman--is not a component of the intangible asset we identify generally as goodwill." (18) Further underscoring this point, goodwill is the "value of the practice which exceeds its tangible assets and which is the tendency of clients/ patients to return to and recommend the practice irrespective of the reputation of the individual practitioner." (19)

How Florida Courts have Applied the Goodwill Legitimate Business Interest

It is worth briefly mentioning that, prior to the enactment of the restrictive covenant statute, the term "goodwill" appears to have been used inconsistently. The term had been used in the text of both F.S. [section][section]542.12 and 542.33(2) (a), the predecessors to the restrictive covenant statute. (20) On the one hand, the First District Court of Appeal, in Obi v. Singletary, 346 So. 2d 1239 (Fla. 1st DCA 1977), employed it in a manner consistent with its commonly understood, common law meaning. (21) On the other hand, later courts used the term when describing protectable customer relationships. (22) Regardless of the precise meaning of "goodwill" under prior statutes, the restrictive covenant statute decoupled customer relationships from "goodwill" by making each its own unique business interest. (23)

Although the restrictive covenant statute was enacted in 1996, no Florida court has yet defined "goodwill" with any precision. Instead, Florida's courts have summarily dealt with the issue based upon the facts presented by each case, leaving practitioners to discern a working definition from the facts, circumstances, and reasoning of the decisions as a whole. (24) From the decisions in Florida that have dealt with the goodwill business interest in any meaningful way, two approaches emerge.

In one approach, several cases have taken an investment-centric approach to analyzing whether goodwill exists. (25) Most recently, in Ansaarie, the First District Court of Appeal determined (26) that the party seeking enforcement had established a business interest in patient, client, and customer goodwill solely on account of its "substantial investments in developing its existing patient, client, and customer base." (27) While the court did not elaborate on what would constitute a substantial investment, its reliance on Southernmost Foot & Ankle Specialists, P.A. v. Torregrosa, 891 So. 2d 591 (Fla. 3d DCA 2004), for this proposition suggests that the investment need not be all that "substantial." In Torregrosa, the investment made by the former employer appeared to be entirely ordinary and usual; to wit, the former employer had developed its business, been in business for 20 years, and hired Dr. Torregrosa fresh out of medical school. (28) Other cases also suggest that the substantiality requirement articulated by the Ansaarie court is, practically speaking, a low hurdle to clear. (29)

Taking a different approach, two Florida courts have taken a relationship-centric approach to analyzing whether goodwill exists, essentially equating goodwill with customer relationships. (30) For instance, in Litwinczuk v. Palm Beach Cardiovascular Clinic, L.C., 939 So. 2d 268, 272-73 (Fla. 4th DCA 2008), the Fourth District Court of Appeal placed a heavy emphasis on the existence of patient relationships in concluding that patient goodwill existed. (31) Likewise, the reasoning in Torregrosa can be read as establishing that the mere existence of patient relationships undergirded the conclusion that goodwill had been established. (32) However, these cases do not shed any light on what customer relations rise to the level of being protectable or what facts are pertinent to such an inquiry under the goodwill interest. The lack of emphasis on the nature of the relationships suggests that the mere fact of a relationship is sufficient. (33)

Reconciling these decisions, it seems the goodwill business interest may be established either by demonstrating that "substantial" investments were made by the business seeking to enforce the covenant or by demonstrating the existence of customer relationships. That said, Florida courts have not expressly ruled that these are the only relevant approaches in analyzing whether goodwill exists.

Current Caselaw

Florida's courts have stated that "the competitive free enterprise system" is "the basis for the American economy and our very way of life." (34) Thus, the clear public policy of Florida is in favor of free and open competition. (35) Nevertheless, Florida's legislature has deemed it permissible for parties in this state to interfere with the free market provided that the competition being eradicated or limited would be unfair. (36) More specifically, this means that the party seeking enforcement of such an agreement in Florida must establish that its covenant does not run afoul of the restrictive covenant statute.

Among other things, the party seeking enforcement of its covenant must demonstrate the existence of one or more legitimate business interests. (37) Recently, the Florida Supreme Court in White discussed the purpose of the legitimate business interest requirement. (38) In discussing what makes a business interest protectable, the White court identified two interrelated, key guideposts. (39) These guideposts were...