Updated: Aug 17, 2020
In the past few years I've noticed something odd popping up in standard non-disclosure agreements (NDAs) that have the power to shut down your business and your livelihood, even if you've been recently unemployed due to COVID. Hidden in the body of the standard four-page agreement we've all seen and signed, among the legalese of what constitutes "confidential information" and under what circumstances that same information is not confidential, is language that restricts you from competing with the party issuing the NDA.
The language reads a little something like this:
"The receiving party acknowledges that they may not market or have under development, products which are competitive with products or services offered by the disclosing party."
What unnerves me about this is that many times, business owners who are eager to jump into initial conversations with potential supply chain partners or new business relationships will happily affix their signatures to these documents and never realize they've just agreed to not compete in any way with this busienss in exchange for nothing more than an initial converstion with them. What if this other business is in the same or similar industry? If you have signed a document including a restriction like this, is it possible you signed away your business by virtue of this single sentence?
In short answer - maybe.
EACH STATE HAS ITS OWN NON-COMPETE LAW
It really depends on a few factors, the most important of which is what state's law governs the contract you just signed. If it's California law, then it's probably safe to exhale. While California does recognize and enforce covenants not to compete in the context of a business sold or a partnership abandoned (See BPC 16600-16602), California does not generally recognize them in the employment context. In Edwards v. Arthur Andersen, 44 Cal. 4th 937, 946-47 (2008), the California Supreme Court ruled that under California Business and Professions Code Section 16600, California employers cannot enforce these employment restrictions against their employees. Further, California employers who terminate their employees for refusal to sign one of these agreements can result in the employer being held liable for wrongful termination. Notably, however, the employee may still be held to confidentiality and the protection of trade secrets of the employer.
On the other end of the spectrum, if you signed an agreement containing non-compete language governed by Florida law, you're probably screwed. As a Florida-licensed attorney, believe me; Florida law favors employers over employees to such an extent that it creates an environment of indentured labor, forcing workers to continue to supply services under any condition or jump into a new career with no relevant experience. These rules, applied equally to skilled professionals and day-laborers, keep wages artificially low, restrict economic growth, and discourage skilled technicians from moving into the state. Although Florida Statute 542.335 specifically proscribes how these restrictive covenants may be validated and enforced, the Florida Supreme Court has ruled that Florida may go further than any other state in enforcing non-compete agreements so long as they are reasonable in time, area and line of business to protect a legitimate business interest. See, Capraro V. Lanier Business Prods., 466 so. 2d 212 (Fla. 1985). The words "reasonable" and "legitimate business interest" are matters to be determined by a jury and may be interpreted broadly to cover just about anything. Notably, continued employment has been held to be sufficient consideration to enforce these agreements. In other words, if you are happy in your job where you are employed "at will", and then your employer shows up and says "sign this right now if you want to keep your job", then that circumstance of "continued employment" is good enough for Florida. See, Wright & Seaton, Inc. v. Prescott, 420 So. 2d 623 (Fla. Dist. Ct. App. 1982).
For a really great synopsis of the law governing your non-compete agreement, the law firm of Greenberg Traurig published through the Association of Corporate Counsel a "Fifty State Survey on Covenants Not to Compete" in 2015 that I recommend checking out.
MEDICAL PROFESSIONALS BOUND BY NON-COMPETES
In 2018, Florida Attorney Amy Ronner published a featured article in the peer-reviewed Florida Bar Journal called "Healers Barred From Healing: Physician Noncompete Agreements". I remember flipping through the Journal to see if there might be something in this issue that applies to my practice when the title caught my attention. Florida enforces non-competes against doctors? I already thought it was nuts that we restrict doctors to practicing solely in the state in which they are licensed. After all, it's not like the biology of the human body changes as we travel across state lines, so why should medical advice be any different? In a recent article, the American Association of Medical Colleges reported that the U.S. will experience a shortage of 122,000 primary and specialty care physicians by 2032 as demand grows faster than supply. Meanwhile, millions of additional Americans are expected to enter the healthcare system, portending a severe shortage of doctors.
The impact of COVID on our healthcare system has been nothing short of devastating, highlighting the myriad of complex problems that have been codified into our legal system in favor of insurance companies running our nation's healthcare rather than our doctors. As aptly stated in Attorney Amy's article, "[t]oday, entities that hire physicians, like Health Maintenance Organizations (HMOs), hospitals, and practice groups, use restrictive convenants to bar former employees from engaging in or creating a competitive medical practice within a geographic region for a set period of time." While courts will sometimes blueline an agreement to modify its scope where it might otherwise be overbroad, few are the circumstances in which a Florida court will strike down a noncompete involving physicians regardless of the hardship to the physician, the public, or the sanctity of the doctor-patient relationship.
NON-COMPETE CLAUSES CREATE MODERN SLAVERY
Folks in favor of enforcing non-compete clauses can be heard whining in unison "But I invested time, money and resources into training this person and now they can just take what they learned from me and compete with me! Don't let them do that!" I hear you; it sounds valid, but let's unpack that.
First, these agreements are applied even against unskilled workers like janitors and agricultural workers who don't require any real training, so eliminate them from the conversation altogether. I believe we can all agree they should never be applied to this class of folks. If you don't want them leaving your employ, then perhaps you ought to instead provide a favorable employment environment.
And second, as applied to skilled workers whom you may have trained, you can recoup your investment by instead providing an employment agreement whereby you legitimately value your time, money and resources into that employee, assign a number of months/years for you to recoup your investment, and then contract for the employee to work for you for that duration. So, if the employment agreement is for 2 years and the employee leaves at 18 months, then the employee must not compete for the remaining 6 months. In this way, you, the employer, receive the full benefit of your bargain without becoming a villainous ogre of a soul-killer, and the employee can have some hope of a future in case you are a terrible employer, or maybe the employee just has a dream of a family and home somewhere else.
In summary, laws that enforce non-compete agreements against the working class keep workers enslaved, preventing them from bettering their lives and the economy, and serve no legitimate interest of the business owner other than to provide unlawful protectionism in violation of federal anti-trust rules.
STATE NON-COMPETE LAWS VIOLATE FEDERAL ANTI-TRUST LAWS
WHAT? State laws violate federal laws, you ask? How can this be? It happens all the time. The interplay between international law, federal law, state law, administrative rules and regulations, and local ordinances is something law students are forced to spend hundreds of hours studying during law school and a lifetime arguing in court. While an explanation of the interplay between federal anti-trust laws and state non-compete statutes are beyond the scope of this article, suffice it to say that it's an argument not often made by state-licensed attorneys arguing in state courts, largely because attorneys are often hired to represent the employer and not the employee. Remember, at this stage of the case, the employee found employment somewhere else, and now the new employer has likely fired the employee under threat of being sued by the former employer for tortious interference. The now unemployed individual has no means to pay for civil defense counsel and is largely at the mercy of the court who will indubitably rule in favor of the well-armed employer with an arsenal of law at their disposal, largely written by the lawyers who represent these employers to begin with. Why drag federal law into state court when it's not in your favor? So, they don't.
COVID SILVER LINING
Last week, while addressing a non-compete clause for one of my clients, it occured to me that, as a nation, we have a unique opportunity to address these non-compete laws once more due to the medical and unemployment crises initiated by COVID. With more people unemployed than ever before, reaching and maybe even surpassing that of The Great Depression of the 1920s, and with the dire public need for mobile doctors and other medical professionals, now is the time to push for the reform of non-compete laws.
"Now is the time to push for the reform of non-compete laws."
As a member of the COVID Task Force of the Business Law Section of the Florida Bar Association, I reached out to the task force chair and suggested that we discuss legislative review of these laws here in Florida at the next special session. With his support, I then reached out to the renowned Florida Attorney Jonathan Pollard who is nationally recognized as an expert practitioner on restrictive convenants in employment agreements, and who personally dedicates thousands in his personal time and resources to representing indigent, unskilled workers bullied by these unscrupulous employers. During our conversation today, Attorney John explained to me something I hadn't before considered. He said that Florida and other states (i.e. Ohio where I graduated law school) that enforce these agreements are ensuring that big tech won't ever move here because tech workers won't want to sign these agreements that stifle their creativity and competitive nature that has largely built California into the economic juggernaut that it is.
After further consideration, I concede that my good colleague John is sadly right. As long as Florida continues to favor a repressed wage economy where workers are forever indentured even in grossly unjust circumstances, we will remain a blue-collar economy fueled by the labors of the repressed. While I don't subscribe to many of California's laws, I have to admit they have done an incredible job guaranteeing free markets for the greater social benefit and public welfare. If you ever get the chance to talk to Attorney John about this issue, be prepared to be blown away by hurricane force winds of passion for the plight of Florida workers, and be inspired to take up whatever means you have in support of his efforts. As for me, I'll continue bluelining these agreements whenever they come my way, educating employers one by one and the attorneys who blindly insert these clauses in their effort to provide ethically obligated zealous representation. Meanwhile, I'll continue working together with my colleagues to initiate, encourage and support legislative reform of trade restraint laws at the state and federal levels. Hopefully, I'll have excellent updates to report soon.