Court in Jacksonville Florida Enforces Most Non-Compete Provisions
Against Former Sales Rep of Veterinary Medical Supply Company
In September 2020, a federal trial court judge in Jacksonville, Florida granted a request by a veterinary orthopedic supply company for a preliminary injunction to enforce a non-compete provision in an employment agreement against one of its former sales reps. The case is called Veterinary Orthopedic Implants v. Hass, Case No. 3:20-cv-868-J-34MCR (M.D. Fla. 2020).
The court’s preliminary injunction enforced parts, but not all, of the post-employment restrictive covenant provisions in the employment agreement that the former sales rep signed when he was hired. The term “restrictive covenant” includes an array of post-employment restrictions common in employment agreements, such as non-compete, non-solicit, and non-disclosure provisions.
The former sales rep was unable to convince the court to invalidate the restrictive covenants, in part, because the rep signed a severance agreement after he was terminated. The severance agreement effectively waived many arguments that the rep otherwise could have used to prevent enforcement of the restrictive covenants. As explained in more detail in the last section of this article, the case illustrates:
- The very real need for individuals to have an employment attorney determine what rights and potential legal claims an individual is giving up when signing a severance agreement;
- When a restrictive covenant dispute cannot be resolved pre-lawsuit, those defending a non-compete lawsuit should insist that a court conduct a full evidentiary hearing before a ruling is made on a request for a preliminary injunction; and
- At least for now, those defending a non-compete lawsuits should address with a court whether the COVID-19 pandemic impacts an individual’s ability to obtain new work.
Case Background. According to the lawsuit, Veterinary Orthopedic Implants, Inc. (“VOI”), a Florida veterinary medical equipment company, makes, markets, and sells veterinary orthopedic products, such as surgical screws, surgical plates, and surgical instruments and tools. VOI employs a team of sales professionals to market and sell their products to veterinarians across the United States and internationally. The bulk of VOI’s revenue comes from sales to large institutions such as university-based medical centers, veterinary clinics associated with zoos, or specialized private veterinary practice groups in large metropolitan areas. Many of these customers are repeat buyers. Buyers from these large organizations, whom VOI calls “Key Opinion Leaders”, were highly prized customers by VOI and others in the industry. VOI claimed it spent decades and thousands of dollars to develop products and market them to Key Opinion Leaders.
In March 2015, VOI hired Matthew Haas as a sales professional to sell its products to veterinarians. While at VOI, Haas was promoted to Senior Business Development Manager and had recently moved to VOI headquarters to pursue advancement with the company. During his last two years at VOI, rather than serving a particular territory, Haas made around 80% of his sales at trade shows and workshops. Haas met many of VOI’s major and repeat customers, including Key Opinion Leaders, at those trade shows and workshops.
When hired, Haas signed an Employment Agreement, which contained post-employment restrictive covenants. The restrictive covenants in the VOI employment agreement effectively prohibited Hass from doing, among other things, the following:
- Soliciting VOI clients for two years;
- Disclosing VOI confidential information; and
- Competing with VOI in any business activity in the U.S. or internally, including being employed by any VOI competitor, for two years.
VOI fired Haas in March 2020. In connection with his termination, Haas signed a severance agreement, called the Separation Agreement and Release (“Separation Agreement”). Under the Separation Agreement, in exchange for a few months of pay, Haas effectively: (i) released VOI for all claims and potential claims he might have against VOI; and (ii) confirmed that he would abide by the restrictive covenants contains in the Employment Agreement.
In July 2020, Haas began working for Arthrex Vet Systems (“Arthrex”), a division of global orthopedic medical device manufacture Arthrex, Inc. In response, VOI filed a lawsuit and requested a preliminary injunction (sometimes known as a temporary injunction), arguing that Haas was violating the Employment Agreement’s restrictive covenant provisions by working for a direct competitor, Arthrex.
Haas, in his defense, primarily argued that: (i) he only accepted the position with Arthrex after he applied for over 20 employment positions outside of the veterinary industry and received no offers; (ii) Arthrex was not a direct competitor of VOI because Arthrex produces a higher-end product and does not compete with VOI on price; and (iii) VOI breached the Employment Agreement by failing to pay him a $100,000 buyout and, therefore, VOI should not be allowed to enforce the Employment Agreement due to an alleged prior material breach.
Court’s Analysis. In determining whether to grant VOI’s request for a preliminary injunction, the Court was required under Federal Rule of Civil Procedure 65 to analyze whether VOI established the following four elements:
- A substantial likelihood of success on the merits.
- A substantial threat of irreparable injury if the preliminary injunction was not granted.
- That the threatened injury to VOI outweighs the harm an injunction may cause Haas.
- Granting the injunction would not disserve the public interest.
Substantial Likelihood of Success on the Merits
First, in addressing whether VOI had a substantial likelihood of success on the merits, the Court analyzed Haas’ defenses. In the original Employment Agreement, VOI and Haas agreed that if a controlling interest of VOI was sold at any time during his employment, then he would receive a payment of $100,000. Haas argued he was entitled to that sum because when he was terminated in March 2020, VOI was in negotiations to be acquired and that his termination was therefore in bad faith. He further argued that VOI kept the Employment Agreement and obligation to pay under the Agreement alive by trying to enforce the non-compete.
The Court disagreed, noting that Haas’ arguments ignored the Separation Agreement he signed after he was terminated. Haas was aware that VOI was being sold at the time of signing the Separation Agreement, but the Separation Agreement, unlike the Employment Agreement, makes no mention of a post-termination payout. On the other hand, the Separation Agreement made it clear that any non-compete clauses from the Employment Agreement were still in effect.
Next, the Court focused on whether VOI had a legitimate business interest in enforcing the full scope of each of the restrictive covenants, as required by Fla. Stat. § 542.335(1)(c). VOI argued that the restrictions were protectable due to its confidential business information and its substantial relationship with its customers. The Court found that, although VOI was unable establish a substantial relationship with its customers, it did establish its interest in its confidential business information. Specifically, the Court found that VOI’s confidential business information existed in its referral sources, patterns of customer preferences and needs, specific customer purchasing information, VOI’s costs and margins, and VOI’s marketing and sales strategies.
The Court was not persuaded by Haas’ argument that he did not use any VOI confidential information. The Court said it was sufficient that Haas had access to this confidential information. Haas’ argument that VOI had no protectable interests in Key Opinion Leaders because they were industry leaders and not specific to VOI was also found to be unpersuasive. The Court found that VOI endeavored to keep the identity of who it designated as a Key Opinion Leader confidential for the purposes of its own marketing strategy, thus that information was considered confidential and a protectable interest.
Finally, the Court analyzed whether the contractually specified restrictions were reasonably necessary to protect VOI’s legitimate business interests. VOI argued that its two-year industry-wide, world-wide prohibition on competition was necessary. The Court, however, only agreed that some degree of restriction was warranted to protect VOI’s confidential business information; it was not persuaded that restrictions of that length of time and geographic reach were reasonably necessary under the facts of the case.
More specifically, the Court found that VOI presented no evidence that a two-year restriction was necessary based on the nature of the confidential information at issue or the way that industry operates. There was no evidence showing the confidential business information would remain viable and relevant for two years. There was also no evidence that Haas took any business records with him and it was unlikely he would carry that information in his head over the span of two years. As a result, the Court found narrowed the non-solicit and non-compete restrictions from two years to one year.
The Court then analyzed the geographic scope of the restrictive covenants. The Court found that it was reasonable to restrict Haas’ work at trade shows and labs across the United States. Haas also worked to develop VOI’s interests in Australia, but there was no evidence he did so anywhere else in the world. Thus, the restriction narrowed from worldwide to the United States and Australia.
Substantial Threat of Irreparable Harm and Balance of Harms
Under Florida Statute § 543.335(1)(j), the violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. Since the Court found that VOI, for the purposes of the preliminary injunction motion, established that it had an enforceable non-compete agreement with Haas, VOI was entitled to a presumption of irreparable harm. Haas’ argued that VOI was unharmed because it had not identified any exclusive customer that it sought to protect. But the Court stated that very purpose of Florida’s rebuttable presumption of irreparable harm is to ensure that an employer does not have to wait until it has been harmed by the loss of a specific customer to obtain a preliminary injunction.
The Court then analyzed whether the threatened injury to VOI outweighed the harm an injunction may cause Haas. VOI was threatened with the potential loss of its confidential business information, which it spent many years and dollars creating. On the other hand, Haas maintained that enforcement of the restrictive covenant would force him into unemployment during a global pandemic.
The Court was not convinced that the harm occasioned by enforcing the terms of an employment agreement that Haas willingly entered into outweighed the harm threatened by VOI’s potential loss of its confidential business information. The Court was concerned, however, with Haas’ ability to support his family during the COVOID-19 pandemic, so it limited the scope of the injunction to allow Haas to continue employment with Arthrex in a limited capacity.
The Court found that the entry of a preliminary injunction in this case would serve the public’s interest in protection and enforcement of contractual rights that were found enforceable under Florida’s restrictive covenant statute. The Court also required that VOI obtain a surety bond in the amount of $150,000 to cover the costs and damages that may be incurred by Haas in the event he is found to have been wrongfully enjoined after a trial.
Takeaways. The three most notable takeaways for employers and employees litigating non-compete agreements include the following:
- First, for employees, there is a very real need to have an employment attorney determine what rights and potential legal claims are being given up when signing a severance agreement. While it is not always practical for an employee to have an attorney review an initial employment agreement, it is imperative that an employee seek the advice of an employment attorney before signing any subsequent employment agreement or a severance agreement. In this case, Haas forfeited a potential $100,000.00 payout in exchange for a much smaller $21,000 payout pursuant to a severance agreement. He also re-affirmed in the severance agreement his commitment to abide by the original Employment Agreement’s restrictive covenants. Haas may have been in a much better financial position and in a better position to defend against the restrictive covenants had he had the advice of legal counsel before signing his severance agreement.
- Second, when a restrictive covenant dispute cannot be resolved pre-lawsuit, those defending a non-compete lawsuit should insist that a court conduct a full evidentiary before a ruling is made on a request for a preliminary injunction. In this case, both sides submitted competing affidavits, but neither requested an evidentiary hearing. The Court decided this case based solely on the affidavits and other written documents submitted – no live testimony. It might not have made a difference in the end but requesting an evidentiary hearing would likely not have hurt Haas.
- Finally, at least for now, those defending a non-compete lawsuit should address with a court whether the COVID-19 pandemic impacts an individual’s ability to obtain new work. As this case shows, COVID-19 may impact whether a restrictive covenant is seen as overbroad or over burdensome. A court may be more inclined to limit the scope of an injunction if it believes an employee cannot find another job due to the pandemic.
Cantrell Zwetsch, P.A. is a litigation boutique that focuses its practice on competition law, employment law, and business disputes throughout Florida and Georgia, including the cities of Tampa, St. Pete, Clearwater, Sarasota, Fort Myers, Key West, Miami, Fort Lauderdale, West Palm Beach, Jacksonville, Orlando, Gainesville, Tallahassee, Pensacola, Savannah, Macon, Augusta, and Atlanta.