There have been a number of recent cases in Florida that deal with the issue of non-compete agreements and independent clauses. This is important because it directly impacts a party’s ability to raise certain defenses to enforcement of a non-compete agreement. Here is a hypothetical:
James works in pharmaceutical sales for a company called Florida Pharmaceutical Co. in Miami, Florida. His territory includes Miami-Dade, Broward and Palm Beach Counties. His targets are doctors— doctors’ offices, hospitals, healthcare facilities, etc. James signs an employment agreement (“the Agreement”) with Florida Pharmaceutical. Under the Agreement, James is paid a base salary plus significant commissions based on his sales volume. The Agreement also contains non-compete and non-solicitation provisions.
James works for Florida Pharmaceutical for seven years. Over the course of his seven years at the Company, James has generated millions of dollars’ worth of revenue for Florida Pharmaceutical. Eventually, he becomes a regional sales manager for the entire Southeastern United States. But then, things go south. The Company starts paying him dramatically lower commissions even though his Agreement has never changed. A few months go by. Each month, James calculates his commissions due based on his sales volume and collections. Each month, the Company is paying him thousands and thousands less than they should be. Eventually, James asks for an accounting to make sure he has been paid the correct commissions. Things get ugly and the Company fires him.
James knows everyone in the industry and is looking to get back in immediately. A few days after being fired from Florida Pharmaceutical, there are already several offers on the table from rival companies. James and his lawyer both assume that the non-compete agreement is completely unenforceable: After all, James agreed to the terms of the Employment Agreement in exchange for a certain compensation package. If the Company breached the Agreement by failing to pay agreed upon commissions, then that breach should discharge any obligations James has under the Agreement (including obligations under the non-compete provisions and other restrictive covenants).
The sort of defense at issue here is known as prior or antecedent breach. There are two parties to a contract. One of them – the first party – breaches the contract. Then the second party breaches the contract. Historically, the second party could defeat a claim for breach of contract by establishing that the first party committed its breach first (a prior breach), thereby relieving the second party its obligations under the contract. This makes a lot of sense. It seems fair and logical. Unfortunately, Florida law on non-compete agreements often does not make sense. And it has absolutely nothing to do with fairness.
Under Florida law, the prior breach defense to non-compete claims has been under attack for the past several years. The upshot of the recent case law: Companies can defeat any prior breach defense through use of certain contractual provisions. That’s right: In order for a company to take the prior breach defense completely off the table, all it has to do is include a provision in its agreements (employment agreements, asset purchase agreements, etc.) about all of the contractual provisions being independent covenants. In essence, the contract is drafted to say that each covenant – each agreement – operates independent of every other agreement in the contract. When contracts are drafted this way, it destroys the prior-breach defense. This is what current Florida law says.
Of course, this is beyond absurd. When someone enters an employment agreement and agrees to certain terms (e.g. a non-compete provision), they do so in exchange for certain compensation. If the other party fails to pay the agreed upon compensation, then the first party should not have to honor those other terms and restrictions (including the non-compete agreement). Just inserting a provision into a contract that says “These are independent covenants” does not make it so and should not be treated as a get out of jail free card. Unfortunately, I do not anticipate Florida courts changing this any time soon.
Bottom line: Before you make a business decision that involves a non-compete agreement or non-compete issues, speak with a lawyer who actually litigates non-compete cases and knows the law.
