Strangely enough, the United States District Court for the Middle District of Florida has become a hotbed of non-compete litigation. That may simply be a product of national trends: As Dow Jones recently reported, companies are becoming increasingly aggressive on the non-compete front. More and more companies are requiring employees to sign non-compete, non-disclosure and confidentiality agreements. Consistent with this, Florida, like everywhere else, is seeing an uptick in non-compete litigation. A recent case out of the Middle District’s Fort Myers division raises a number of interesting issues.
The case pits an elevator sales and servicing company against a former employee. In August 2007, Larry Hubbard went to work for a company called General Elevator Sales and Service (GESS). When he was hired, Hubbard signed an agreement containing non-compete, non-solicitation and non-disclosure provisions. Hubbard’s job title was service operations manager. In that capacity, Hubbard supervised the company’s field mechanics and was involved in developing strategies and solutions for the company’s customers. In September 2011, a company called ThyssenKrupp (“TK”) acquired all of the interest in GESS through a stock purchase transaction. Hubbard stayed on at TK, working in the same job, until December 2012. He worked for GESS until December 2012 and then resigned.
At the time of his resignation, Hubbard told GESS that he was going to work as an elevator consultant, representing clients in reviewing elevator proposals.
Time out: One of the most interesting things about practicing law is that you learn about all sorts of different businesses. I have realized that there are hundreds of industries out there that I have never even thought about. Take the elevator industry as an example. Apparently, there are elevator consultants that work with companies (e.g. building owners) and help them evaluate proposals for new elevators.
But, back to the case: Hubbard leaves the company and says he is going to work as an elevator consultant. So, TK is a bit surprised when it learns that Hubbard is working for a company called General Elevator Solutions, or, GES and basically doing his same old job. According to the complaint, Hubbard and GES hatched a plan to steal TK’s customers.
I surmise that part of that plan (although perhaps not actionable and not discussed in the complaint) is the use of the name General Elevator Solutions and the acronym GES. Yes, the company has a different name. But the acronym’s GES and GESS and very similar. It’s kind of a perfect storm for client poaching and customer confusion: TK buys GESS and starts operating under the TK name. An upstart company, GES, enters the market. Hubbard jumps ship and starts working for GES. I’m sure some customers are a bit confused. You have TK. And then you have GES with Hubbard. It’s reasonable to suggest that some customers probably think the new GES and Hubbard is the same as the old GESS and Hubbard. Fascinating.
According to the complaint, the scheme worked like this: GES approaches TK’s clients and offers to arrange a free elevator inspection with an independent elevator consultant. The independent consultant? Hubbard. Hubbard does the inspection and identifies certain mechanical problems with the equipment. He documents these mechanical problems in a report that he provides to the customers. GES then says, “Gee, that report says you have some mechanical problems. You should switch your elevator business to GES.” And apparently, the plan is working: Multiple customers in Hubbard’s old region have notified TK that they intend to sever ties with the company. And most of these customers did so after getting the free inspection and report.
It appears that Hubbard has some problems. For that matter, GES also could have some problems, but they have not been named as a defendant in the lawsuit. TK may be waiting to see what discovery reveals before making the decision about whether or not to add GES as a defendant. As it stands, TK has sued only Hubbard. The complaint contains claims for breach of his non-compete agreement, but also claims for tortious interference, common law unfair competition, and violation of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”).
On June 25, the court denied Hubbard’s motion to dismiss. The sole defense raised in that motion was that TK could not enforce the non-compete agreement because (1) GESS, not TK, was a party to the agreement and (2) the agreement did not contain a provision authorizing enforcement by a party’s successor or assignee. In support of this argument, Hubbard relied on Florida’s non-compete statute, Fla. Stat. § 542.335(1)(f)(2), which provides in pertinent part:
“The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:
In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.”
The court rejected this argument, holding that the plain language of the statute merely provides that the court shall not refuse enforcement where there is a provision allowing for enforcement by an assignee. That language does not require a court to deny enforcement where such an assignment provision is lacking. Instead, the court looked to cases interpreting Florida law of commercial transactions. Under Florida law, the surviving corporation of a merger has “all the rights, privileges, immunities and powers” of the merged corporation. Florida courts, including the Middle District, have held that this general law of mergers applies in the non-compete context. The takeaway, on this point, is that a non-compete agreement can be enforced in the merger context, even if that agreement does not contain a provision expressly providing for assignment. From here, the case is headed for a hearing on a preliminary injunction.
Some Further Observations:
It will be interesting to see whether or not TK seeks to bring GES, the competing elevator company, into the mix. After all, GES and Hubbard appear to have acted in concert. GES allegedly gave Hubbard out to be an independent consultant, when, in reality, Hubbard’s elevator inspector license with the state of Florida indicates that he is affiliated with GES. Then there is the issue of the inspection reports, identifying certain mechanical problems with the elevators that TK was servicing. The content and veracity of these reports will be incredibly significant. Assume that the reports were completely false: the reports indicated mechanical problems that did not exist. If the reports were verifiably false, and customers left TK on the basis of those reports, this opens up a number of possibilities. In that situation, you could expect to see TK bring GES into the action and sue them for many of the same things: tortious interference, violations of FDUTPA, etc. But you could image more than that. This could be fraud. The reports are a misrepresentation, there’s reliance (albeit by a third party) and then damages to TK. Some states, like New York for instance, allow a fraud claim in that context (e.g. misrepresentation to a third party). Then you have defamation.
But consider the flip side. Assume the reports are entirely accurate: The elevators serviced by TK had significant mechanical problems. TK was doing a sloppy job of maintaining and servicing the elevators. Because of these mechanical problems, TK’s customers were put at risk of elevator malfunctions that could have resulted in serious bodily harm or death. Hubbard left TK because he knew about these problems and knew that TK did not take them seriously. Hubbard and GES were legitimately trying to help these customers and trying to keep them safe. What then? Throw out the possibility of fraud and defamation. Then, look at the tortious interference claim. If a person is warning these customers about legitimate mechanical problems (e.g. warning them of a threat) at least partially in the interest of keeping them safe, that suggests the conduct may be privileged. Then turn to the FDUTPA claim. Again, if GES is warning customers about a legitimate threat, that does not strike me as unfair or deceptive. In short, if the reports of mechanical problems are true, it completely alters the landscape of the case.
The case is Thyssenkrupp Elevator Corp. v. Hubbard, 2:13-CV-202-FTM-29, 2013 WL 3242380 (M.D. Fla. June 25, 2013).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. His office can be reached at 954-332-2380.