A recent appellate decision out of New York raises some interesting issues for Florida employers and their out-of-state employees. The facts of the case are not extraordinary:
Brown and Brown, Inc. (BBI), a Florida company, has subsidiaries throughout the country. One of its subsidiaries, Brown and Brown of New York, Inc. (BBNY), hired Theresa Johnson (Johnson) to conduct actuarial work on its behalf. When Johnson started working, she executed an employment agreement. An integral part of the agreement was that the named parties to the agreement were Johnson and both BBI and BBNY. Remember this point, because its importance will come up later.
Also included in the agreement were certain restrictive covenants. The non-solicitation agreement barred Johnson from conducting business with any BBNY customer for a two-year period post-employment. The confidentiality provision protected the confidential information of both BBI and BBNY. Finally, the non-inducement section barred Johnson from soliciting BBNY’s employees for a two-year period after termination of the employment relationship.
After several years, Johnson was terminated and subsequently accepted employment with a competitor. BBI and BBNY then filed suit for, amongst other claims, breach of contract for violation each of the restrictive covenants. The issues relevant here are not so much the claims themselves, but the court’s decision with respect to the choice of law provision in the contract.
The employment agreement stipulated that it would be governed according to Florida law. New York upholds choice of law provisions under that framework unless there is no relationship between the law and the parties or transaction. In Johnson’s case, the trial court (the Supreme Court as this is a New York case) decided that choice of law provision was invalid because there was no such relationship between the law and the parties. BBI and BBNY appealed this decision, which brought us to the case at hand.
The appellate court agreed with BBI and BBNY that the Supreme Court erred in this matter. In reaching this decision, the court pointed first to the fact that one of the parties to the agreement, BBI, was a Florida corporation. (I told you that would be important.) The court also relied on the facts that BBI provided much of the material used by BBNY in conducting its business; that Johnson’s salary was administered in and paid out of Florida; and that Johnson traveled to Florida for meetings and training sessions. All of these factors, the court said, militate in favor of the existence of a relationship between the parties and Florida law.
The court went on, however, to invalidate the choice of law provision. Florida law, as it relates to restrictive covenants, states that courts, “[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.”¹ The New York appellate court held that the prohibition on consideration of the hardship to one of the parties to the agreement is “truly obnoxious to New York public policy [.]”²
On a meta-level, choice of law provisions are seen to provide consistency for businesses or individuals that conduct business across state lines. Courts typically articulate upholding the provisions as an effort to effectuate the intent of the parties to the agreement, all of whom are seen to have a vested interest in knowing what state’s laws will apply once the agreement is in force or being litigated. Where parties to an agreement have accepted a state’s laws as controlling, but the courts in another state refuse to enforce the provision on public policy grounds, legal constancy is necessarily eroded. Parties find themselves faced with questions there-to-fore unspoken: Where have courts refused to enforce? Where are courts likely to refuse to enforce in the future? Should we choose a different state’s laws as controlling? Are there other steps we can take to ensure that our choice is honored?
From the stance of the employee, this and similar rulings create fodder to go on the offensive with respect to otherwise enforceable restrictive covenants. Out-of-state residents who find themselves subject to a restrictive covenant with a Florida choice of law provision have new fuel to seek a declaratory judgment that the covenant is unenforceable. In at least four states, courts have determined that the Florida restrictive covenant statute is anathema to their established public policy.³
For employers, this ruling creates further need to ensure that employment agreements containing restrictive covenants are well drafted. First, including a choice of venue provision in the agreement will go a long way to ensuring that the choice of law provision will be upheld. Where employers have elected for out-of-state venue or not chosen a venue at all, it is imperative that they establish connections between the employee and the State of Florida. There is no reason for the court to reach the public policy implications of the choice of law if they can line item the provision due to an insufficient relationship between the parties and the state. The breadth of the restriction will likely be taken into consideration when the restriction faces a public policy challenge. Make the restriction sufficient to the ends you are trying to achieve without over-reaching.
One more point before I close. One of the reasons that the New York court refused even partial enforcement of the restrictive covenants was that the contract was not presented to Johnson until her first day of work. Johnson had already left her previous employer. Neither BBI nor BBNY offered anything in consideration for the employment agreement over and above employment, which obviously had already been bargained for. Don’t make this mistake. Present the covenant, or at least its terms, prior to hiring the employee. Otherwise, there may not be a contract.
¹Florida Statues §542.335(1)(g)
²Brown & Brown, Inc. v. Johnson, 980 N.Y.S.2d 631, 638 (2014)
³See e.g. Id; Carson v. Obor Holding Co., LLC 318 Ga.App. 645, 734 S.E.2d 477; Brown & Brown, Inc. v. Mudron, 379 Ill.App.3d 724, 320 Ill.Dec. 293, 877 N.E.2d 437; Unisource Worldwide, Inc. v. South Cent. Alabama Supply, LLC, 199 F.Supp.2d 1194 [Ala.].
Nathan Saunders is a trial lawyer and litigator at Jonathan Pollard, LLC. His office is based in Fort Lauderdale, Florida. He focuses his practice on competition, particularly cases involving non-compete, trade secret and antitrust disputes and represents clients in Florida and throughout the country. His office can be reached at 954-332-2380.