A recent non-compete case out of Florida’s Third District Court of Appeals deals with the issue of restrictive covenants and independent clauses. Let’s take a look:
In the Trial Court
Defendants Dale Denton and David West were employees of Richland Towers, Inc. They signed employment agreements with Richland that contained, among other restrictive covenants, non-compete clauses. In 2008, Richland Towers, Inc. ceased its operations and its affiliate, Richland Towers, LLC took over its business. The defendants transferred their employment to Richland Towers, LLC and remained employed there until their departure in 2011. Immediately after their departure, defendants formed a company in direct competition with Richland Towers, LLC, allegedly in violation of their restrictive covenants. Richland Towers, Inc. and Richland Towers, LLC brought suit. In the lower court, Richland sought to preliminarily enjoin the activities of Denton and West, but the injunction was denied. Richland appealed.
In analyzing Richland’s likelihood of success on the merits (one of the three requirements for a temporary injunction), the lower court looked at two of the defendants’ contentions that success was unlikely. First, Denton and West offered that the restrictive covenants were unenforceable because Richland Towers, Inc. was no longer conducting business. The court did away with this contention because the contract allowed affiliates of Richland Towers, Inc. to enforce the covenants. Richland Towers, LLC was one such affiliate. Second, Denton and West alleged prior breach of the contract by claiming that they had not received bonus compensation per the terms of the contract. Denton and West argued that the prior breach rendered the contracts unenforceable and void in their entirety. The lower court agreed. The Third District, however, did not agree.
On Appeal to the Third DCA
The Third District stated that in order for the lower court to reach its decision, it must have concluded as a preliminary matter that each of the obligations at issue were dependent covenants. Let me explain: Typically, contracts are construed in their entirety. Some clauses in the contract are so essential to the entirety of the agreement that the entire contract fails upon their breach. These are dependent clauses. The contract depends on their execution. Other clauses are not so essential. When such inessential clauses are breached, damages may result, but the entire contract will not fail. These are independent clauses. The contract exists independent of their execution.
In Richland, the restrictive covenant section of the contract contained a subsection entitled, “Covenants Independent.” That clause read as follows:
Each restrictive covenant on the part of the Employee set forth in this Agreement shall be construed as a covenant independent of any other covenant or provisions [sic] of this Agreement or any other agreement which the Corporation and the Employee may have, fully performed and not executory, and the existence of any claim or cause of action by the Employee against the Corporation, whether predicated upon another covenant or provision of the Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of any other covenant.
The Third District found that this clause trumped the general rule that contractual covenants are considered dependent. The Court reasoned that the clause showed that, “the parties unambiguously intended that the covenants were independent.”¹ Though the lower court cited the above referenced clause, it concluded that the very nature of the employment agreement rested on Richland’s agreement to pay Denton and West. The lower court found that because Richland did not pay its employees as agreed, the contract failed. The Third District did away with this reasoning. The court stated that because the reasoning applies to any employment relationship, the reasoning must fail. The third district concluded that the law supports the position that employers and employees can agree by contract to provide that restrictive covenants are independent.
Relying on their reasoning, which was supported by the court’s own precedent, the Third District reversed the denial of the injunction and remanded for further proceedings.
For employers, this is a great ruling. Employers no longer have to worry that their own prior breach of an employment contact renders its restrictive covenants unenforceable. (At least if your case will be heard by the Third District.) Employers need only insert a provision in their restrictive covenant clause providing that the covenants are independent. That said, if you are reading to gain an understanding of the state of the law as it is, stop here. If, however, you are reading for an understanding of the state of the law as it should be, the rest is for you.
As I stated previously, the Third District rested its conclusion on its own prior precedent. Specifically, it relied on its decision in Reliance Wholesale Inc. v. Godfrey.² There, as here, the defendant claimed that an action for his breach of the restrictive covenants could not stand due to the plaintiff’s prior breach. There, as here, the trial court agreed. There, as here, the Third District reversed. It stated that the prior breach did not bar the action because the restrictive covenant provision contained an independent covenant clause. The precedent, it seems, lines up. Until you look at the case law the Third District cited in Reliance.
To come to their conclusion in Reliance, the Third District looked to Capraro v. Lanier Bus. Products, Inc., a Fourth District case.³ Again, the defendant in the lower court, Capraro, claimed that the action against him could not stand due to a prior breach by Lanier. The defendant alleged that the contract required Lanier to tell him trade secrets in addition to his other compensation. Capraro argued that Lanier’s failure to tell him trade secrets constituted a prior breach that rendered the contract void. The Fourth District agreed with the trial court. The trade secret language did not create an enforceable dependent covenant. The breach of the trade secret provision did not, therefore, render the contract void.
Note that the court did not look to whether or not the restrictive covenant clause was a dependent covenant; instead it looked to the provision of the contract on which the defendant relied to show prior breach. The Fourth District correctly stated that because the trade secret provision was independent, the contract was enforceable even though that provision may have been breached. Though the Third District cited this case in Reliance, it did not follow Capraro’s precedent.
If applied correctly in Richland, the precedent laid down in Capraro may have resulted in a different decision. The court would have restricted its reasoning to the compensation clause. The defendants in Richland argued that they did not receive bonus compensation per the terms of the agreement. If the court found that the payment of the salary was a dependent clause while the payment of the bonus was an independent clause, the decision to reverse and remand was the correct one. If the court found that the bonus clause was dependent, however, the entire contract would have failed. There would be no restrictive covenant at issue, as the independent clause in which the restrictive covenants were found cannot exist independent of a contract.
The court in Richland said as much itself. It stated that, “When a dependent covenant has been breached, the entire contract is virtually destroyed.” The problem with their decision is that the court went on to look at the wrong clause. Instead of looking at the the clause that the defendants urged had been breached to determine if that clause was dependent; the court looked at the restrictive covenant clause to determine if that clause was independent. Regardless of whether or not the court got the ultimate ruling correct, bad precedent has been set; precedent good for employers, but not good for the law.
¹Richland Towers, Inc. v. Denton, 2D12-5493, 2014 WL 941952 (Fla. 3rd DCA Mar. 12, 2014)
²Reliance Wholesale, Inc. v. Godfrey, 51 So. 3d 561 (Fla. 3rd DCA 2010)
³Capraro v. Lanier Bus. Products, Inc., 445 So. 2d 719 (Fla. 4th DCA 1984) approved, 466 So. 2d 212 (Fla. 1985)
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.