In Florida, a party opposing enforcement of a non-compete agreement may raise as a defense that the employer, or other enforcing party, no longer continues in the same business. Florida Statute § 542.335(1)(g)(2) provides that a court:
may consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.
Florida's Second District Court of Appeal recently addressed the cessation of business defense in Richland Towers, Inc. v. Denton, et al., No. 2D12-5493 (Fla. 2d DCA Mar. 12, 2014). In Richland, two key employees left their employer to start a competing business. The employees had previously signed non-compete agreements which precluded the employees from engaging in a competing business during their employment and for a period of time after their departure.
The employer in Richland brought suit against the employees, alleging breach of their employment agreements and seeking an injunction. The employees raised several defenses, one being that their former employer, Richland Towers, Inc., was no longer in business, rendering the non-compete agreements unenforceable.
The trial court rejected the employers' cessation of business defense and the appellate court agreed. The Richland court recognized the defense where an employer no longer continues in the same business if the discontinuation was not caused by the employee breaching the non-compete agreement. For example, suppose an employee is a sales rep and his district covers the entire State of Florida. If the employee leaves the employer to go work for a competitor, in breach of the employee's non-compete agreement, the employee cannot argue that the non-compete agreement is unenforceable because the employer no longer operates in Florida. It was the employee's breach (leaving his district in Florida to work for a competitor) which caused the employer's cessation of business.
The cessation of business defense did not apply in Richland as the employees' former employer designated a third party beneficiary, Richland Towers, LLC, who stood in the shoes of Richland Towers, Inc.. Although the employer, Richland Towers, Inc., ceased doing business in 2008, the non-compete agreements against the employees were valid through 2011. Equally important, the employment agreements identified the new entity, Richland Towers, LLC, as a beneficiary under the agreements. Even though the original employer was no longer in business, the non-compete agreements remained valid and enforceable against the employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
