Florida Statute section 542.335(1)(b) provides a nonexclusive list of "legitimate business interests" that are protected under non-compete agreements. "Customer, patient or client goodwill" are among the interests included in the statute’s list of legitimate business interests. In order to understand how Florida courts protect customer goodwill, it helps to understand how courts define goodwill. The law on this subject, unfortunately, is rather thin. This post will look at those cases which have addressed customer or client goodwill in the context of a non-compete agreement.
Definitions of Goodwill
There are multiple definitions for goodwill. From an accounting perspective, goodwill may include the value of a company’s intangible assets such as its reputation among clients. Another definition of goodwill is "[t]hat part of business value over and above the value of identifiable business assets." See
http://www.valuadder.com/ glossary/business-goodwill.html. Using this definition, factors that contribute to a company’s goodwill include its going concern value, excess business income and expectation of future economic benefits. Id. Under this definition, companies have an interest in protecting goodwill because its goodwill represents earnings that are in addition to the ordinary return on business assets. Id.
The legal definition of goodwill differs considerably from the definition used in the accounting profession. In California, for example, goodwill has been defined as a the expectation of continued public patronage. Cal. Bus. & Prof. Code Sec. 14100. Other courts have defined goodwill as a preexisting relationship arising from a continuing course of business. Wellspan Health v. Bayliss, 2005 PA Super 76 (Pa.Super.Ct. 2005) (recognizing that "the interest protected under the umbrella of goodwill is a business's positive reputation.") Goodwill includes such things as customer names, addresses and the requirements or needs of the customer. Donahue v. Permacel Tape Corp., 234 Ind. 398, 127 N.E. 2d 235, 240 (1955).
Awarding Damages for Harm to Goodwill
In Insurance Field Services, Inc., v. White & White Inspection, 384 So.2d 303 (5th DCA 1980), Florida’s 5th District Court of Appeals examined how a company lost goodwill due to a former employee breaching a non-compete agreement. Insurance Field Services provided underwriting and auditing services for the insurance industry. The employer’s branch manager, while still working for the employer, started a competing business even though the employee had signed a two year non-compete agreement. Id. at 305. Evidence at trial demonstrated that the employee-manager solicited longstanding clients of the employer and told customers that the employer was going out of business (which was not true). Id. Over the course of a couple of months, the employee was able to establish business relationships with many of the employer’s former customers.
On appeal, the 5th DCA in Insurance Field Services found that the employee’s interference with the employer’s customers caused the employer to lose profits. Id. at 308. The Court of Appeals affirmed the trial court’s award of damages, in part, because of the harm caused to the employer’s goodwill from the actions of the former employee. According to the Court of Appeals, "goodwill [is] accomplished when a client becomes accustomed to dealing with someone who is regularly performing a service." Id. at 308. The damages awarded by the trial court, and upheld by the Court of Appeals, were due to the loss of goodwill caused by the employee’s conduct. Id.
Protecting Goodwill Through Injunctive Relief
A company seeking to protect its customer goodwill is not limited to damages. Courts will also grant injunctive relief in order to protect this business interest. In NAPCO v. Moore, et al., 196 F.Supp. 1217, 1230-31 (M.D.Fl. 2002), the United States District Court for the Middle District of Florida granted injunctive relief to "maintain long standing relationships and preserv[e] the goodwill of a company built up over the course of years of doing business." In granting the injunction, the district court in NAPCO found that the former employee of the company had solicited customer’s of the employer, in violation of a non-compete agreement, and that the "net effect of this solicitation has a high possibility of permanently damaging the reputation and goodwill of [the employer]." Id. at 1231.