In our recurring “State-by-State Smackdown” series on the evolving law with respect to covenants not to compete, we’ve described the traditional balancing-test approach that is the law in the majority of jurisdictions as the Legitimate Business Interest or “LBI” test. In understanding this shifting landscape, we’ve typically highlighted statutes and/or judicial opinions in jurisdictions that have begun to shift away (or even depart entirely) from the classical LBI analysis.
Today, we’re doing something a little different, taking our cue from a recent New York state appellate decision: Brown & Brown, Inc. v. Johnson, 980 N.Y.S. 2d 631 (App. Div., 4th Dep’t, February 7, 2014). Read on.
For the majority of state jurisdictions that have retained the LBI test, we’ve noted that although laws vary state-by-state, one can usually generalize that under an LBI regime, the way in which one would litigate a noncompete clause is by challenging the reasonableness of the kind of restrictions placed on the employee, the duration such restrictions apply, and/or the geographical scope in which such restrictions are meant to apply. Even though the state laws differ, the same general principles typically inform courts across different LBI jurisdictions.
You might suspect that there’s something motivating our use of weasel words like “general” and “typically” in the previous sentence, and you’d be right. Today, we’re looking at two states that both fall under the LBI rubric, but nevertheless have applications of the LBI test that diverge so broadly that the above-referenced New York appellate court in Brown & Brown subsequently described the Florida law as “truly obnoxious” to the public policy of New York. Id.; slip op. at 4-5. How is this possible?
First, both states clearly fall within the “LBI” rubric. In Florida, the LBI doctrine was first developed by the courts, and then subsequently codified by the legislature as § 542.335 of the Florida Statutes (2002). See Passalacqua v. Naviant, Inc., 844 So.2d 792, 795 (Fla. DCA, 4th Dist. 2003). Under the Florida statute, an employer seeking to enforce a noncompete must first prove a legitimate business interest, § 542.335(1)(b); upon doing so, a noncompete will be enforceable “so long as such contracts are reasonable in time, area, and line of business.” Id. at § 542.335(1).
New York’s LBI test, on the other hand, has developed entirely through case law; nevertheless, it is seemingly quite similar to Florida’s; under New York law, a noncompete is reasonable if it “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999) (internal citations omitted).
And here’s where our cautionary tale begins. When Florida-based employer Brown & Brown, Inc. hired Theresa A. Johnson, it required her to sign an employment agreement containing several covenants not to compete. That agreement also contained a choice-of-law provision specifying that, in the event of any dispute arising under the agreement, the parties agreed that Florida law would apply.
Thus, when Brown & Brown terminated Johnson in 2011 and decided to sue her in New York for breaching the noncompete clauses contained in her employment agreement, it may not have expected to face a substantive motion by Ms. Johnson challenging the validity of Florida law, and, as a result, throwing out Brown & Brown’s non-solicitation and non-inducement claims against her. (Although perhaps it should have.)
So what happened? To figure that out, we need to delve into the precise way in which the Florida legislature codified the LBI test. As we’ve described previously, most courts interpret the second prong of New York’s version of the LBI test – that the clause must “not impose undue hardship on the employee” – as requiring the court to look into the duration, scope and applicability of the clause at issue. This is, of course, exactly what the Florida statute says. See § 542.335(1).
The devil, as they say, is in the details. And as it turns out, the New York appellate court thought that the problem comes first from subsection (1)(g), which prohibits a court from considering “any individualizedeconomic or other hardship that might be caused to the person against whom enforcement is sought,” as well as the following subsection (1)(h), requiring the court to construe a noncompete “in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement.” Brown & Brown, slip op. at 4.
As a result, the New York court held that enforcing the Florida law in New York would be “truly obnoxious” to the public policy of that state – and so it refused to do so, even though the parties otherwise agreed that Florida law would apply. Id.
And that, in a nutshell, is why we continue to run this series. If you’re an employer whose reach extends into multiple jurisdictions – or an employee at such a business – then you need to know the often finely-grained distinctions as to how courts in those jurisdictions will interpret your covenant not to compete, even if those jurisdictions all ostensibly fall within the traditional “LBI” model.