The value of your business comes from a variety of sources: inventory, trademarks, equipment, trade secrets, customer lists, and goodwill. Protecting these assets is critical to the long-term success of your business. One of the best ways of ensuring this protection is via a non-compete agreement. This will allow your business to prevent someone who has or had business relationship with your business from becoming direct competition.
The well-known use of a non-compete is to prevent a former employee or owner from directly competing. However, it can also be used to prevent competition from contractors, licensees, franchisees, and distributors. A properly drafted non-compete agreement can be a very powerful tool in protecting your business in a wide variety of its business dealings.
All that said, for a non-compete to be effective, while at the same time preventing a business from casually wielding such power, the law requires that a non-compete agreement be reasonably necessary to protect a legitimate business interest. If it does not, a court will not enforce the non-compete. The law defines a legitimate business interest as including, but not necessarily limited to:
- Trade secrets.
- Valuable confidential business or professional information that otherwise does not qualify as a trade secret.
- Existing substantial relationships with specific prospective or existing customers, patients, or clients.
- Customer, patient, or client goodwill associated with:
- An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;
- A specific geographic location; or
- A specific marketing or trade area.
- Extraordinary or specialized training.
When a business attempts to enforce a non-compete, in addition to proving that it has a legitimate business interest, the business as has the burden of proving that the non-compete is reasonable in length of time and geographic scope. The non-compete should only be as broad in time and location as is necessary to protect the legitimate business interest. For example, a non-compete for a business that only operates in Miami that prevents its former CEO from competing anywhere in Florida may likely be seen as unreasonable as the business does not operate in the entire state. On the other hand, if the business operates throughout the Western Hemisphere a non-compete that prohibits the former CEO from competing anywhere in North America could very well be enforceable.
The nature of the relationship between the business and the person the business is trying to prevent from competing also plays a factor in determining reasonableness. Non-competes are utilized for a variety of business relationships: employees, contractors, partners, licensees, and former owners (the seller in a business acquisition). Florida law provides that non-competes against employees that are less than six months in length are presumed reasonable and over two years are presumed unreasonable, whereas a non-compete against the seller of a business, anything less than 3 years is presumed reasonable and over seven years is presumed unreasonable. But keep in mind these are presumptions that can be defeated, so simply having all your employees sign non-competes with a one-year term will not necessarily be deemed reasonable by a court.
Ser & Associates regularly used non-competes to assist clients in protecting their on-going business. If want to ensure your business is protected, contact us today at 305-222-7282.
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