You Only Get One Chance to "Get it Right" With Contracts
Business is a contact sport. To build a great business you need people. People to sell and run and work your business.
With all those people, you’ll invariably run into one or two who won’t play by the rules. So, to protect you, Florida law lets you restrict employees so they can’t compete with you or steal your customers.
In August, an appeals court in south Florida issued an opinion that you probably haven’t heard about, but will impact all businesses that use employee non-compete agreements. This case shows why, with all important contracts, you don’t get a second chance to get it right.
In 2003, Mr. and Mrs. Williamson, the owners of Coastal Loading, a roof tile loading and hauling business, put it up for sale. In early 2004, two people decided to buy the business and negotiated an asset purchase contract. Among other things, that contract said that the Williamsons would agree “not to compete with the business being sold.”
As often happens, the buyer and seller signed the contract before they closed the deal. So, at the closing a few months later, the Williamsons and buyers negotiated and signed a separate non-compete and non-solicitation agreement. That agreement said the seller would not compete in the “roof tile loading” business for 5 years and would not “call on or solicit” seller’s customers.
Of course, a few months later the buyers discovered that Mr. Williamson had hauled roof tiles for a former Coastal customer. Mr. Williamson said the customer had called and requested his services.
The buyer filed suit to stop future competition. The trial court ordered the Williamsons not to engage in the roof tile hauling business and not to do business with the buyer’s customers.
The Williamsons appealed.
Now, non-compete and non-solicitation agreements are enforceable in Florida only if they meet certain statutory requirements. One of those requirements is that they be in writing and signed by the person who is restricted.
Based on that requirement, the appeals court removed the order, holding that the Williamsons did not breach the restrictive agreement.
The court said that roof tile hauling and roof tile loading are two separate businesses. Since the non-compete agreement only referenced roof tile loading, the Williamsons were not prohibited from roof tile hauling.
And, to add insult to injury, because the former Coastal customer contacted Mr. Williamson directly, the court also ruled that there was no violation of the non-solicitation agreement.
So, Mr. Williamson can work for his former customers as long as the buyers can’t prove he called on those customers. The buyers paid good money for a business and now have to compete with the sellers. And, the Williamsons get money from selling the business and can make more money competing against it.
Why? All because of a few simple words in a contract.
What does this mean for you?
First, this applies to more than business sales. The decision effects all non-compete agreements.
Next, the restrictive covenants you use must contain two things: an accurate description of all your business’ activities and language that automatically changes the description if those activities change.
Finally, all non-solicitation agreements must include a prohibition on accepting business from (and not just calling or soliciting) your customers. Without this prohibition, enforcing a non-solicitation agreement is very difficult - if not impossible - because you have to prove your employee actually solicited the customer.
What would happen if your employee uses your customer list or industry knowledge learned while working for to compete against you? Would he undercut your prices? Would she cherry pick your best accounts? What if you thought you were protected only to find out later that you weren’t?
Make sure you get your contracts right the first time so you don’t suffer a “Coastal Loading” disaster.