Whose Relationships?
By: Matt McLauchlin
Section 542.335, Fla. Stat., which governs the enforceability of non-compete agreements in Florida, allows an employer to protect its “substantial relationships” with “specific prospective or existing customers, patients, or clients.” One issue that often arises in non-solicitation cases is who, as between the departing employee and employer, “owns” the substantial relationship with the customer or client. The default presumption is that an employee who is being paid by his or her employer to develop or maintain relationships with customers and clients to be serviced by his or her employer is developing those relationships for the employer. That is, just because the employee works to build the customer relationship, it was built for the employer, and the employee was specifically being paid for that service. Indeed, this circumstance would appear to be precisely the type of scenario that the “substantial relationships” portion of section 542.335 was intended to protect. A number of cases discuss and uphold this principle.
1. Customers Developed for the Employer, During the Employment, at Employer’s Expense.
In Reliance Wholesale, Inc. v. Godfrey, 51 So. 3d 561, 565 (Fla. 3d DCA 2010), the court found that an employer had the substantial relationships with specific prospective or existing customers in the circumstance when its former employee, during her employment and at the employer’s expense, attended several tradeshows where she “would go to meet and greet customers and potential customers, so as to establish personal relationships for business purposes.” The employee was given an expense account for the purpose of meeting and entertaining potential customers. It was only through these relationships that were established at the employer’s expense that the employee was able to take customers with her to her new employer. The court held that “[a]s with many sales positions, regardless of the industry, forming relationships with prospective and existing customers is invaluable and often vital for success.” Id.; see also, Bradley v. Health Coalition, Inc., 687 So.2d 329, 334–35 (Fla. 3d DCA 1997) (“[t]he purpose of the statutory provision is to prevent an employee from taking advantage of a customer relationship which was developed during the term of the employee's employment”); Hilb Rogal & Hobbs of Florida, Inc. v. Grimmel, 48 So. 3d 957, 961 (Fla. 4th DCA 2010) (“Based upon the statute's provision that ‘substantial relationships with specific prospective or existing customers’ is a legitimate business interest, it appears that even though Grimmel brought these customers into HRH, Grimmel was HRH's employee and that was what his job entailed. He was a sales producer and it was his job to find customers. Even though he was acquainted with some of these people before he worked for HRH, he did not have a prior business relationship with them.”)
2. Pre-existing Relationships of Employee.
In contrast to the foregoing situation, there may be particular factual circumstances when an employee may reasonably argue that certain customers should remain the employee’s customers upon the employee’s termination of employment. The outcome of this issue in any given case can be highly fact-specific and dependent upon the particular language of the non-solicitation provision. It might be possible that an employee who brings certain customers to her employer at the time of initial employment may be able to argue, upon later departing, that those customers were always “her” customers and she is free to solicit them. This argument would essentially be that the employer did not have the “substantial relationship” with those customers whom the employee initially originated and developed prior to the employment with the employer. The employee would argue that the employer did not obtain a “legitimate business interest” in those relationships just by hiring the employee. The resolution of this issue might come down to whether the employer helped financially support the employee in establishing, developing, or maintaining those customers. This will be fact specific. One can imagine a situation in which an employee established and developed at his own expense a number of clients who simply followed him to his new employer and the new employer did nothing financially to assist the employee in obtaining these customers. Perhaps in such a situation, the employee should be entitled to “keep” those customers, and a court’s task would be to determine which customers on the list of customers solicited by the employee during his employment were ‘antecedent’ customers versus customers developed during the employment relationship. If certain customers were customers of a sales employee before that employee began work for his employer, there may be circumstances where a court might find those customers to remain those of the departing employee and not of his now former employer.
The court in Hilb Rogal & Hobbs of Florida, Inc. v. Grimmel, appeared to recognize this possibility. There, the court held that the employer had substantial relationships with the customers solicited by the employee during his employment but suggested, in dicta, that the existence of an actual “business relationship” established between the employee and customers prior to becoming employed with the employer might alter the analysis. Id. However, an employee’s mere “acquaintance” with potential customers prior to signing the non-solicit covenant would not suffice to provide the employee any rights to those relationships. Id.
Other cases have also recognized that there may be circumstances when an employee may continue to solicit pre-existing customers he or she developed and brought to his or her employer at the time of initial hire, even despite the employee signing a non-solicit clause with the employer. This is particularly so if the non-solicit covenant does not clearly articulate that pre-existing relationships are part of the non-solicit and when the employer does not "pay" for the right to preclude solicitation of pre-existing customer relationships.
In Joseph U Moore v. Howard, 534 So.2d 935 (Fla. 2d DCA 1988), the appellate court upheld the trial court ruling that found the non-solicit clause, which precluded solicitation of "customers...of Employer" to be ambiguous and allowed the introduction of parol evidence. There was evidence that the employee had his own "preexisting" customers that he brought to the employer, so logically, those preexisting customers could not have been, at the time of signing the non-solicit, "customers...of Employer." The court stated, "The covenant… prohibits Howard from doing business with the 'customers ... of Employer.' These words are not defined in the agreement; if anything, at the time Howard entered into the agreement, his preexisting clients were not 'customers ... of Employer' and should be excluded on that basis." Id. at 936. There was further evidence in the Moore case of a verbal "promise" at the time employee was hired that his pre-existing customers were to remain those of the employee.
In Arthur J. Gallagher Svc. Co. v. Egan, the defendant employee argued that the former employer could not preclude him from soliciting his pre-existing clients. The court ruled otherwise, finding there that the employer had actually paid $140,000 to buy the employee's book of business when it brought him on as an employee. Arthur J. Gallagher Serv. Co. v. Egan, 12-80361-CIV, 2012 WL 12839373, at *6 (S.D. Fla. June 29, 2012), report and recommendation adopted, 12-CV-80361, 2012 WL 12838463 (S.D. Fla. Aug. 15, 2012), aff'd, 514 Fed. Appx. 839 (11th Cir. 2013). The court held that the monetary purchase of the pre-existing relationships was the necessary and sufficient consideration for the employer to gain a "legitimate business interest" in the pre-existing relationships. While ultimately ruling against the employee based on the particular facts, the Gallagher court essentially recognized that there are situations in which it might be appropriate for the employee to claim the employer does not have a right to preclude post-employment solicitation of his pre-existing customers. The Gallagher court recognized that there has to be some form of consideration being transferred to the employee for the employer to be able to claim a legitimate business interest in the employee’s pre-existing business relationships developed at the employee's or another’s cost.
Courts outside Florida also appear willing to consider an employee’s claim of the right to continue to solicit pre-existing customers brought by the employee into the employment relationship. In Hall v. Edgewood Partners Ins. Ctr., Inc., 878 F.3d 524, 529–30 (6th Cir. 2017), the employee was sued for violating a non-solicitation provision after leaving the employment of his employer. The employee claimed the right to solicit certain customers whose business and relationships he had developed prior to the employment relationship. The employee submitted evidence of “certain clients with which he formed relationships without any financial contribution from [his employer].”
The court found that the employer had no legitimate business interest in precluding the employee from soliciting clients ‘who came to the employer solely to avail themselves of the employee’s services and only as a result of the employee’s own independent recruitment efforts. Id. The court held as to this specific list of pre-existing customers, the employer “cannot enforce [the] non-solicitation agreement” but held that this was a fact specific inquiry and the list of pre-existing relationships had to be defined and segregated from other relationships that were developed during the employment period. Id. In so ruling, the court emphasized that the employer would not have a legitimate business interest in the employee’s pre-existing customer relationships as it had not “developed” or used its own “resources” in “recruiting and developing” such customers. Id.
Similarly, in BDO Siedman v. Hirshberg, the court held that the employer could not enforce a non-solicitation covenant against an employee to the extent it attempted to preclude him from soliciting and servicing customers that the employee had developed at his own expense prior to beginning his employment with the employer. BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1225 (1999). The BDO court reasoned that “[a] restraint is reasonable only 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.” Id. at 1223 (emphasis in original) (citations omitted). The BDO court found that the plaintiff (an accounting firm) had a legitimate interest in protecting against the defendant's competitive use of client relationships that the plaintiff enabled him to acquire through his performance of accounting services for the plaintiff's clients during the course of his employment. Id. at 1225.
However, the court also concluded that extending the restrictive covenant to prohibit the employee from soliciting the employee’s pre-existing clients with whom he did not develop relationships through his performance of accounting services during the course of his employment would constitute an unreasonable restraint. Id. It found that the employer did not have a legitimate business interest in the employee’s clients he brought to BDO. The court stated that “it would be unreasonable to extend the covenant to personal clients of [the employee] who came to the firm solely to avail themselves of [the employee’s] services and only as a result of his own independent recruitment efforts, which [the employer] neither subsidized nor otherwise financially supported as a part of a program of client development.” Id. It further reasoned that “[b]ecause the goodwill of those clients was not acquired through the expenditure of [the employer’s] resources, the [employer] has no legitimate interest in preventing defendant from competing for their patronage.” Id.
The court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dunn, 191 F. Supp. 2d 1346, 1352–53 (M.D. Fla. 2002), acknowledged the rationale and ruling in BDO but reached a different conclusion based on the facts of the case. In contrast to the situation in BDO, the employee in Merrill Lynch presented no evidence that he had obtained any of his clients “solely as a result of his own independent recruitment efforts, which Plaintiff neither subsidized nor otherwise financially supported as a part of a program of client development.” Id. See also, Leedom Mgmt. Grp., Inc. v. Perlmutter, No. 8:11-CV-2108-T-33TBM, 2012 WL 909322, at *7 (M.D. Fla. Feb. 15, 2012), report and recommendation adopted, No. 8:11-CV-2108-T-33TBM, 2012 WL 909311 (M.D. Fla. Mar. 15, 2012) (employer established the formation of a substantive business relationship and legitimate business interest sufficient to preclude employee from soliciting even his pre-existing customers).
In summary, if you are an employee who has developed a valuable book of business, make sure when you are negotiating an employment agreement with a new employer that you make it clear in your agreement that upon termination, you will be able to continue to solicit and service your pre-existing customer base and compete against your former employer with those customers. Include a specific list of these customers in your employment agreement. If you are an employer, make sure that if you intend on obtaining the benefit of your non-solicitation clause to extend to pre-existing clients and customers of a new employee that you document the consideration you are providing to the new employee to obtain a legitimate business interest in those relationships. You should expressly lay out this understanding in writing on the front end. Otherwise, expensive litigation over this issue will inevitably ensue following the employee’s departure.