Is this 11th Circuit Case on Non-Competes a Game-Changer?
Under section 542.335, Florida Statutes, the violation of an enforceable restrictive covenant such as a non-compete agreement creates a presumption of irreparable harm to the party seeking enforcement. Irreparable harm is one of the key elements needed for an injunction, i.e. a court order preventing the former employee from continuing to violate a restrictive covenant.
Section 542.335 also provides that “[i]n determining the enforceability of a restrictive covenant, a court…. [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.”
I have always understood these provisions to mean that if a former employee was in violation of a valid restrictive covenant, i.e. one that was reasonable in time, area, and line of business, and supported by one or more legitimate business interests, the court was prohibited from considering the hardship the employee would suffer if an injunction were entered. See, e.g., DePuy Orthopaedics, Inc. v. Waxman, 95 So. 3d 928, 940 (Fla. 1st DCA 2012) (rejecting former employees’ argument that they would suffer harm if they were enjoined, as being in conflict with section 542.335); N. Am. Products Corp. v. Moore, 196 F. Supp. 2d 1217, 1231 (M.D. Fla. 2002) (holding that under section 542.335, “the Court is precluded from considering the individual economic hardship that the ex-employee would suffer if the covenant is enforced.”).
Not so, according to a recent decision by the Eleventh Circuit Court of Appeals, TransUnion Risk & Alternative Data Solutions, Inc. v. MacLachlan, No. 15-10985, 2015 WL 5042255 (11th Cir. Aug. 27, 2015) (unpublished).
TransUnion sued its former employee Daniel MacLachlan for violating his non-compete agreement. The federal district court entered a preliminary injunction enjoining MacLachlan from working for his current employer or any business similar to TransUnion. MacLachlan appealed, arguing that the district court erred in applying section 542.335 because it is inconsistent with Rule 65 of the Federal Rules of Civil Procedure, which governs injunctions.
The Eleventh Circuit agreed with MacLachlan, in part. The court rejected MacLachlan’s argument that section 542.335 is inconsistent with Rule 65 on the issue of irreparable harm. While section 542.335 creates a presumption of irreparable harm, it does not relieve the party seeking enforcement to establish irreparable harm, as Rule 65 requires. Rather, the court noted, section 542.335 “prescribes how irreparable injury is established in the restrictive covenant context.” (Emphasis supplied).
But the court agreed with MaClachlan that the district court erred by failing to consider the potential hardship to MacLachlan when “balancing the harms” under Rule 65. As noted above, under section 542.335, “[i]n determining the enforceability of a restrictive covenant, a court … [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” But under Rule 65, courts are directed to “balance the harms” by evaluating the threatened injury to the party seeking enforcement against the possible harm to the defendant if an injunction is granted.
This apparent conflict is not a conflict at all, the court reasoned. Rather, one must distinguish between the enforceability of a restrictive covenant and the enforcement of an already enforceable restrictive covenant. MacLachlan’s agreement was enforceable; therefore his violation of the agreement created a presumption of irreparable harm. But in determining whether an injunction was an appropriate and effective remedy, the court was required to consider any harm that MacLachlan would suffer if an injunction issued. The court therefore dissolved the injunction and remanded the case to the district court to balance the harms as required by Rule 65.
The TransUnion case is a potential game-changer. If courts accept its reasoning, former employees will be armed with a powerful new defense – that an injunction is inappropriate because it will cause the former employee hardship. This defense, though available under many states’ laws and oft-cited by former employees defending against actions to enforce non-compete agreements, has been widely rejected by Florida courts since section 542.335 was enacted into law in 1996.
Whether TransUnion is groundbreaking or anomalous remains to be seen. It is an unpublished decision, which means that it is not binding precedent, though it may be cited as persuasive authority. In addition, TransUnion was decided in the context of Federal Rule of Civil Procedure 65, so its applicability in state court is open to question. That said, Florida civil procedure also requires courts to “balance the harms” when deciding whether an injunction is appropriate, so the logic of TransUnion arguably applies with equal force in state court. But to follow TransUnion, courts will have to depart from nearly 20 years of precedent.