Florida’s 5th DCA has issued an opinion that reaffirms the importance of customer relationships and customer goodwill in non-compete cases. The decision breaks no new ground, but instead, demonstrates what we have known all along: Florida courts will uphold aggressive non-compete agreements when those agreements are used to protect customer relationships.
The facts of the case are a bit messy, but here you go: Judy Schneider owned a business that provided civil service of process training and consulting to Florida sheriffs. In short, this involves training Florida sheriffs offices on how to properly serve papers, serve writs, execute on property and the like. Schneider split up the business and sold the “training and manual writing” portion to a company called Avalon Legal Information Services. She sold the “consulting” portion to an attorney named Gerard Keating. It seems a bit ridiculous to draw a distinction between training and consulting, but that’s what happened. The consulting side involved providing piece-meal advice to sheriffs’ offices. The training side involved formal training programs. To complicate matters, Schneider worked for with both Avalon and Keating. As part of her employment with Keating, Schneider signed a non-compete agreement. The agreement provided that, aside from her role as an instructor and manual writer for Avalon, Schneider would not compete with Keating or solicit any of his civil process consulting contracts in the state of Florida for three years following the termination of their independent contractor agreement.
In 2012, Schneider opted not to renew her agreement with Keating. Instead, Schneider began working exclusively with Avalon, where she undertook efforts to expand the company’s offerings. You can see where this is going: Schneider helpedAvalon expand from training and manual writing into the world of civil process consulting. Avalon then began offerring new products and services, like a “Help CD and 24/7 telephone support.” In short, Avalon was directly competing with Keating, and sending direct solicitations all sheriffs’ departments throughout the state of Florida. Over the course of the following year, sixteen sheriffs’ offices cancelled their contracts with Keating and signed on with Avalon. As expected, Keating filed a lawsuit against Avalon, its owner George Kent and Schneider.
The trial court ruled in favor of Keating, and entered a preliminary injunction. On appeal, the 5th DCA affirmed. The 5th DCA’s decision is, essentially, based on customer relationships and customer goodwill. First, the facts clearly revealed that Schneider had solicited Keating’s clients in violation of the non-compete agreement. Avalon was roped into the mess under a tortious interference theory. In delving into the merits (i.e. legitimate business interest), the court held that the non-compete was justified as a means of protecting “substantial relationships with existing and prospective clients” and “client goodwill.” Avalon and Schneider attempted to argue that Schneider had long-standing relationships in the industry, relationships that she had before she ever began working with Keating. After all, Schneider had worked for the Volusia County Sheriff’s Office for more than 30 years, and had worked in the business of civil process consulting before Keating entered the industry. The court rejected that argument, finding that Schneider had sold all of that to Keating: Remember, Schneider sold the consulting business to Keating for $200,000. Keating bought the business, the client relationships and the customer goodwill.
In the end, the court ruled that Schneider was free to solicit customers (for consulting services) who were not already under contract with Keating and not already identified as prospective customers. Beyond that, Schneider could continue providing training and manual writing services as she had always done.
I understand the appellate court’s reasoning. The decision is a reasonable one given the facts. That said, the opinion raises some difficult questions regarding customer relationships. Florida 542.335 protects “substantial customer relationships.” In other contexts, Florida courts have held that no substantial customer relationship exists where there is no exclusive relationship, the customers are known throughout the industry and contracts are awarded through open bidding. Here, the customers are sheriffs’ departments throughout the state of Florida. Although these department’s may have had an exclusive relationship with Keating for civil process consulting, many of them still worked with Avalon for formal training. Beyond this, the “customers” (sheriffs’ departments) would be well-known to anyone in the civil process training/consulting industry. And one can assume that, as state agencies, there would be some competitive process involved in winning these contracts. In other words, the departments would want bids, they would want free competition and they would award contracts to the company with the most competitive pricing. In fact, that’s exactly what happened: Avalon (and Schneider) undercut Keating’s prices and sixteen sheriff’s departments jumped ship. To me, this suggests that the relationships at issue were not “substantial customer relationships” within the meaning of Florida 542.335, as interpreted by Florida courts. Further, this suggests that goodwill is not at issue. Instead, we’re dealing with pure price competition. And Keating has managed to convince a Florida appellate court to shut that competition down.
The case is Avalon Legal Info. Services, Inc. v. Keating, 5D12-78, 2013 WL 843033 (Fla. 5th DCA) Mar. 8, 2013)