Florida law allows employers to protect themselves by entering into noncompete agreements with employees. Such agreements generally provide that if the employee ceases to work for the employer, the employee may not work for a competitor or take on former clients of the employer for period of time and/or in a fixed geographic area.
Violations are generally enforceable by injunction - a court can prohibit a violating former employee from working for a competitor or otherwise violating the agreement. The agreement may also allow for monetary damages to the employer.
There are limits to monetary damages that can be imposed. In a recent case, an insurance agency entered into a noncompete agreement with one of its agents. The agreement provided that the insurance agency would receive as liquidated damages in the event of a breach of the agreement by the agent (a) $10,000, plus (b) the entire commissions earned by the agency on the accounts sold and/or serviced by agent during the 24 months before the agent ceased to work for the agency. The agent stopped work for the agency and went to work for a competitor, violating the agreement.
The agency obtained a damages award for$161,572.88 under the liquidated damages provision. The agent challenged the damage award, claiming that the liquidated damages provision was unenforceable as a penalty.
The appellate court noted that parties to a contract may stipulate in advance to an amount to be paid as liquidated damages in the event of a breach, provided that the damages resulting from the breach are not readily ascertainable, and provided that the sum stipulated as damages is not so grossly disproportionate to any damages that might reasonably be expected to follow from a breach that the parties could only have intended to induce full performance, rather than to liquidate their damages. If, however, a penalty provision is disguised as a liquidated damages provision, it is unenforceable. The theory is simply that we do not allow one party to hold a penalty provision over the head of the other party "in terrorem" to deter that party from breaching a promise.
In the case at issue, the court had a problem with three aspects of the liquidated damages provision. First, the agency was entitled to 100% of the commissions payable to the agency on the agents accounts for the prior 2 years - however, if the agent had stayed with the firm some portion of those fees would have been payable to the agent so ALL of the commissions payable to the agency is not a fair measure of damages to the agency. Second, the damages were based on ALL of the agent’s former accounts, not just the ones that followed the agent to her new place of work. Again, this was deemed to be an unfair measure of damages suffered by the agency from the breach of contract. Lastly, in addition to these penalties, another $10,000 penalty was thrown in for good measure.
Based on these observations, the appellate court held that the monetary damages were in the nature of a penalty and were not enforceable as liquidated damages. Using the case as a guide, employers can allow for monetary damages for these types of breaches, but they must be a fair measure of actual damages likely to be suffered from the breach.
JANE MARIE BURZEE, Appellant, v. PARK AVENUE INSURANCE AGENCY, INC., Appellee. 5th District. Case No. 5D05-3608. Opinion filed December 29, 2006.