In November 2010, the Court of Appeals in Michigan upheld a lower court ruling and ordered the defendant to pay a total of $1,615,000 in damages and attorney’s fees. What did he do? The defendant, the seller in a dental practice transition, opened a new practice within the agreed upon restrictive covenant area. Only about 100 patients actually transferred, which represented less than 5% of the active patient base at the time of the sale. Even so, the awarded damages amounted to 80% of the purchase price plus over $42,000 in legal fees.
One of the primary provisions found in Purchase and Sale contracts and Employment, Independent Contractor and Partnership Agreements is a Restrictive Covenant, or Covenant Not to Compete. We are often asked whether these are enforceable in Florida.
YES, restrictive covenants ARE enforceable in Florida. In fact, a few years ago in Naples, a physician who opened up a practice on Marco Island had to pay $90,000 in damages plus legal fees and was prohibited from practicing in Collier County for two years because he violated the restrictive covenant from when he was an employee of an area physician.
That is just one example.
We are also asked questions that relate to the distance and time that is considered enforceable. Essentially, the restriction on the geographic area is situational and jurisdictional – it depends on where you live and what you are restricting.
Currently in Florida, the standard is that the area has to be “reasonable.” If required, the court will disregard the restricted area set out in the contract and define what is “reasonable.” This decision is usually based on:
1. Protecting the employer, buyer or remaining partner from damage that could be caused to the practice by a violation of the restriction and;
2. Protecting the employee, seller or departing partner from undue restrictions of the practice of their chosen profession.
Generally speaking, highly populated areas will generally have covenants with shorter distances whereas sparsely populated areas will have longer distances.
An example of an enforceable restrictive area could be a five to seven mile radius from the practice location in most metropolitan or developed areas of Florida. An unreasonable restriction would be a 25 mile radius from the same practice. On the other hand, it might be reasonable to enforce a 25 mile restriction in an urban area for a dentist that draws patients from a 25 mile radius or for a practice in a more remote or rural area.
With respect to time, Florida Statute §542.335 clearly provides the following restrictive covenant provisions:
1. For Employees or Independent Contractors: A covenant of 6 months or less is presumed to be reasonable
A covenant greater than 2 years is presumed to be unreasonable
For the time period between 6 months and 2 years, the employer must show that the time restriction is necessary to protect a legitimate business interest of the practice.
2. For Sellers: A covenant of 3 years or less is presumed to be reasonable
A covenant of greater than 7 years is presumed to be unreasonable
For the time period between 3 years and 7 years, the buyer must show that the time restriction is necessary to protect a legitimate business interest of the practice.
It is also made clear in the Statute that an injunction can be obtained from the court to prohibit the continued violation of a restrictive covenant and the court shall not consider any individual economic or other hardship that might be caused to the person. The prevailing party can also be awarded attorney fees.
The bottom line: Restrictive Covenants are enforceable in Florida and can be very expensive if violated. That said, Restrictive Covenants that are unreasonable will most likely not be enforced. Having an experienced professional who works with these types of agreements on a regular basis can prove to be invaluable (possibly worth even $1.6 million) whether you are buying or selling your practice.