In a prior post, I touched on how Florida law permits a court to enforce a non-compete agreement against a third party who was not a party to the underlying agreement. See, e.g., Leighton v. First Universal Lending, LLC, 925 So. 2d 462, 465 (Fla. 4th DCA 2006). Before a court can enjoin a third party from violating a non-compete agreement, however, the third party must receive notice and have an opportunity to be heard. Id., citing Sheoah Highlands, Inc. v. Daugherty, 837 So.2d 579, 583 (Fla. 5th DCA 2003). This post will look at how courts in other jurisdictions resolve claims seeking to enforce non-compete agreements against non-parties.
In 1997, the Indiana Court of Appeals issued a decision summarizing the case law regarding enforcement of non-compete agreements against third parties. See Norlund v. Faust, 675 N.E.2d 1142 (Ind. Ct. App. 1997). In Norlund, an ophthalmologist/employer sought to enforce a non-compete agreement against a former employee and the employee’s wife. Both the employee and his wife were ophthalmologists. After working for the employer for a couple of years (under an employment agreement that contained a non-compete clause), the employee left his employer and loaned his wife $30,000 to start a competing ophthalmologic practice. Id. at 1147.
The trial court in Norlund found that the employee had directly breached the non-compete agreement. The court further found that the employee’s wife had indirectly breached the non-compete agreement and entered injunctions against both the employee and his wife enforcing the terms of the agreement. Id. at 1148. On appeal, the court of appeals agreed with the trial court that the employee’s wife, and the business she created, should be enjoined from competing with her husband’s former employer. Id. at 1155. The appellate court in Norlund looked for guidance to other states in considering its decision, noting that “Indiana case law provides little guidance on this question …” Id. at 1156. Interestingly, one of the first decisions cited by the court was a Florida decision holding “that the rule that a stranger to a covenant may be enjoined from aiding and assisting a covenantor in violating his covenant is supported by an overwhelming weight of authority.” West Shore Restaurant Corp. v. Turk, 101 So.2d 123 (Fla. 1958); see also, McCart v. H&R Block, Inc. 470 N.E.2d 756 (Ind. App. Ct. 1984)(emphasis added).
It is helpful to understand the reasoning behind other court decisions enforcing non-compete agreements against a non-parties. In McCart, for example, the court reasoned that to allow a non-party to a non-compete agreement compete with a spouse’s former employer “would frustrate the purpose of the agreement” between the employer and employee. The court would not allow an employee’s spouse to compete if the intention was to “circumnavigate justice.” McCart v. H&R Block, Inc., 470 N.E.2d at 762.
In Arwell Div. of Orkin Exterminating Co. v. Kendrick, 267 N.E.2d 352 (Ill. App. Ct. 1971), the court held that the non-compete agreement could be enforced against a former employee’s spouse, noting that a “party that induces another to violate his contract may be restrained from such conduct.” The court further found that if a party “knowingly participates or aides another in the violation of the contract, such conduct may be regarded as inducement. Id., 267 N.E.2d at 354.
Even though a non-party may be enjoined from breaching a non-compete agreement, there must still be evidence that the enjoined party aided or operated in concert with the original party to the agreement. Norland v. Faust, 675 N.E.2d at 1157, citing Russell v. Mullis, 479 So.2d 727 (Ala. 1985). In Russell v. Mullis, a convenience store owner sold his two stores and in doing so, signed a non-compete containing a 10 year duration and a 10 mile radius. The seller’s wife owned a portion of the land on which the stores were situated and used her portion of the sale proceeds to start a competing convenience store. Id. The competing store was owned and operated by the seller’s wife, not the seller. The wife obtained the financing, negotiated with suppliers and had licenses issued in her name. Her husband, who had sold the prior stores, did not assist his wife in any way. Id.
The court in Russell recognized that a stranger to a non-compete agreement may be restrained from aiding and abetting another party in breaching the agreement. However, the facts in Russell did not support such a restraint. In Russell, the party seeking to enforce the non-compete agreement offered no evidence that the seller’s wife was acting as a front for the seller. Simply because the parties are married will not make them alter egos for one another. As such, the wife in Russell was free to start a business independent of her husband.
The point of the above cases is a simple one. In the course of non-compete litigation, a court may enforce the terms of the non-compete against a party or company that never signed the agreement. What is important is that the party seeking to enforce the non-compete agreement convince the court that the non-party acted in some way that helped another party breach the non-compete agreement. If the non-party is acting as a proxy for the party to the agreement, the court may be more inclined to enforce the non-compete agreement against the non-party. If the non-party, however, can show that his actions were not intended to frustrate the purpose of the non-compete agreement, but instead motivated by reasons independent of the agreement, a court will be less inclined to enjoin the third party.