Merchant Processing, “Sub-offices,” and Restrictive Covenants.

MERCHANT PROCESSING, “SUB-OFFICES,” AND RESTRICTIVE COVENANTS.

Written by Alfredo Dally

The credit card payment process is filled with middlemen working with each other to process payments. Merchant processing companies allow merchants to process credit card payments from their customers and help merchants manage their sales. Many merchant processing companies offer their services directly to customers, or alternatively, through an independent contractor via “sub-offices.” By virtue of working with the contracted company, independent contractors are able to gain valuable insight into the company’s business model and trade secrets. Therefore, given the possibility of a competing business using the company’s important matters against them, it is imperative that companies protect themselves contractually.

Restrictive covenants are often seen in employment contracts to protect a company from giving valuable and important information to a competing business. Under Florida law, restrictive covenants are permissible and regulated under Florida Statute § 542.335. For a restrictive covenant to be valid, a business looking to enforce a covenant must plead and prove the existence of a legitimate business interest. A legitimate business interest may include trade secrets, valuable confidential business or professional information, or extraordinary or specialized training, among other things.[1]

However, Florida law does not distinguish who a restrictive covenant can apply to.[2] Accordingly, a restrictive covenant can apply to an independent contractor, just as it would apply to a traditional employee.[3] When a merchant processing company decides to enter into an independent contractor agreement, the same rules apply in determining the enforceability and reasonableness of the restrictive covenant.

The application of restrictive covenants within the merchant processing field can be seen in Data Payment Systems v. Caso.[4] Data Payment Systems had entered into an independent contractor agreement with Ignite Payments that contained restrictive covenants of non-compete and confidentiality.[5] The defendants used their relationship with Data Payment to solicit existing Data Payment customers to move their business to the new merchant processing company that directly competed with Data Payment.[6] The Third District Court of Appeals reversed the trial court’s order denying injunctive relief for violating the restrictive covenant.[7] The Court in Caso explained that the trial court failed to consider Fla. Stat. § 542.335 when determining whether the irreparable harm prong for injunctive relief was met.[8] The violation of an enforceable restrictive covenant automatically creates a presumption of irreparable harm under the Florida law.[9]

Restrictive covenants between the merchant processing company and independent contractors must still comply with the reasonableness determination of time, area, and line of business required under Fla. Stat. § 542.335. However, because merchant processing takes place almost instantaneously between different states or countries, this may affect how area is considered in determining the applicability of a restrictive covenant. One example can be seen in Leedom Mgmt. Group v. Perlmutter.[10] In Perlmutter, Leedom Management Group and Paymaxx, who deal in merchant processing for the automotive industry in Florida, sued their former employee, Perlmutter, after she started her own merchant processing company in Tennessee and worked with a corporation in Texas that directly competed with Leedom.[11] The Court in Perlmutter held that the restrictive covenant was applicable to the Texas dealings because they were in direct competition with Leedom.[12] On the other hand, the Court found that the restrictive covenant were not specifically applied to Perlmutter’s new Tennessee company. The Court clarified that, “to the extent that Defendant, through Perlpay (the Tennessee company created by Perlmutter), is soliciting or attempts to solicit Leedom clients or otherwise discloses information not in the best interests of Leedom, the restrictive covenants are invoked.”[13] Had Perlmutter solicited her own clients outside of the geographic bounds of Florida, then there may not have been an issue with the restrictive covenant.

Unfortunately, Perlmutter may not provide the clearest answer to how a restrictive covenant would apply to merchant processing independent contractor contracts in terms of geographic reasonableness. While the Court in Perlmutter looked at the location where Leedom was soliciting its clients from to determine the geographic area where the restrictive covenant would apply,[14] this type of inquiry may not always be appropriate. Although not yet applied to restrictive covenants in merchant processing contracts under Florida law, many courts have found that a nationwide restrictive covenant is not invalid per se, so long as there is a necessity to protect the business interests of the business looking to enforce such a restrictive covenant.[15] Courts not only have the discretion to determine the reasonableness of the area and time limitations, but also the discretion to determine what limitations would be reasonable under the circumstances.[16] What may be reasonable in one case may be unreasonable in another case, and consequently, the limited case law is less equipped to reliably indicate the likely outcomes in future disputes addressing restrictive covenant applicability.

In sum, restrictive covenants are applicable and can be valid in contracts between a merchant processing company and its independent contractors. Still, the ultimate goal of a restrictive covenant is to protect the legitimate business needs of the company looking to enforce it,[17] and what constitutes a “legitimate business need” differs based on the industry. Therefore, even though Florida courts will protect merchant processing companies that enter “sub-office” or independent contractor agreements through enforceable restrictive covenants, it is crucial for merchant processing companies to be cognizant of how courts determine the reasonableness of time, area, and line of business criteria, required under Fla. Stat. § 542.335.

[1] Fla. Stat. § 542.335.

[2] See generally id.

[3] See Data Payment Sys. v. Caso, 253 So. 3d 53 (Fla. 3d DCA 2018) (applying the restrictive covenant requirements under Fla. Stat. § 542.335 to an independent contractor contract).

[4] Id.

[5] Id. at 55.

[6] Id. at 56.

[7] Id. at 58.

[8] Id. at 57.

[9] Fla. Stat. § 542.335(j); see also Caso, 253 So. 3d at 58.

[10] Leedom Mgmt. Grp. v. Perlmutter, No. 8:11-cv-2108-T-33TBM, 2012 U.S. Dist. LEXIS 35589 at *3 (M.D. Fla. Feb. 15, 2012)

[11] Id.

[12] Id. at 21.

[13] Id. at 22.

[14] See id. at 21-22.

[15] See Auto Club Affiliates, Inc. v. Donahey, 281 So. 2d 239 (Fla. 2d DCA 1973); see also Veterinary Orthopedic Implants, Inc. v. Haas, No. 3:20-cv-868-J-34MCR, 2020 U.S. Dist. LEXIS 163271 at *42 (M.D. Fla. Sep. 8, 2020).

[16] See Xerographics, Inc. v. Thomas, 537 So. 2d 140, 143 (Fla. 2d DCA 1988).

[17] See Fla. Stat. § 542.335.

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