Part 17 of “The Restricting Covenant” Series: Realtors, Real Estate Agents, and Restrictive Covenants
At least once a month I receive a postcard in the mail from a local, regional or national realtor about homes sold recently in my neighborhood. These glossy postcards typically feature a specific real estate agent with his or her photo, name and telephone number. What these postcards don’t tell you, however, is whether the agent is subject to a non-compete agreement. Because I’m always looking for interesting topics to discuss related to restrictive covenants, this seventeenth article in The Restricting Covenant series explores realtors, real estate agents and non-compete disputes.
Not in My Neighborhood
Vassilia Mazzotta, a licensed real estate broker in Connecticut, signed an employment agreement with Century 21 Access America that included a two-year non-compete agreement within 15 miles from Century 21’s office. Connecticut is a state that will enforce reasonable non-compete agreements. Mazzotta resigned, joined a competing realty company, and continued to engage in the same services within the restricted area – the sale of single and multi-family residential real estate. Century 21 filed a complaint and obtained a preliminary injunction against Mazzotta. Access America, LLC v. Mazzotta (2005).
In her defense, Mazzotta first argued that she had signed her employment agreement under “duress.” The trial court was not persuaded, particularly in light of the significant benefits she had received under her agreement (including enhanced commissions). Although Mazzotta downplayed the training she had received from Century 21, the judge found “substantial evidence” that the training “did or should have made her a more productive salesperson, and that such training, combined with introduction to the plaintiff’s client base and its sales methods, created an interest which the plaintiff could legitimately seek to protect through a covenant not to compete.” In her termination letter, Mazzotta confirmed that she was well aware of her non-compete obligations by stating: “I understand what I have signed and I know you must do what you have to.”
Mazzotta’s arguments attacking the legality of her non-compete is similar to many other non-compete challenges in states that enforce them – specifically, she attacked the restrictions as overbroad and unreasonable in (a) duration and (b) geographic scope. As to geography, she offered testimony from an individual who was “well-credentialed in the realty business.” However, her expert acknowledged on cross-examination that a restriction on competition within the same town (and other contiguous towns) might be reasonable. As to the duration, Mazzotta asserted two arguments. She first explained that suspension of a real estate agent’s license in Connecticut is only up to one year, suggesting her former employer’s mandate of two years was punitive and unreasonable. Second, she claimed that she was associated with Century 21 only for one year prior to her decision to leave. However, the court noted that she had been associated with a predecessor firm which Century 21 had purchased, suggesting a much longer period of association with the office and, hence, access to its client base, sales methods, and other protectable interests. The court also noted that if, after a full hearing on the merits, the time restriction was deemed excessive, the court had the authority to reduce the duration under the “blue pencil rule.” See Part 7: Blue Pencils and Brokers. See also Century 21 Access America v. Lisboa (2003) (blue-penciling a two-year restriction down to one year).
Interestingly, a year before the Mazzotta case was decided, the same realtor, Century 21, had brought a similar complaint against another real estate agent, Mayra Garcia, before a different judge in a different judicial district in Connecticut, and was unsuccessful in obtaining temporary injunctive relief. Century 21 Access America v. Garcia (2004). The judge found “noteworthy” that Ms. Garcia was a new agent who had sold only one property with Century 21, and had acquired no confidential information after her training sessions with Century 21. There was no evidence that she was involved in marketing or the development of Century 21’s business or that she was privy to any valuable or strategic corporate information. The judge concluded that under these circumstances, “any enforcement of the restrictive covenant would merely be punitive and not reasonable.”
The Mazzotta and Garcia cases illustrate how each non-compete situation is very fact- specific, and how different judges, even within the same state, can vary from one another regarding the imposition of injunctive relief or the enforceability of non-competition agreements.
The Devil Is In the Detail
This next case, Tam-Bay Realty, Inc. v. Ross (1988), is an example of a court adhering to a literal reading of non-compete restrictions with no exceptions. William Ross purchased the Pinellas County portion of a real estate brokerage business from Doris Killian and Tam-Bay Realty, Inc. The purchase agreement had a non-compete clause that prohibited Killian and Tam-Bay Realty from “opening, operating, serving as an officer, director or other employee of any real estate brokerage business located within the geographical boundaries of Pinellas County, Florida,” for three years. After the sale, Killian opened an office outside the geographical boundaries of Pinellas County, but ran advertisements of homes located in Pinellas County, listed itself in the RELO Directory (a relocation directory used by realtors) as doing business in almost all Pinellas County communities, and advertised properties for sale in Pinellas County. The trial court found that Killian and Tam-Bay Realty had breached the non-compete agreement. However, a Florida appeals court reversed.
The appellate court ruled that Killian and Tam-Bay Realty did not breach the non-compete agreement because they did not compete with Ross by opening, operating, and serving as an officer or director of any brokerage business located within Pinellas County. They lawfully competed with Ross within Pinellas County from a brokerage business located outside of Pinellas County “thereby adhering to the literal meaning of the noncompete agreement.” Using this same literal reading approach, another Florida appeals court reached a similar result in Heiderich v. Florida Equine Veterinary Services, Inc. (2012), as discussed in Part 6: Veterinarians and Vehicles.
Do We Battle On Your Turf or Mine?
This last case discussed is not so much about the merits of the non-compete dispute, but rather involves who ultimately will decide the dispute – jury vs. arbitrator – two competing franchisees of Re/Max of New Jersey had to adjudicate their dispute. Castle Realty Mgt., LLC v. Burbage (2017).
Kevin Burbage, a licensed real estate broker in New Jersey, worked for Re/Max Realtor 1. He resigned and joined Re/Max Realtor 2. Realtor 1 sued Burbage and Realtor 2 in the Chancery Division (New Jersey’s civil judicial forum that adjudicates primarily equitable, non-monetary relief), seeking equitable and monetary damages for violating his non-compete agreement and engaging in unfair competition. Burbage and Realtor 2 moved to dismiss the complaint and compel everyone into binding arbitration. They argued that Realtor 1 and Realtor 2’s separate franchise agreements with their franchisor (Re/Max of New Jersey) required them to submit their dispute to mediation and arbitration. Both franchise agreements contained identical dispute resolution provisions regarding the Re/Max Dispute Resolution System. That motion was denied.
On appeal, the appellate court affirmed the lower court’s decision that the defendants did not have the right to force the plaintiff to arbitration. While the appellate panel found some validity to the defendants’ argument that the franchise agreements’ dispute resolution clause suggested that Re/Max intended to require all franchisees to resolve any disagreements through arbitration, it pointed to another clause in the franchise agreements, which expressly disclaimed any third-party beneficiary status from one franchisee to another. Because of this ambiguity between the two clauses, the court rejected the defendants’ position that the plaintiff had unequivocally agreed to submit this dispute to arbitration.
The Burbage case highlights the procedural minefield that can sometimes take on a life of its own before you ever get to a decision on the merits.