Defining a Non-Compete Agreement
The term non-compete agreement generally refers to a contractual provision between two parties where one party agrees not to compete with another party. Most often, such an agreement is entered into in a business relationship between an employer and an employee. However, these agreements also may be entered into between vendors, contractors, and other parties. In the employment context, these agreements typically come in two forms: a non-compete agreement and a non-solicitation agreement. Further, as will be discussed below, both of these agreements also may become full-blown contracts.
The purpose of the non-compete agreement is simple – to protect the interest of the party desiring the protection from a competitor or a former employee. The goal is to prevent the other party from competing against you. A non-compete agreement, however, should not be confused with a contract that is designed to protect an intellectual property right, such as copyrights, trademarks, and patents. The distinction between the two is not meant to be all inclusive or absolute and parties are certainly free to enter into a contract that seeks to protect both interests.
In the employment context, the essential components of a non-compete agreement are: (1) a restriction on the activities that an employee may engage in after ceasing their employment; (2) a timeframe during which such activity restriction is applicable; and (3) geographic area over which the restriction applies. Many non-compete agreements contain overlapping or parallel provisions.
For example, the non-compete agreement may say that, for the period of twelve (12) months following the termination date of employment, the employee is prohibited from performing work of the same nature for any competitor company in the United States. As the example shows, the agreement may contain three distinct provisions that overlap. First, the restriction is for twelve (12) months and some courts have held that upon a showing that such a time period is unreasonable or excessive, they are willing to "blue pencil" the time down to something more reasonable. Second, the restriction may still be reasonable even if the geographic area is the entire United States, especially in the instance where the employee had been a high level or executive employee of the former employer with relationships and goodwill with consumers nationwide. Finally , on its face, the agreement is still prohibitive only of competitors. The practical effect, however, is a restriction on any kind of employment that causes the employee to compete with the employer. Indeed, given the principal-agent theory of several states, some actions by an employee would cause a violation of their fiduciary duty.
What this means is that the employee may be restricted from following up on business leads or customers that the former employer would be entitled to pursue as a part of their business.
For instance, using the above example, let’s say that an employee who has a non-compete is terminated. The twelve (12) month period of restriction passes but there are still prospective and/or active customers that the employee serviced before the termination of their employment. Based on the general principal-agent theory, it may be difficult for the employee to try to come back into direct contact with such prospective or active customers and avoid competing with the former employer.
Deciding whether or not an existing non-compete agreement is enforceable can be difficult. Several non-compete clauses are overbroad or unenforceable, but the facts that lead to that conclusion may be unique, limited, or otherwise hard to see. As it relates to drafting a new non-compete agreement, whether you have a prior agreement also under Tennessee law as a part of a merger, transfer, or some other business relationship, the scope and structure of the agreement should be very specific and carefully considered.
Examples of these include the duration of the agreement, the scope of services or activities in which the employee would be prohibited from engaging, and the geographical scope of the agreement. The potential remedies for breach of the agreement also are very important. Careful consideration should be given to whether or not to seek to enjoin a competitor’s or the former employee’s conduct and pursue damages for actual harm suffered under breach of contract theories. Each situation is different so the remedy should be tailored accordingly.
State law may also affect the criterion considerations so you should be cognizant of the applicable standards that may be used to determine the enforceability of a particular agreement and how it was drafted.
The Legal Landscape of Non-Compete Agreements in Tennessee
Non-compete agreements in Tennessee are largely governed by common law rather than statute. Case law has established that there is no "magic formula" for determining the enforceability of non-compete agreements, but several factors are considered.
The Court looks to see if the agreement adequately protects the employer’s business interest. Does the agreement place an undue burden on the employee? Does the agreement impose undue hardship on the employee or is it injurious to the public? If the Court believes that the non-compete agreement is for longer than is necessary to protect the employer’s business interest it will void the agreement in its entirety. Generally, the courts only allow blue-penciling and the reformation of non-compete agreements in the limited circumstances where the contract is more than likely valid, where the parties intended to be bound and the Court can reform the contract without invalidating the entire agreement.
Many judges have stated that they are reluctant to reform non-compete agreements because they are contracts of adhesion. A contract of adhesion is a standard-form contract that is offered on a take-it-or-leave-it basis. They are normally drafted unilaterally and presented to the other party without allowing for negotiation. If a contract is clearly not advantageous to the employee a court may enforce the non-compete only in part. Tennessee courts also write their opinions so that they protect employees as much as possible because they believe that the more favorable the Court is to employees the more likely they will be trusted to fairly enforce the terms of the contract. An employee should always try to negotiate their own provisions to help minimize the risks of a possible non-compete suit.
Enforcement Standards In Tennessee
A Tennessee non-compete agreement is typically enforced if it is reasonable in scope, geography, and length of duration. However, a number of factors are considered by the courts in determining whether or not a non-compete is reasonable. In addition to the considerations noted above, the need for customer protection and the effect on the employer-employee relationship are also reviewed by the courts. Also, the loss of jobs in the community may have an effect as a consideration. Tennessee non-compete provisions have been voided where the employer already has sufficient protection through other legal means and where the risk of loss of employment would be detrimental to the local community.
If a restriction sought by the employer is not deemed reasonable by the courts, instead of tossing out the whole provision, the court is allowed to revise the covenant in order to confine it to the appropriate scope. The court can revise or strike a provision rather than rejecting the entire covenant, which provides some relief to employers. However, the employer is not guaranteed to receive the relief that it seeks. After a careful review, the court can strike down any or all of the non-compete or non-solicit provisions.
General Issues and Conflicts
A common challenge an employee may face with non-compete agreements in Tennessee involves whether the scope of the agreement is reasonable. As evidenced by the number of articles and cases dealing with this issue in Tennessee, plenty of employees have been forced to battle their former employer on the grounds that the restrictions are unreasonable. The typical requirements for non-compete agreement in Tennessee require some sort of legal notice of the restriction and that the restriction is a reasonable one. A common question a court must deal with when deciding the reasonableness of a restrictive covenant in Tennessee is whether the agreement is more likely to hurt the employee than to help the employer.
Whether a non-compete agreement is reasonable is often a battle of the experts. Employers will typically present evidence from a manager or some type of supervisor to support its argument that the agreement is needed to protect its business. Employees, however, will characterize the employer’s business as something that could be easily replicated by a competitor. While Tennessee citizens can be a moving target, a large business that has specific customer lists often has an easier time convincing Tennessee courts that its business requires more protection to stay competitive.
The type of information that is protected by a non-compete agreement is also an issue in many cases. Employees will try to justify that their actions did not violate the non-compete because the information they accessed was public or could easily be found. Examples of public access could be that the customer list is available on a website or that products or services are sold in public stores. Employers routinely argue that this information is trade secrets, confidential information or proprietary to the business. Typically, employers will be successful in convincing the court that the information the employee is supposed to protect is private, but it’s an uphill battle for the employee that is worth fighting.
One of the most common reasons individuals find themselves in a dispute over a non-compete agreement in Tennessee is when the employee says he/she was never hired pursuant to the agreement. This would commonly happen where the individual signed the non-compete agreement on his/her first day of employment. The employer may have very little documentation proving that the agreement was actually signed at the time alleged. It is important that Tennessee employers are prepared to prove that the non-compete agreement was signed at some point in the employment relationship. Without such evidence, the weight of the evidence would favor the employee.
Non-Compete Agreement Alternatives
Another option that is arguably more common than the non-compete is the non-disclosure or confidentiality agreement. Where an employee will come into contact with certain employees’ personal/proprietary information in their work, it can be very prudent for the company to contractually obligate those employees to keep company information confidential.
Other less restrictive alternatives to a non-compete include a non-solicitation agreement with the employee and/or a customer non-solicitation agreement. A non-solicitation agreement is when the company contracts with the employee to not directly solicit the company’s customers for a period of time after employment has ended. In some cases, an agreement with the business’ customers can be helpful, depending on whether or not a similar agreement with employees was used . If an employee is under an agreement to not directly solicit the company’s customers, the company may benefit from a customer agreement as well so that if a customer directly solicits an employee, it is not a breach of contract. In other instances, having no customer non-solicitation agreement might suffice, on the basis that the agreement with the employees prevent them from breaching. Ultimately, these alternative agreements should be tailored based on the particular circumstances and the type of competitors the business faces.
As we mentioned before, there are many restrictions to the scope and limitations of a non-compete agreement. Accordingly, a helpful alternative route is to work with an attorney to determine whether a contract should be signed or if there are other ways to protect your business.
How to Draft an Enforceable Non-Compete Agreement
The first step is to include a geographic scope that is reasonable for your business model. Non-compete agreements can be found to be overly broad when they apply to too large of an area. You should ensure that the geographic area in which you compete with your employees is clearly defined. The next consideration is whether the time period of restrictions is reasonable for your industry. A good rule of thumb is to choose a time period that is approximately 1-2 years from the date an employee is terminated. Tennessee Courts in the past have found restrictions over two years to be excessive. The key to drafting a non-compete agreement that has a better chance of being upheld by a Tennessee Court is to ensure that it is no broader than is necessary. At the very least, your non-compete agreement should limit competition in the geographic location that the employee was actually involved in competing in.
Case Studies
In 1990, in the case of Sanders v. Acxiom Corp., Tennessee’s Court of Appeals ruled that a non-compete agreement signed by former employees was unenforceable as it prohibited them from being employed by any competitor "in any capacity," and the company had not shown a legitimate and protectable business interest in enforcing the non-compete. At the time, Acxiom touted itself as "a data-collection agency and "one of (sic) the most sophisticated and comprehensive commercial database in North America," providing businesses with names of potential customers and other information derived from government tax and census records and other reliable sources. However, the court agreed with the trial court that Acxiom had not shown it had a legitimate and protectable business interest in preventing its employees from becoming employed by a competitor, especially since Acxiom’s alleged database was "somewhat different from those of its competitors as it is not a mail order list broker."
A "trade secret" as defined in Tennessee’s Uniform Trade Secrets Act (UTSA) encompasses "information… that (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, other persons who can obtain economic value from its disclosure or use [and] (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." In 2008, the Nashville Business Journal reported on three cases, including that of the as-yet-defunct 360 Media Group, LLC that put the UTSA’s trade secret protection to its severest test. Of the 360 Media Group, LLC case, a Davidson County High Court judge went so far as to declare the plaintiff a "bad actor," but she still allowed the company to recover from the defendants for misappropriation of trade secrets . The plaintiff pointed to a spreadsheet it called its "client list," which had been given to each employee and because it contained the names and addresses of all clients and tools used to measure the success of the company’s marketing campaigns, such as the number of people who opened an email or clicked on a specific link, it asserted the spreadsheet was a stolen trade secret. Nevertheless, to prevail on its trade secret claim, plaintiff needed to prove the spreadsheet was more than just a customer list: it needed to show the spreadsheet was actually a "customer list plus something else". However, the court said the spreadsheet was "a customer list and nothing else."
In 2013, a federal court in Middle Tennessee weighed into the debate over non-compete agreements and held that two former employees of an accounting firm were subject to a restrictive covenant preventing them from soliciting business from their former employer’s clients, both in the geographic area where they lived and worked and when their prior employer was in the process of merging with another agency. The court was particularly swayed by the fact that the agreement specifically defined the restrictive covenant’s geographic region and limited the length of time the employees would be bound by that covenant. The federal court found that the covenants did not impose an undue hardship on the former employees, while distinguishing the case from Sanders v. Acxiom by noting that the Sanders decision turned on the lack of a legitimate protectable business interest.
In 2017, the Tennessee Court of Appeals in Fite v. Cantaloupe Marketing Company ruled that a non-compete agreement signed by a car wash manager was enforceable even though it restricted him from soliciting work from the car wash’s manager, and its clients, based in part on "the particular circumstances set forth in the employment contract" and the nature of the specific industry.
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