For most employees, their first recognition of what a non-competition agreement means comes after that employee has left work. Usually, it comes in the context of an employer contacting the employee and/or the new employer with notice of the agreement and the former employer’s intent to enforce that agreement. Over the course of my practice, I have helped both employers enforce these agreements and employees undo the enforcement of these agreements. Experience has taught me that the key to understanding and either enforcing or defending against a non-compete agreement is taking time to dig into the details.
Are non-compete agreements enforceable?
In Tennessee, non-compete agreements are part of a class of agreements known as restrictive employment covenants. These include not just non-compete agreements, but also non=solicitation (don’t contact our customers), no raiding (don’t hire away our employees) and non-disclosure (don’t talk about our stuff) agreements. This entire class of agreements is enforceable if they are reasonable under the particular circumstances.
What is a “reasonable”?
"Reasonableness" has several components, requiring both temporal and geographic reasonableness in the restrictions and that the restrictions are no more than necessary to protect a legitimate interest of the employer. In my experience, courts in Tennessee tend to place the most emphasis on whether the employer has a legitimately protectable business interest and if the agreement is reasonable in terms of not being more restrictive than necessary to protect that business interest.
Geographic and temporal reasonableness, requires that the restriction be only so broad as necessary to protect the employer's interests against unfair competition. There are no hard and fast rules as to what is reasonable - one must look at the business, what the employee was doing, the nature of the competition, the existence of trade secrets, and similar factors in drafting limitations which are not overreaching. The key issue for the employer on the front end is spending time going over these details to ensure that they are all addressed in the agreement. In this case, one-size-fits-all agreements definitely cause more problems for both the employer and employee than they solve.
Are there are any general guidelines?
When you are examining a non-competition agreement, the guidelines are based on the protectable business interest of the employer and the reasonableness of the limitations. Tennessee courts have generally upheld three-year periods (or temporal scopes) as being reasonable, but that is not true in every case. I have had cases in which the courts have reduced that time to only several months. Typically this sort of temporal limitation will be based on the nature of the business, the duties of the employee, how long it will take to effectively replace the employee and the needs of the employer.
With respect to the geographic scope, courts may uphold covenants of national scope, but this is pretty rare. If the employer has a legitimate interest in prohibiting nationwide competition it requires the employer to show that the scope of the employee's duties are such that the employee covers the entire nation. This may be the case for a national employer with an employee who works on a national level, but with anything less it is unlikely that a broad geographic scope would be supported. For most employees, the likely scope is significantly less and is usually limited to the area in which the employee actually performed services. In many instances that scope is limited to specific customers.
What is a legitimate business interest?
When considering the interest of the employer, Tennessee courts have looked to the reasoning behind the parties entering into the non-competition agreement. The first question is what did the employee do for the employer? As an example, if the employee was a salesperson or was the "face of the employer" it is more likely that a court would find the employer has a legitimate interest to protect. Presumably, the employer has spent time and money promoting that employee as the personification of the employer and building relationships with the customers. Courts are not going to let a former employee trade on the relationships created by the employer and will view that as an unfair competition.
Also, if the employee had some specialized knowledge of how the employer performed some unique process or something that was unique about the employer, that would also be protected. Courts typically consider that this knowledge gave the employer a competitive advantage and that knowledge may be a protectable business interest. This typically occurs with specialized technical or scientific positions. However, where many employers go astray is in trying to protect more mundane interests, even knowledge which the employee brought into the workplace or knowledge which the employee gathered as part of the employee's work. In one case, an employer attempted to protect the knowledge which an employee gained of how to use a janitorial machine that polishes floors. Most often this sort of information is not a protectable interest and the court in that case found that it was not.
The bottom line for this is that if the employer cannot articulate (and ultimately prove) a legitimate business interest to protect, the likelihood of enforcing a non-competition agreement is minimal. Again, for the employer, the lesson is to spend time on the front end working with counsel to create a valid, reasonable and enforceable agreement.
In each case, non-compete agreements are very serious matters that are examined on a case-by-case basis by the courts. Just as one-size-fits-all agreements often fail, so to do one-size-fits-all defenses to non-compete agreements. Whether there is an enforceable non-compete agreement depends on a very thorough examination of the facts of the case. This is why if you are uncertain about your non-compete rights, have been sued by a former employer, threatened with litigation or you are an employer trying to protect something in your workplace, you should consult with an experience non-compete attorney. To arrange a consultation to discuss your non-compete agreement, you can contact my office at (901) 881-6205 to schedule a consultation.