This article was first published on HRLaws.com’s Tennessee Employment Law Letter by Butler Snow’s David L. Johnson
Clients like clear answers. “Is my noncompete agreement enforceable?” is a frequent question that, unfortunately, often doesn’t have a clear answer. Over the years, Tennessee courts have grappled with two deeply rooted principles: the freedom to enter into contracts vs. the public policy favoring free enterprise and competition. The outcome is that noncompete agreements are disfavored but will be enforced if they’re reasonable. Unfortunately, what’s “reasonable” is often in the eye of the beholder, and one judge can see things very differently than another judge.
A noncompete agreement, like any other contract, must be supported by consideration, or the exchange of something of value. Conditioning an employee’s hire on his execution of a noncompete agreement will be sufficient consideration. However, if an employee has already been working for the company, consideration becomes a bit more tricky. If the employer doesn’t offer something tangible (e.g., a pay raise, stock options, or more vacation), continued employment by itself can suffice if it ends up being for an appreciable amount of time after the agreement is signed.
The employer must also have a “protectable business interest” to warrant a noncompete agreement. In making that determination, Tennessee courts typically ask the following nonexclusive questions:
- Has the employee been privy to trade secrets or other confidential information?
- specialized training?
- Have customers associated the employee with the employer’s business to the extent that he essentially served as the “face” of the company?
What may be OK for one class of employees may not be OK for another class. At the end of the day, the question really is whether the employer would be placed at an unfair competitive disadvantage if the employee runs afoul of the contract.
If the employer can show that it has a protectable business interest, the restrictions on competition must be reasonably tailored to protect that interest. For instance, the geographic and temporal scope of the restrictions may not be excessive. A “one-size-fits-all” noncompete agreement for all employees likely will not be valid. A three-year worldwide restriction may be OK for a senior executive, but it probably wouldn’t be enforceable for an ordinary salesperson.
Finally, in determining whether the restrictions are reasonable, the court will balance the employer’s interests with the hardship placed on the employee as well as any public interests that may come into play. Along those lines, the circumstances under which the employee leaves may be pertinent. Needless to say, a judge probably will be more sympathetic to an employee who is laid off and is simply seeking to earn a living in the only industry in which she has worked as opposed to an employee who quits to accept a higher-paying job with a competitor.
David L. Johnson is a member of Butler Snow’s labor and employment group in the Nashville office. He focuses on business litigation, employment litigation, noncompete and trade secret matters, appellate issues, and intellectual property litigation. You may reach him at firstname.lastname@example.org.