News & Events

Tennessee Court of Appeals Tackles Issues Surrounding Preparation to Compete

As set forth in this link, I’ve previously written about the circumstances in which taking preparatory measures to compete crosses the line so as to become unlawful.  A couple of recent Tennessee Court of Appeals decisions provide more insight.

In Leslie’s Poolmart, Inc. v. Blue Wave Pool Supply of Memphis, LLC, Todd Heins worked as a manager at a Memphis store owned by Leslie’s Poolmart, a national swimming pool company.  Although he was subject to a nonsolicitation and noncompetition agreement, the agreement only prevented him from competing while still employed by Leslie’s.  In 2015, a customer, Jay Karcher, approached Heins about opening a competing business.  For several months thereafter, Karcher and Heins—while Heins was still employed by Leslie’s—scouted potential locations, filed articles of organization, and took other actions to prepare to open the business.

The following year, Heins resigned so that he could pursue the competing venture.  Leslie’s sued him for breach of contract, breach of fiduciary duty, and other causes of action.  The Tennessee Court of Appeals affirmed the trial court’s finding that Heins’ preparatory actions were fair game.  The court noted:

The relevant case law reflects that an employee is not prohibited, per se, from preparing to compete post-employment.  Competition is, obviously, a key element of the free enterprise system.  In the present case, the agreement at issue does not even purport to prevent an employee from competing directly with Leslie’s following his or her employment with Leslie’s.

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It is the apparent position of Leslie’s that Heins, in order to adhere to his contractual duties and fiduciary duty, somehow was compelled to reject Karcher’s idea, change the subject, or else resign on the spot if he wished to pursue the idea with Karcher.  This is neither what the law requires of employees nor what Heins’ contract with Leslie’s requires of him.

The court also noted that the outcome may have been different “[h]ad Heins undermined Leslie’s in some fashion while Heins still worked for Leslie’s.”  Leslie’s, however, had no evidence of any foul play, and therefore, Heins’s preparatory actions were acceptable.

In another case, Great Am. Opportunities, Inc. v. Patterson,[1] the Tennessee Court of Appeals enforced a provision of a non-compete agreement that prevented the defendant employee from “prepar[ing] to compete directly or indirectly” while still employed.  Before leaving to work for a competitor, the employee “concocted a plan to leave,” provided his new employer with a client list and sales estimate, and signed an agreement with his new employer.  Moreover, within four days after leaving, the employee established 12 customer agreements for his new employer despite only establishing half of that number for his former employer during the months leading up to his resignation.  According to the Court of Appeals, “[t]hese facts establish, at the very least, that Employee was preparing to compete and failed to dedicate his best efforts while still employed by” the plaintiff.

Employers wishing to prevent employees from preparing to compete should consider adding such language in their standard noncompete agreements.  For a discussion about what generally is considered to be permissible and impermissible, click here.

[1] In the interest of disclosure, Butler Snow has represented the plaintiff in this case.