Evaluating Non-Compete Agreements Under Tennessee Law
We are often asked by clients to provide advice regarding the enforcement of non-compete agreements under Tennessee law. This post will provide a general overview of the way Tennessee courts evaluate non-compete agreements.
Non-compete agreements are disfavored in Tennessee. However, as a general rule, non-compete agreements will be enforced if there is a legitimate business interest to be protected and the time and territorial limitations are reasonable. There are several fact-specific factors that courts consider regarding both the “legitimate business interest” element and the “time and territorial” elements of non-compete agreements.
Tennessee Court of Appeals Decisions
The following excerpts from Tennessee Court of Appeals opinions provide a good overview on the law that Tennessee courts apply when considering whether to enforce a non-compete agreement:
Generally, covenants not to compete are disfavored in Tennessee but will be enforced if they are deemed reasonable under the particular circumstances. While there is no inflexible formula for deciding the ubiquitous question of reasonableness, the Tennessee Supreme Court has described the analysis to be used:
… if there is a legitimate business interest to be protected and the time and territorial limitations are reasonable then non-compete agreements are enforceable. Factors relevant to whether a covenant is reasonable include: (1) the consideration supporting the covenant; (2) the threatened danger to the employer in the absence of the covenant; (3) the economic hardship imposed on the employee by the covenant; and (4) whether the covenant is inimical to the public interest. Also, the time and territorial limits must be no greater than necessary to protect the business interest of the employer.
Protecting Legitimate Business Interests
In considering the relevant factors, a threshold question is whether the employer has a legitimate business interest, i.e., one that is properly protectable by a non-competition covenant. The basic requirement for enforceability of a covenant not to compete is the existence of a legitimate business interest which is properly protectable and is actually protected by the agreement. There is no legitimate interest in protection from competition, only from unfair competition.
Non-competition agreements are generally disfavored in Tennessee as a restraint on trade. They are not, however, per seunenforceable. Rather, they are to be construed in favor of the employee. As noted by the trial court, in order to enforce the non-compete agreement, the employer must establish that it has a legitimate business interest that warrants the protection of a non-competition agreement. If the employer has a protectable business interest, the court then continues its analysis of the reasonableness of the non-competition agreement.
In order to establish a protectable business interest, the employer must show “special facts present over and above ordinary competition” such that the employee would have an unfair advantage over the employer absent the non-competition agreement after his employment has ended. In determining if there would be such an unfair advantage, the court must consider (1) whether the employer provided specialized training, skill, or knowledge to the employee, (2) whether the employee was privy to business secrets and confidential information, and (3) whether the employee had such repeated contact with the employer’s customers that the customers would tend to see the employee as the “face” of the company. These factors, individually or together, may give rise to a protectable business interest.
As to training, after employment has ended, an employee may use his general skill and knowledge, either acquired during the course of employment or brought into the employment relationship, even if the employee acquired the knowledge and skill through expensive training. The employee’s use of specialized or unique skill or knowledge acquired through special training may be restricted by a non-competition agreement “at least when such training is present along with other factors tending to show a protectable interest.” (“Training in conjunction with other factors has … been cited as a factor in upholding the reasonableness of a covenant.”). The court must draw a line “ ‘between the general skills and knowledge of the trade and information that is peculiar to the employer’s business.’“ They must determine “whether the skill acquired as a result of [the training the employee received] is sufficiently special as to make a competing use of it by the employee unfair.”
Likewise, the employer may have a legitimate business interest warranting the protection of a non-compete agreement if the employee’s repeated contacts with customers would cause the customers to tend to associate the employee with the employer. In the customers’ eyes, the employee must become the “face” of the employer.
The Vantage Technology court stated: This relationship is based on the employer’s goodwill…. [As the employer's agent], the employee is made privy to certain information that is personal, if not technically confidential. Because this relationship arises out of the employer’s goodwill, the employer has a legitimate interest in keeping the employee from using this relationship, or the information that flows through it, for his own benefit. This is especially true if this special relationship exists along with the elements of confidential information and/or specialized training.
Thus, the employer may have a protectable interest in the relationship between the employee and its customers because that relationship is based on the employer’s goodwill.
Drafters of noncompete agreements must carefully prepare their agreements to comply with Tennessee law or the agreement will not be enforced. Business Litigation over non-compete agreements often focuses on the application of the “time and territorial” elements and the “legitimate business interest” elements to the unique facts of their employment relationship.