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Legitimate Business Interest Needed to Enforce Tennessee Non-Compete Agreements

Posted on May 15 2016 3:03PM by Attorney, Jason A. Lee

The Tennessee Court of Appeals in John Jason Davis v. Johnstone Group Inc. v. Appraisal Services Group, Inc., No. W2015-01884-COA-R3-CV, 2016 WL 908902 (Tenn. Ct. App. 2016) discussed the enforceability of a non-compete agreement and a request for injunctive relief.  The key issues in this case was whether there was a legitimate business protectable business interest that would justify the enforcement of this non-competition agreement.  This case provides a very good overview of Tennessee law on the enforcement of non-competition agreements. 

 

The Court noted that non-compete agreements are disfavored in Tennessee because they restrain trade (citing Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471 (Tenn. 1984)).  However, the Court found that Tennessee Courts will still uphold agreements if the restrictions are reasonable.  Additionally, the time and territorial of limits of the agreement must be no greater than is necessary to protect the business interests of the employer (citing Matthews v. Barnes, 293 S.W. 1993 (Tenn. 1927)). 

 

The Court noted that the Tennessee Supreme Court’s analysis in the Hasty opinion is the key case law on the issue of whether a legitimate business interest justifies the enforcement of the non-competition clause.  Specifically, the Tennessee Supreme Court in the Hasty case said as follows:

 

Of course, any competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer.

 

Hasty, 671 S.W.2d at 473.  As a result, the employer trying to enforce the agreement must show special facts “beyond protection from ordinary competition that would give” the employee “an unfair advantage” in competing with the prior employer.  The Tennessee Court of Appeals elaborated on this requirement in Vantage Technology, LLC v. Cross, 17 S.W.3d 637 (Tenn. Ct. App. 1999) as follows:

 

Considerations in determining whether an employee would have such an unfair advantage include (1) whether the employer provided the employee with specialized training; (2) whether the employee is given access to trade or business secrets or other confidential information; and (3) whether the employer's customers tend to associate the employer's business with the employee due to the employee's repeated contacts with the customers on behalf of the employer. These considerations may operate individually or in tandem to give rise to a properly protectable business interest.

 

In consideration of these three Vantage factors, 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”. Davis at 4.  Without going into detail about this particular case, the Court found that the prior employer in this situation simply failed to prove the required elements found in the Vantage decision.  As a result, the Court did not enforce the non–competition agreement in this particular case.  If you want more specific facts about this particular agreement then you should review this case.  Regardless, this case provides a good overview of various factors to consider when trying to enforce or craft a non-competition agreement in Tennessee. 

 

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TAGS: Breach of Contract, Employment Law, Corporation/LLC Law, Contracts
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Jason A. Lee is a Member of Burrow Lee, PLLC. He practices in all areas of defense litigation inside and outside of Tennessee.

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