Understanding Noncompete Agreements
Keys to Understanding Your Noncompetition Agreement
What is a Noncompetition Agreement?
A noncompetition agreement is a contract between an employer and employee. This agreement is intended to limit what the employee can do after employment ends. It can be entered into at any time during the employment. It can also be entered into as part of a separation agreement. The ultimate purpose of the agreement is to limit an employee going out into competition against her former employer, but it does not always get enforced by a court as it is written.
Are Noncompetition Agreements enforceable in Tennessee?
The short answer is yes. The longer answer is “yes, but.” 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. When a court examines a non-competition agreement, the court can enforce the agreement, refuse to enforce the agreement, or rewrite it for the parties. This all starts with a determination of what is reasonable.
What is reasonable?
As a court looks at this agreement, “reasonableness” has several components. It requires temporal and geographic reasonableness in the restrictions and that the restrictions are no greater 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 general guidelines?
Yes, sort of. Anytime you are dealing with the concept of “reasonableness” and any court’s determination of what is reasonable, that can be highly specific. However, the case law has given us some guidance.
In terms of a time limit, 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. I have also had a case where the court extended it to five (5) years. 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 were 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 business interests can be protected?
To determine what can be protected, the first question is what did the employee do for the employer? If the employee worked in manufacturing and had no customer interaction, customer information may not be protectable. At the other end, 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 because the employer has promoted 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 could also be protected. Courts typically consider that this knowledge gave the employer a competitive advantage and that knowledge may be a protectable business interest. However, this knowledge has to have come from the employer. 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.
How can we help you?
Whether you are an employee or an employer, you can benefit from an early examination of your agreements. You want to examine them before they are in dispute. We have over 30 years of experience helping both employers and employees work with noncompetition agreements and would like the opportunity to help you.
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