Non-Compete Agreements: It's Not All About You, Employers

In these times of economic woe, employers can add another thing to their list of worries — the unavailability of jobs and falling salaries may actually expose employers to what previously would have been considered unfair competition.

It is no secret that non-competition agreements, because they are a restraint on trade, are disfavored in Tennessee.[1] But, at least until recently, if the non-compete agreements were reasonable, Tennessee Courts generally enforced them. In the years since the Hasty decision, Tennessee employers have operated fairly comfortably in a system that allowed them to establish reasonableness, in part, by proving a legitimate business interest.[2]

Protectable interests exist where a departing employee would gain an unfair advantage in competition, over and above ordinary competition. Historically, the considerations related to whether an employer has a protectable interest 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 because of the employee's repeated contacts with the customers on behalf of the employer."[3] Either individually or combined, these considerations can give rise to a protectable business interest.

Assuming there is a protectable business interest, the factors relevant to whether a covenant is reasonable include the threatened danger to the employer in the absence of the covenant, the economic hardship on the employee through enforcement of the covenant, and whether it is inimical to the public interest.[4]   

A recent Tennessee case opened the field for employers to successfully establish a legitimate business interest outside of those listed in the Vantage Tech case.[5] The case involved a claim of tortious inducement to breach a non-compete covenant by the defendant staffing agency as well as breach of the agreement by the defendant employees. The plaintiff staffing agency provided occupational, physical and speech therapists to a residential state facility for individuals with severe disabilities.  The plaintiff agency staffed the facility under an exclusive contract, which was set to expire by its own terms in June 2003. The therapists employed by the plaintiff agency and assigned to the state facility all signed covenants not to compete, which prohibited them from working at the state facility for one year after the termination of their employment.

Upon the impending expiration of the aforementioned contract, the state requested bids to staff the facility under a new contract. Through the bidding process, the defendant staffing agency was awarded the contract. The defendant agency then met with the defendant therapists while they were still employed by the plaintiff, and offered to hire them so that they could continue working at the state facility. The defendant staffing agency was aware that the defendant therapists were subject to non-compete covenants, and it agreed to indemnify the defendant therapists if the plaintiff staffing agency tried to enforce the covenants. Importantly, before accepting the offer, the defendant therapists sought other employment through the plaintiff staffing agency and pursued other outside employment. Being either unable to find any other jobs or to locate a position with similar pay, the defendant therapists accepted the defendant agency's offer and continued working at the facility. And as expected, the plaintiff agency filed suit against the individual defendant therapists to enforce the non-compete agreements and against the defendant agency for tortiously inducing the breach of those agreements.

After a bench trial, the trial court concluded that the non-compete agreements were enforceable, that the defendant therapists had breached them and that the defendant staffing agency had tortiously induced the individual defendant therapists to breach their contracts. The court entered a judgment for $10,000 against each of the nine individual defendants and for $270,000 against the defendant agency. The defendants appealed. The Western Section of the Court of Appeals reversed, concluding that while the plaintiff agency had a legitimate protectable business interest, the non-compete covenants were not enforceable in light of the hardship to the defendant therapists and the adverse impact on the public interest.

This decision provides a few significant developments for Tennessee employers seeking to enforce non-competition agreements. First, it recognized that, as a staffing agency, the plaintiff had a protectable business interest in preventing "opportunistic disintermediation."  That is, for the first time the Tennessee courts recognized that a staffing agency can have an interest in either the improper elimination of its status as the middle man or the appropriation of the competent employees it had provided to the state without compensation.  This was a break from the legitimate business interests laid out in the Vantage Tech case, and it was a victory for temporary agencies and similar staffing agencies. But while the appellate court agreed with the trial court on that issue and expanded the scope of legitimate business interests, it declined to enforce the non-competition agreements.

The court recognized that even though the staffing agency had a protectable interest in prohibiting the therapists from working directly or indirectly for the state, its interests were outweighed by the hardship on the former employees and the fact that the contracts were inimical to the public interest. The court held that the hardship on the former employees was "onerous" or, in some instances, "virtually intolerable."[6] The court devoted a considerable portion of its opinion to discussing the defendant therapists' efforts to find new employment, the unavailability of such, and the significant pay decrease associated with acceptance of positions that were available. Leaving no room for doubt where its decision was headed, the court analyzed the personal circumstances of the defendant therapists, even down to specifics like the therapists' support of their family members living in the Philippines and the financial effects of at least one of the therapists' ongoing divorce proceedings.

As for the public interest, it was undisputed that these therapists had developed a close relationship with a "vulnerable patient population" of mentally ill or mentally retarded clients. The court held it was inimical to the public interest in serving this vulnerable population to enforce the non-compete agreement.[7] The court relied heavily on the testimony of multiple witnesses who cited continuity of care from the same therapist as critical to the interest of the facility's patients. Finding this evidence and the hardship on the former employees outweighed the employer's interests, the court refused to enforce the non-compete agreements.       

Are there lessons learned here? Yes. Staffing companies now have an express business interest to support a reasonable non-compete covenant with employees furnished to third parties under circumstances like those in Columbus Medical Services. More broadly, however, the hardship on the employee is a factor that counsel for employers should consider in drafting and deciding whether to enforce restrictions. The court created a road map for counsel for departing employees (or their new employers) in developing facts to support the hardship factor. Moreover, the hardship on the employee factor would appear to be more pronounced in the current economic climate of double-digit employment, where any job is extremely important. Finally, it is unclear from Columbus Medical Services whether a severe hardship on the employee alone might be sufficient to void a non-compete agreement supported by a legitimate business interest. A legitimate argument may be made, however, that where the employer's legitimate business interest is weak or is marginally affected by the employee's competition, the hardship on the employee may tip the scales in the employee's favor, even without consideration of public policy.

Notes

  1. Hasty v. Rent-A-Driver Inc., 671 S.W.2d 471, 472 (Tenn. 1984).
  2. See Hasty, 671 S.W.2d at 473.
  3. Vantage Tech. LLC v. Cross, 17 S.W.3d 367 (Tenn. Ct. App. 1999).
  4. Allright Auto Parks, 409 S.W.2d 361, 363 (Tenn. 1966).
  5. Columbus Med. Servs. LLC v. David Thomas & Liberty Healthcare Corp., No. W2008-00345-COA-R3-CV, 2009 Tenn. App. LEXIS 543 (Tenn. Ct. App. Aug. 13, 2009).
  6. Id. at **63-65.
  7. See Murfreesboro Med. Clinic P.A. v. Udom, 166 S.W.3d 674, 678 (Tenn. 2005) (holding physician covenants not to compete unenforceable as against the public's interest in continuity of health care)

Edward G. Phillips EDWARD G. PHILLIPS is a lawyer with Kramer Rayson LLC in Knoxville, where his primary areas of practice are labor and employment law. He graduated with honors from East Tennessee State University and received his law degree from the University of Tennessee College of Law in 1978 with honors, and as a member of The Order of the Coif. He is a former chair of the Tennessee Bar Association’s Labor and Employment Law Section.