Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Tennessee
While Tennessee law, in general, prohibits agreements between persons or corporations that tend to restrain trade, the courts have recognized agreements between employers and employees when they are:
- to prevent solicitation of the employer's existing customers;
- to protect the employer's trade or business secrets and confidential information; and
- to protect the employer's substantial investment in employee training or enhancing the employee's skill and experience.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Tennessee courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of of duration, geographic scope and what is needed to protect the employer's legitimate business interests. If a court finds an agreement is unreasonable, it may modify the agreement to the extent necessary to protect the employer's interests without imposing undue hardship on the employee.
Examples of non-compete agreements that Tennessee courts have found to be reasonable include:
- A 3-year, 50-mile radius restriction against an accountant from practicing business accounting and tax preparation work. The court modified the agreement which originally would have barred the employee from practicing his profession at all.
- A 1-year, nationwide restriction against a former salesperson of a satellite telephone and global positioning system equipment company. The original agreement covered all of North America.
- A 1-year restriction against a former private security guard from performing or hiring others to perform security services at the site where he had provided services within the one year prior to termination because it applied to only one site.
The courts have found the following restrictive covenants unreasonable:
- A 2-year, nationwide restriction from soliciting all customers of the employer.
- A 6-month, 1,200-mile radius restriction. The court reduced it to a 31-customer restriction.
- A 46-city restriction when the employee only worked in three cities.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.
Questions & Answers: Non-Competition Agreements in Tennessee