Tennessee Business Litigation Lawyers Blog

In a very recent breach of contract case, a former employee of the defendant was held not to have been constructively discharged from employment, and, therefore, was not entitled to a bonus provided for in his employment agreement.  The Court of Appeals of Tennessee determined that the former employee voluntarily terminated his employment based on the totality of the facts.

Here are the key facts:

• The former executive employee (“Executive”) signed a two- year contract (“Employment Agreement”) with the Defendant, a real estate business, to be an executive vice-president
• In addition to his salary of $275,000 per year, the Employment Agreement provided that Executive would receive a “minimum annual bonus” of $275,000 per year
• As the Employment Agreement was interpreted by the court, the annual bonus was payable even if Executive was unable to work, for any period (even one longer than thirty days), so long as he did not voluntarily terminate his employment
• As the Employment Agreement was interpreted by the court, if the Executive became sick and unable to work, he was only entitled to receive his base salary for thirty days, e., he only had thirty days of paid sick leave
• Executive began work in late February of 2017
• Within weeks of beginning work, Executive suffered a heart attack and had to stop working
• On April 27, 2017, Executive entered a twelve-week cardiac rehabilitation program
• Executive was paid his full salary through May 18, 2017 (well beyond the thirty-day sick leave period provided for in the Employment Agreement)
• After May of 2017, Executive and Defendant engaged in discussions about his continued employment, his entitlement to a bonus, and the amount thereof
• In the above discussions, there was disagreement between Executive and Defendant
• After June of 2017, Executive did not respond to Defendant
• On July 28, 2017, Executive filed a beach of contract suit against Defendant requesting that the court award him, among other items, the $275,000 bonus

On appeal, one of the determinative issues was whether or not the Executive had terminated his employment with Defendant voluntarily or whether, on the other hand, he had been constructively discharged from employment, as he alleged. If it was determined that he was constructively discharged, he was entitled to the $275,000 bonus.

Constructive discharge, under Tennessee law, occurs when an employer engages in conduct which is intended to cause an employee to quit. The constructive discharge theory recognizes that some voluntary terminations of employment are, in fact, involuntary terminations.  Tennessee law requires a court to consider the “totality of facts” related to the termination of an employee’s employment in deciding whether there was a constructive discharge.

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A former employer’s claims against a former employee and the former employee’s new employer for breach of a non-compete agreement and violating the Tennessee Uniform Trade Secrets Act (“Trade Secrets Act”) were dismissed in a case which is instructive on a couple of fronts. Mainly, the case illustrates the futility of a former employer attempting to claim that information the former employee acquired during his or her employment amounts to “trade secrets” under the Trade Secrets Act when the former employer allowed third parties to have access to the same information.

Here are the key facts:

• Daniel was employed by one of the two Plaintiffs in the case (Plaintiff One)
• Daniel’s position, at the time of his termination of employment with Plaintiff One, was supervisor of Plaintiff One’s billing department
• Prior to being supervisor of Plaintiff One’s billing department, Daniel’s position at Plaintiff One was as a bill collector
• Plaintiff One was in the business of collecting for amounts owed to Plaintiff Two
• Plaintiff Two provided services to healthcare providers for which it was entitled to a percentage of those healthcare providers’ claims each month
• Daniel went to work for a company called Premier Mobile (“Premier”) after his employment with Plaintiff One ended
• Premier had a prior business relationship with both Plaintiffs
• During that relationship, Premier engaged in the same business the Plaintiffs engaged in, but only in the State of Virginia
• About two weeks before Premier hired Daniel, its relationship with the Plaintiffs ended
• Premier hired Daniel in the position of “scheduler”
• Daniel performed work in Virginia at Premier’s headquarters after Premier hired him
• Daniel’s non-compete agreement with Plaintiff One prohibited him from competing against it in any state having customers of Plaintiff One from whom Plaintiff One received more than 2% of its annual revenue

After Daniel went to work for Premier, Plaintiff One sued Daniel for breaching his non-compete agreement by working for Premier and Plaintiffs One and Two sued Daniel and Premier for violating the Trade Secrets Act.

TRADE SECRETS ACT CLAIM

The Plaintiffs claimed that a number of documents which comprised trade secrets under the Trade Secrets Act were taken by Daniel and used by Daniel and his new employer, Premier. The documents which Plaintiffs claimed amounted to trade secrets included documents regarding how to provide dental treatment and to receive payment for it; “transmittal letters;” emails; spreadsheets; invoices; dental progress notes; memos; orders; and similar documents. To qualify as trade secrets under the Trade Secrets Act, not only must information meet the definition of trade secrets, but also, the party claiming the information is trade secrets must show that it took reasonable efforts, under the circumstances, to maintain its secrecy.  As well, if a third party can “readily” obtain the information which is claimed to be trade secrets “through proper means,” the information cannot qualify as trade secrets.

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The Tennessee Revised Limited Liability Company Act (the “Act”) sets forth the circumstances under which a limited liability company (“LLC”) member or manager may be liable to the LLC or to other LLC members.  An LLC member’s or manager’s potential liability can arise from two separate categories of conduct: (1) conduct that is a breach of the member’s or manager’s duty of loyalty (duty of loyalty cases); and (2) conduct in the operation or management of the LLC that is below the standards of care set forth in the Act (duty of care cases).

This blog deals strictly with the second category set forth above — liability resulting from failure to manage and to operate the LLC with the required degree of care. What level of care in the management and operation of the LLC must a member’s or manager’s care fall below before that member or manager can be personally liable? Under the Act, a member or manager may be personally liable where his or her conduct: (1) Is grossly negligent or reckless; (2) is intentional misconduct; (3) or amounts to a knowing violation of the law. In my opinion, the grossly negligent standard, in most situations, would be the easiest for a plaintiff bringing suit against another member or manager to prove.

The Act insulates LLC members and managers from liability for ordinary negligence. Why? Because the Act incorporates the policies of the Business Judgment Rule, which Rule predates the Act and has been an integral part of business law for decades. The Business Judgment Rule is meant to protect those in charge of managing and operating businesses, as long as they act in good faith and for proper purposes, from liability for business decisions that turn out to have been unwise. It recognizes that managers and operators of businesses would be deterred from taking calculated risks that might advance the organization if they had to worry about lawsuits from members or shareholders engaged in “Monday morning quarterbacking.”

Under Tennessee law, gross negligence is defined as “a conscious neglect of duty or a callous indifference to consequences” or “such entire want of care as would raise a presumption of a conscious indifference to consequences.” There is but one Tennessee case which addresses the issue of the liability of a member or manager for gross negligence. It does not shed much, if any, light on the subject. In that case, the Court of Appeals concluded, without much analysis or discussion of the facts constituting the alleged gross negligence, that the trial court had not erred in determining that the member’s conduct was not grossly negligent.

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It is helpful to think of the potential personal liability of members of Tennessee LLC’s falling into two categories. The first category is the personal liability of a member to the LLC itself for the member’s breach of the duty of care, breach of the duty of loyalty, or the breach of the duty of good faith and fair dealing.  The personal liability of a member for breaches of those duties (which duties are set forth in T.C.A.§ 48-249-403) is typically addressed in a derivative proceeding brought by another member of the LLC on behalf of the LLC.  The second category of personal liability of an LLC member involves claims by a non-member third party against a member, individually, for some action or omission related to the business of the LLC. That second category of potential personal liability is the subject of this blog.

The Tennessee Revised Limited Liability Company Act (the “Act”) expressly codifies a rule which limits the personal liability of LLC members related to LLC business (the “Limited Liability Rule”). (See T.C.A. §48-249-114) The Limited Liability Rule is set forth in three subparagraphs which provide, generally, that: (a) The obligations and debts of the LLC, regardless of whether they originate from a contract or from tortious activity, are “solely” the obligation of the LLC; (b) a member has no personal liability for debts of the LLC just because of his or her membership; and (c) a member is not liable for the acts or omissions of other members, or employees or agents of the LLC.

The limited liability rule for LLC members provides broad protection to members. If the LLC fails to pay a creditor, the LLC’s members are not personally responsible to that creditor. If an LLC employee causes a serious personal injury to a third party while doing his or her job for the LLC, the LLC’s members are not personally liable for it.

There are quite a few exceptions, however, to the rule of limited liability for LLC members. The exceptions fall into, at least, the following categories: (1) Where an LLC member commits an intentional tort, such as misrepresentation; (2) where the LLC’s veil is pierced; (3) where the LLC member has engaged in a fraudulent transfer of LLC assets to himself or herself; (4) where the member is held personally liable under the theory that he or she did not disclose that he or she was acting on behalf of the LLC; and (5) where the LLC member has personally guaranteed debts of the LLC.

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A recent construction defect case decided by the Court of Appeals of Tennessee illustrates how both the three-year statute of limitations for injury to real property and the six-year statute of limitations for breach of contract can both apply in a construction defect case. The trial court held that the claims of the Plaintiffs, the homeowners, were barred by the three-year statute of limitations. The court of appeals reversed the trial court holding that some of the Plaintiffs’ claims were subject to the three-year statute, but others were subject to Tennessee’s six-year breach of contract statute.

Here are the basic facts of the case:

• The Plaintiffs bought a newly-constructed home built by Defendants
• The Plaintiffs alleged that the home contained construction defects and substandard materials
• The Plaintiffs asserted several different causes of action including negligence, breach of warranty and breach of contract
• Plaintiffs alleged that Defendant had breached their contract with them in a number of ways, including by employing negligent construction practices, but also, by refusing to honor the warranty made by Defendants to make repairs pursuant to the one-year warranty made by Defendants
• There was no dispute that the Plaintiffs’ claims were filed after the three-year statute of limitations for injuries to real property would bar them
• The Plaintiffs’ claims had been filed such that there was no dispute that they were not barred by the six-year statute of limitations applicable to breach of contract actions

The resolution of the statute of limitations issues in this case, as with many cases, turned on the analysis and application of the “gravamen of the complaint” theory which has been adopted in Tennessee. The court of appeals wrote that the overarching issue in the case was whether the trial court had properly determined that the gravamen of the Plaintiffs’ complaint was injury to real property such that the three-year statute of limitations applied.

The leading modern case on the gravamen of the complaint theory is the Supreme Court of Tennessee’s opinion in Benz-Elliott v. Barrett Enters., LP. The most critical point to understand about the gravamen of the complaint theory is that the applicable statute of limitations is not determined by the cause of action asserted by a plaintiff, but by the type of damage alleged by the plaintiff to have resulted from that cause of action.  Another fundamental factor to keep in mind in applying the gravamen of the complaint theory is that, under Tennessee law, a plaintiff can plead alternative causes of action. That factor, and how it affects the gravamen of the complaint theory, was expounded upon in the Benz-Elliott case.

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In a 2022 case, the Court of Appeals of Tennessee relied heavily on the specialized training the former employer (“Employer”) gave its former employee (“Employee”) in upholding a trial court’s decision that the non-competition agreement signed by the Employee was enforceable. Unlike many cases involving former employers trying to enforce non-compete agreements, in this case, the Employer made no argument that the Employee had become the “face of the company” because the Employer’s customers closely associated its business with  Employee.   The former Employer relied, successfully it turned out, on the specialized training it provided to the former Employee along with the former Employee’s access to trade secrets and proprietary information during his employment.

Many covenant not to compete cases involve facts that make them close calls as to whether the non-compete agreements at issue will be enforced.  The case that is the topic of this blog post is worth a post, among other reasons, because it exemplifies a factual scenario in which, in my opinion, a Tennessee court would always enforce a non-competition agreement, if it followed the law.

Here are the key facts of the case:

• Employer was a staffing company that worked exclusively to provide healthcare information technology (“HIT”) personnel to hospital systems
• Before beginning work for the Employer, Employee had no experience or training in the industry served by Employer
• In 2012, Employee began employment with Employer as a recruiter
• At the time he began employment with Employer, Employee signed a “Confidentiality, Non-Competition and Non-Solicitation Agreement” with Employer
• That agreement contained typical terms including a term prohibiting Employee from working for a competing business for one year after terminating employment
• During his seven years of employment for the Employer, during which Employee advanced in responsibilities and was considered very valuable, Employer provided a substantial amount of training to Employee, including: (1) A week of classroom training on how to recruit HIT personnel; (2) a twelve to fourteen week class at a university, Belmont, regarding the healthcare industry; (3) a seminar in Chicago on leadership; (4) what the court described as “countless” lessons and mentoring from high-level executives at Employer; and (5) a variety of other HIT training
• During his seven years of employment, Employee also had access to a variety of trade secrets, and proprietary and confidential information of Employer, including: (1) client lists; (2) financial information; (3) information about prospective clients; (4) budgets and forecasts; (5) compensation structures; and (6) billing rates for all the personnel placed by Employer
• During his seven years of employment, Employee had also become an expert on unique software utilized by Employer

In 2019, Employee went to work for a direct competitor of Employer. Employer sued to enforce the non-compete agreement. The trial court upheld it. Thereafter, the court of appeals affirmed the trial court.

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