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Understanding How Tennessee Courts Analyze Non-Compete Agreements

For a former employee or contractor who has signed a non-competition agreement, the threshold question is quite often this: Is the non-compete agreement enforceable or not?

How Tennessee courts treat non-compete agreements varies by court and by the unique facts of each case. In my experience, there is quite a bit of subjectivity involved when a court undertakes to determine if a non-competition agreement is enforceable and, if so, to what extent.

Despite the reality that each non-compete case turns on its own facts and on the particular court making the ruling, there are some guidelines that any court must apply when ruling on a non-compete agreement. For employers and employees who want to understand those guidelines, a very good case to read is Vantage Technology, LLC v. Cross, a 1999 decision of the Court of Appeals of Tennessee.

Here is a summary of the facts of the case:

  • Cross (“Employee”) went to work for Vantage (“Employer”) in 1994
  • Employer was in the business of providing equipment and support to doctors who performed cataract surgeries in rural hospitals
  • Employee’s title was “technician” and his duties included transporting materials and instruments to doctors performing cataract surgeries and assisting them during surgery
  • An important part of Employee’s job was building relationships with doctors and learning about their surgical preferences
  • Employer also provided machines to doctors who performed cataract surgeries in rural hospitals, which machines were crucial for the surgeries
  • Employer provided Employee about 241 hours of training during his first month of employment
  • By the time Employee resigned, about two years after he started, he had built a strong relationship with a doctor who performed a substantial number of surgeries with the help of Employer
  • Employee resigned and immediately formed a business relationship with that physician whereby they started a company which competed with Employer
  • Employer filed suit against the Employee alleging that he had breached the non-compete agreement

The trial court ruled in favor of Employee finding the agreement unenforceable. The Court of Appeals reversed.

A threshold question in every non-compete case in Tennessee is whether or not the employer has a “protectable interest” such that a non-compete agreement is necessary to protect it from unfair competition. To have a protectable business interest, an employer must be able to show that the non-compete agreement is necessary in order that it be protected from unfair competition, not just ordinary competition. This is a crucial distinction in non-compete cases.

In determining whether an employer has a protectable business interest, as set forth in the Vantage opinion, a Tennessee court should look at three different factors: (1) Whether the employer provide specialized training to the employee; (2) whether a non-compete is necessary to keep the former employee from using trade secrets and confidential information against the former employer; and (3) whether the employee established relationships with customers of the employer by virtue of the goodwill of the employer.

Based on the facts before it, the Vantage court held that the Employer had a protectable business interest. In doing so, it found that the training provided to the Employee bestowed, not just general knowledge and skill on Employee, but specialized knowledge and skill.  The Court also found that Employee had knowledge of pricing terms and surgeon preferences which amounted to confidential information.  It also found that Employee had developed special relationships with doctors, which relationships he developed while employed and based on the goodwill of Employer.

Every non-compete case is different and requires intense factual analysis by counsel. The Vantage case provides an excellent roadmap for such an analysis.

Even if a Tennessee court determines that an employer has a protectable business interest and that the non-compete agreement before it is enforceable, that finding does not resolve the case. Once a court determines that a non-competition agreement is enforceable, it may still modify the length, or geographical scope of the agreement. It may even modify what the former employee or contractor is restrained from doing from what is set forth in the written agreement. The inquiry about the extent to which the terms of a non-compete should be modified, if at all, is a subject to itself, and one I will try to address in a blog in the near future.