Articles Posted in Business Litigation

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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

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It happens with some frequency in Tennessee that a check is written and notated “paid in full” or “payment in full.” Sometimes, if a check is not written “paid in full,” the business which owes the debt may send an accompanying letter stating that the payment is for the full amount of the account or debt.  Sometimes, when the debtor is very prudent, it so notates the check and also sends such a letter with the check.

Under Tennessee common law, as well as under a Tennessee statute, T.C.A. §47-3-311, if a person or business owed money (a creditor), cashes a check marked “paid in full” or with similar language, or cashes a check sent with a letter stating that the payment is in full satisfaction of the debt, that creditor may well be barred from collecting any additional money.

In Tennessee breach of contract cases, a party who proves an accord and satisfaction is relieved of further liability to the creditor. To prove successfully an accord and satisfaction, the debtor must prove that the amount it owed the creditor was disputed; it sent a check conspicuously marked “paid in full,” or with other language establishing that the payment was in full satisfaction of the debt, or sent the check with a letter indicating that the payment was in full satisfaction of the alleged debt; and, that the creditor cashed the check.

For an example of a breach of contract case where an accord and satisfaction defense was successful, take a look at Pendergrass v. Ingram (Tenn. Ct. App. 2016).  Here are the basic facts of that case:

  • Plaintiffs agreed to do certain grading and other work on Defendant’s property
  • The parties orally agreed that Plaintiffs would be paid $2,500
  • Plaintiffs were paid $1,000 up front
  • After the Plaintiffs began working, the Plaintiffs performed additional work beyond the work to which the parties had agreed
  • The parties never discussed what Plaintiffs would be paid for the additional work
  • After the work was finished, the Plaintiffs sent Defendant a bill for $9,073
  • Defendant let the Plaintiffs know that he did not believe he owed more than $1,500
  • The Defendant then sent Plaintiffs a check for $1,500 with the notation “pd. in full”
  • The Plaintiffs marked through the “pd. in full” notation on the check and cashed it

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For salesmen and manufacturers representatives who are owed commissions, a recent decision of the Court of Appeals for the Sixth Circuit in a breach of contract case for commissions owed is not encouraging. The analysis and application of Tennessee breach of contract law to the facts of the case by the majority of the three judge panel was D to D-  work (to the losing plaintiff, I am sure it was F work) .  The dissenting judge’s opinion, which was justifiably quite sharp, is the only bright spot for those seeking unpaid commissions (and for lawyers who like to see the law applied correctly).

In the case, Maverick Group Marketing, Inc. v. Worx Environmental Products, Ltd., the plaintiff sales company worked for years on behalf of the defendant to have Wal-Mart buy the defendant’s product.  Then, the defendant terminated its contract with plaintiff.  The defendant then received its first order from Wal-Mart three weeks after terminating its contract with the plaintiff.

Before terminating the plaintiff’s contract, the defendant had supplied Wal-Mart a supplier agreement, Wal-Mart had tested the product, and Wal-Mart and the defendant had agreed on the price for the product. The only thing that had not happened was that Wal-Mart had not placed an order.

The contract between the plaintiff and the defendant provided that, if the agreement between them was terminated, then the plaintiff would still receive commissions on “orders solicited prior to the effective date of termination.” The two judge majority reasoned that, because Wal-Mart had not placed an order, no orders had been solicited and, therefore, the plaintiff was not entitled to any sales commissions.

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In Tennessee, quite a few corporations and LLCs are owned equally by two parties. Frequently, the relationship between the owners sours, or worse.  At some point, a “business divorce” may become necessary. If you want to keep the business, but need your co-owner out of the business, how do you proceed?

The first thing you should do is to check the by-laws (for corporations) or operating agreement (for LLCs), if they exist, which they may not. If there was good pre-formation planning, you may be fortunate enough to have an agreement already in place about how one owner may buy out the other.  Some by-laws and operating agreements contain provisions which allow one owner to make an offer to the other owner for his or her membership interests or shares. Those provisions then require the owner to whom the offer is made either to accept the offer or to buy out the owner who made the offer for the same amount that was offered to him or her.  If the other owner may also want to keep the business, considerable caution and thought need to go into an offer since the non-offering owner may decide to buy out the offering owner if he or she determines that the price offered makes it attractive to keep the business.

If the by-laws or operating agreement do not provide for a process whereby one owner can force an end to the joint ownership, you should consider approaching the other owner to try and reach an agreement about a price the other owner is willing to take for his or her interest in the corporation or LLC. If you reach a suitable agreement, be sure to memorialize it in a document.  It is highly advisable that you have an experienced Tennessee business divorce lawyer ensure that the agreement covers you.

If no agreement can be reached, you may have to dissolve the LLC or corporation. In my experience, it will probably not come to a dissolution because, in most cases, a co-owner would be foolish to force a dissolution as opposed to taking a buy-out.  In a dissolution, the going concern value of the company will be lost which means that your co-owner is likely to receive substantially less in a dissolution than he or she would receive pursuant to an offer made on the fair value of his or her interest in the business as a going concern.  If you are forced to dissolve the company, you will most likely be able to buy assets of the company, and you can start a new competing business just as soon as the dissolution process begins, if not before.

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Many Tennessee businesses have commercial general liability policies, and many other types of policies and endorsements, which contain exclusions for any loss resulting from dishonest or criminal acts. These exclusions will most likely apply to employees, partners and directors of the business.

Sometimes, in insurance policy litigation, there is no way to defeat a policy exclusion for dishonest or criminal acts. For example, if the insurance company can prove that the loss resulted solely and exclusively as a result of the theft or other illegal conduct by an employee of the insured business, the insurance company will not have to pay the claim. Where, however, the loss could have resulted from both the dishonest or criminal act of an employee and some other concurrent cause, the insurance company may not be able to rely successfully on the exclusion.

While no published Tennessee opinion addresses a fact situation where there was a dishonest or criminal acts exclusion in an insurance policy along with concurrent causation (causation of a loss resulting from an employee’s dishonest or criminal conduct and some other cause), the opinion of the Supreme Court of Tennessee in Allstate Insurance Company v. Watts, 811 S.W.2d 883 (1991) would apply directly to such a case.

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In a recent shareholder dispute case, Athlon Sports Communications, Inc. v. Duggan, the Court of Appeals of Tennessee affirmed a decision from the Chancery Court of Davidson County, Tennessee valuing the stock of minority, dissenting shareholders at an amount substantially below the value sought by the minority shareholders.  The case is significant because the Court of Appeals declined to depart from the Delaware Block Method as the method for valuing dissenting shareholders’ shares as the Defendants persuasively, but unsuccessfully, argued that it should.

Here is summary of the key facts:

  • The dissenting shareholders were the Defendants
  • The Defendants owned stock in a company (“Company”) engaged in the sports media and publishing business
  • One of the Defendants had invested in the Company and become its President because he, and the other shareholders, believed that he could turn the Company around
  • The Company was not turned around and the majority entered into a merger which forced the minority shareholders out
  • The Defendants and the Company could not agree on a fair price for the shares of the Defendants: The Company was willing to pay $.10 per share and the Defendants demanded $6.18 per share
  • The Company filed an action for a judicial appraisal
  • The Company’s expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Cost of Asset Approach: 80%, value $0
  • Income Approach: 20%, value $0
  • Market Approach: 0%, value $0
  • The Defendants’ expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Net Asset Value: 33%, value $6.20 per share
  • Market Value: 33%, value $6.09 per share
  • Earnings Value: 33%, value $7.16 per share

The trial court adopted the valuation of the Company’s expert, but held that the stock had a value of $.10 per share based on the fact that the Company’s trade name had existed for 44 years and had value.  The trial court rejected the valuation of the Defendants’ experts for several reasons, including that it was based on projections of future earnings.

On appeal, the Defendants made several compelling points as to why the strict application of the Delaware Block Method did not fairly value their stock.  They argued that the Delaware Block Method is based on past performance and that was unfair where a business, like the Company, was about to embark on new ventures which were anticipated to be profitable.  Prior to the merger, the Company, to lure investors and capital, had relied on forecasts that showed that the Company’s profitability would increase.

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For shareholders of Tennessee corporations and members of Tennessee LLCs, the statutes of limitation which apply to breach of fiduciary duty claims are short — very short. The statute of limitation for breach of fiduciary duty lawsuits related to corporations and the statute of limitation for breach of fiduciary duty lawsuits related to LLCs are nearly identical.  Both require that a breach of fiduciary duty claim be filed within one year of the breach.

Both the corporate statute and the LLC statute are extended if the “breach is not discovered nor reasonably should have been discovered” within one year. If that is the case, both statutes of limitation provide that the lawsuit must be filed within one year of when the breach was discovered or reasonably should have been discovered. In any event, to extend either statute of limitation beyond three years, the shareholder or member must prove that the defendant fraudulently concealed the conduct giving rise to the breach of fiduciary duty claim.

Where an LLC member or shareholder of a corporation attempts to prove that he or she should not have been required to file within one year because he or she did not discover, and could not have reasonably discovered, the breach of fiduciary duty, that member or shareholder must prove that his or her lawsuit was filed within one year of the date he or she discovered “facts that would put a reasonable person on notice that injury has been suffered as a result of wrongful conduct.” Keep in mind that the one year period begins to run then, and not when the member or shareholder has been told by an attorney or other advisor that he or she has grounds for a breach of fiduciary duty lawsuit.

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Assuming that one party proves that the other party has breached a valid and enforceable contract, what amount of money can the non-breaching party recover from the breaching party? When explaining how a Tennessee court will approach the question of what amount of money to award someone for a breach of contract, it is helpful to think of two broad categories of damages under Tennessee law that come into play in breach of contract cases.

What are those categories? The first is the category of expectation damages. The second is the category of reliance damages.  An astute client, who has lost money because of a breach of contract, might ask the following questions (all of which I will attempt to answer):

What damages are expectation damages and what damages are reliance damages?

  • What is the difference between the two categories?
  • How does a Tennessee court decide which category of damages to award?
  • Which category of damages is better for an injured party?

Expectation damages are designed to put the non-breaching party in the same position that he or she would have been in had the contract not been breached. Expectation damages, in my experience, are the most common category of damages awarded in breach of contract cases in Tennessee.

In Tennessee, generally, if the court can award expectation damages for breach of contract, it will. Also, generally, if the court determines that the injured party is not entitled to expectation damages, but only to reliance damages, the injured party will get a monetary award that is less than the amount for which it had hoped (and, very possibly, an award less than the money it might have actually made but for the breach of contract).

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In a recent construction law case decided by the Court of Appeals of Tennessee, Beacon4, LLC v. I & L Investments, LLC, the project Owner was ordered to pay, not only the withheld retainage owed to the Contractor, but also, the Contractor’s attorney’s fees, as well as pre-judgment interest.  The case is a good example of the Tennessee Prompt Pay Act achieving its intended purpose — requiring owners to pick up a contractor’s tab for attorney’s fees when they withhold retainage in bad faith and for no legitimate reason other than to pressure the contractor to take less than it is owed or to release lien rights it has for work or materials.

Here are the key facts:

  • Contractor entered into a contract for the construction of a building with Owner
  • Owner retained Butler, a principal in an architectural firm, to act as construction manager for the Project
  • On May 17, 2011 a certificate of occupancy was issued for the building
  • On November 11, 2011, counsel for Contractor sent Owner a letter demanding Owner pay the $48,442.77 it was holding in retainage as well as another $120,000 for change order work
  • Although Butler responded that the retainage was being withheld because of unresolved deficiencies in site work, he admitted at trial that he never placed any monetary value on any corrective work
  • On April 12, 2012, Owner sent a letter to Contractor advising it that it had a “final check” in the amount of $62,297 which was available provided that Contractor (and a subcontractor) executed an “appropriate lien release”
  • Contractor filed a lawsuit alleging that it was owed the retainage and that it was entitled to attorney’s fees under the Prompt Pay Act because the retainage had been withheld in bad faith (it also alleged breach of contract for the change order work)
  • The trial court found that Contractor was owed the retainage; that Owner had violated the Prompt Pay Act by withholding the retainage in bad faith; that Contractor was entitled to an award of attorney’s fees under the Prompt Pay Act for Owner’s bad faith; and that Owner was responsible for pre-judgment interest at 6% APR

The Court of Appeals (“Court”) affirmed the decision of the trial court that Contractor was entitled to the retainage, that Owner had acted in bad faith under the Prompt Pay Act in withholding payment, and that Owner was liable for attorney’s fees.

The Court observed that, under §66-34-204 of the Tennessee Prompt Pay Act, the retainage had to be paid within 90 days of the issuance of the certificate of occupancy, and that Owner had failed to do that. Owner argued that the 90 period of that statute did not apply because the General Conditions of the contract allowed it to hold the retainage beyond 90 days. The provision of the General Conditions relied upon by Owner allowed it to withhold the retainage until the occurrence of a number of conditions, including Contractor’s execution of documents necessary for “waivers of liens.”

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Can you recover punitive damages in Tennessee for breach of contract? It is difficult, but not impossible.  Moreover, there is little published case law on the subject, and, as discussed below, there is one major question about punitive damages in breach of contract cases which has yet to be fully explored and answered by Tennessee courts.

A good place to start is a summary of some Tennessee cases where punitive damages were requested for breach of contract.

Riad v. Erie Insurance Exchange (Tenn. Ct. App. 2013):  In this case, the plaintiff alleged the defendant insurance company was liable for breach of contract, bad faith failure to pay and for violating the Tennessee Consumer Protection Act.  After a trial, the jury assessed punitive damages against the defendant of $1.5 million dollars.  (It assessed compensatory damages of $343,430).

While regurgitating the same phrase used in previous Tennessee cases that punitive damages are “generally not available in breach of contract cases,” the court upheld the award of punitive damages. It did so by pointing to the seminal punitive damages case in Tennessee, Hodges v. S.C. Toof & Co. (Tenn. 1992).  In Hodges, the Supreme Court of Tennessee held that, to recover punitive damages, the defendant must have acted intentionally, fraudulently, maliciously, or recklessly.  Notably, Hodges was not a breach of contract case.

Dog House Investments, LLC v. Teal Properties, Inc. (Tenn. Ct. App. 2014): In this case, the plaintiff alleged breach of contract and promissory fraud.  (A defendant is liable for promissory fraud if it can be proven that, at the time the defendant made a promise, it had no present intent to fulfill that promise.)  The Court of Appeals of Tennessee held that the breach of contract in this case did not rise to a level of egregiousness warranting an award of punitive damages.  I think most people would agree that the conduct of the defendant in this case was every bit as egregious as the conduct of the defendant in the Riad case.  In the Dog House case, the court seemed to say that, in order to receive punitive damages for breach of contract, there must be some fraud in addition to a breach of contract. Notably, in this case, the court allowed the punitive damages verdict to stand because the trial judge had found that the defendant not only breached the contract, but also, committed promissory fraud. Continue reading →