Business Litigation

Establishing Irreparable Harm in Non-Compete Cases

Published on: May 1, 2022 | by J. Ross Pepper

When an employer seeks a temporary restraining order (“TRO”) or temporary injunction in a Tennessee federal court against a former employee, or other person or entity with whom it had a non-compete agreement, to succeed, it must show irreparable harm will result to it if the TRO or injunction is not granted. (For purposes of this post, a non-compete agreement refers to an agreement that prohibits competition, use of confidential information, or solicitation of customers).

To obtain a TRO or temporary injunction, a federal district court in Tennessee must consider four factors: (1) The plaintiff’s likelihood of success as to the merits; (2) whether the plaintiff will suffer irreparable harm or injury if the relief is not granted; (3) whether substantial harm will be caused if the relief is granted; and (4) the effect of the injunctive relief on the interests of the public. The irreparable harm factor is indispensable. While a district court may grant a TRO or temporary injunction even where the plaintiff has not shown that it is substantially probable that the plaintiff will ultimately win the case on the merits, to grant either a TRO or a temporary injunction, a Tennessee federal district court must make specific findings that the plaintiff will suffer irreparable injury.

What is considered irreparable injury by Tennessee federal courts? An injury is irreparable if it cannot be compensated by money damages. In non-compete cases, a former employer or business cannot be compensated for lost revenues: From customers and contracts it can never prove it lost; from confidential information that was used by others to gain customers, sales or otherwise to increase profitability; or from lost customer goodwill. When someone breaches a non-compete agreement, the injured party will not be able to quantify its damages in many, if not most, cases. If it cannot quantify them, it cannot prove them and recover them. Thus, without injunctive relief, the injured plaintiff will suffer irreparable injury.

As a general rule, Tennessee federal courts recognize that irreparable harm occurs when a non-competition agreement is violated. In fact, they have recognized that, when a non-compete agreement is breached, in most cases, irreparable injury will result. The below are summaries of two instructive cases where former employees had signed non-compete agreements with their former employers. Continue reading

First Material Breach by Seller Causes it to Lose Breach of Contract Case

Published on: March 13, 2022 | by J. Ross Pepper

I have written at least a couple of blogs about the first material breach rule and how it works (and doesn’t work) in Tennessee. Nevertheless, here is another blog on that subject which discusses a very recent breach of contract case handed down by the Court of Appeals of Tennessee. Since the first material breach rule is very often applicable in commercial litigation, it is hard to give it too much attention, analysis, review and thought. Also, the case which is the subject of this blog is unique in that it is one in which the defense was used successfully.

The first material breach rule, to review, holds that a party cannot recover damages for a breach of contract if it committed the first material breach of the contract. Once a party to a contract materially breaches it, the other party to it is relived from rendering further performance and cannot be held liable for damages flowing from any breach by it which occurred after the other party’s prior material breach.

The case involved an asset purchase agreement whereby the Seller agreed to sell the assets of a meal preparation business to the Buyer, which was also in the same business. The purchase price was $310,000. The asset purchase agreement (the “Agreement”) required that the Buyer pay $150,000 within two days of the closing, and, thereafter, that it pay monthly installments of $11,333 before the last day of each month.

The Agreement also required the Seller to tender to the Buyer its recipes for meals and snacks. Moreover, in the Agreement, the Seller made promises not to compete with Buyer and not to solicit customers of Buyer.

Using Promissory Estoppel to Recover Damages in Tennessee

Published on: January 8, 2022 | by J. Ross Pepper

Promissory estoppel may be used offensively as a cause of action to recover damages, unlike equitable estoppel, which may only be used to defend. It is a useful cause of action in those situations in which a promise was made to the plaintiff, but the promise does not rise to the level of an enforceable contract.

To prove a promissory estoppel claim, a plaintiff must prove that (1) the defendant made a promise; (2) the promise was definite enough and unambiguous enough to be enforced; and (3) that the plaintiff reasonably relied on the promise. A plaintiff does not have to prove that there was an express contract between it and the defendant to prove a promissory estoppel case.

A review of Tennessee cases wherein courts have adjudicated promissory estoppel claims reveals a couple of important points. First, plaintiffs who assert it are not often successful with it. That is not a surprise since our courts have stated it is only appropriate to allow recovery for promissory estoppel in “exceptional cases.” Second, it is a cause of action that will be won or will be lost based on the unique equities of each case.

There are many Tennessee cases discussing why the courts in those cases found that plaintiffs were not entitled to recover under a promissory estoppel cause of action. What is more helpful, in my opinion, than looking at one of those many cases is to consider one of the “exceptional cases” in which a plaintiff recovered on a promissory estoppel claim. One such case is Engenius Entertainment, Inc. v. W.W. Herenton, 971 S.W.2d 12 (Tenn. Ct. App. 1997). The facts of that case are extensive, but necessary to discuss as they established equities strongly favoring the plaintiff and resulting in the plaintiff’s success. Here are the key facts: Continue reading

Promissory Fraud in Tennessee

Published on: December 19, 2021 | by J. Ross Pepper

Having handled several promissory fraud cases over the years, I would characterize it as a tough tort to prove, but, under the right facts, certainly not impossible. Promissory fraud was not recognized as a cause of action in Tennessee until relatively recently, and, therefore, there is not nearly the amount of case law discussing promissory fraud in Tennessee as there is discussing other fraud causes of action.

To prove promissory fraud, a plaintiff must prove three of the same elements that must be proven for a fraud claim (fraud is now to be referred to in Tennessee as “intentional misrepresentation”). First, the plaintiff must prove that the defendant made an intentional misrepresentation of a material fact. Second, the plaintiff must prove that the defendant knew that the fact was false when he stated the fact. Third, the plaintiff must have suffered a loss based on the plaintiff’s reasonable reliance on the material fact at issue. Where the causes of action of intentional misrepresentation and promissory fraud differ are in the fourth element of each tort.

The fourth element of the tort of intentional misrepresentation requires that the plaintiff prove that the misrepresentation related to an existing fact, e.g., that the defendant represented the value of her assets were $2 million on a financial statement presented to the plaintiff when, in fact, they were $1 million. The fourth element of the tort of promissory fraud requires that the plaintiff prove that the defendant made a promise of future action, but at the time he made it, he had no intention to perform it. For example, let’s assume that the defendant represented to the plaintiff that “if you will sign this royalty contract and allow me to sell your product, I will not terminate it as long as your product is selling.” If the defendant, years later, terminated the contract even though the plaintiff’s product was still selling, a promissory fraud claim might be successful provided that the plaintiff could also provide the type of proof discussed below.

In my estimation, by far, the most critical point to understand about the tort of promissory fraud is that you cannot prove it by relying just on the fact that the defendant subsequently did not keep his promise. See, Farmers & Merchants Bank v. Petty, 664 S.W.2d 77, 80-81 (Tenn. Ct. App. 1983) If the only proof you can muster is that the defendant subsequently did not do what he said he would do, you will likely be on the losing end of a motion for summary judgment, or maybe even a motion to dismiss or a motion for judgment on the pleadings. The plaintiff in Farmers & Merchants Bank alleged that a bank officer had stated that the plaintiff would never have to repay a loan the bank had made to the plaintiff. The court in that case held that, as a matter of law, such a statement, standing alone, was insufficient to support a claim for promissory fraud since there was “no evidence, circumstantial or otherwise that the representation was false when made.”

Recovering Attorneys’ Fees for the Misuse of a Power of Attorney

Published on: October 25, 2021 | by J. Ross Pepper

Tennessee courts have long followed the “American Rule” when it comes to deciding whether attorneys’ fees should be awarded to the prevailing party in a lawsuit. Under the American Rule, a prevailing party is entitled to an award of attorneys’ fees only under three circumstances. Those are: (1) Where the parties have a contract which contains a term providing for the award of attorneys’ fees; (2) where a statute provides for the award of attorneys’ fees; or (3) where there is some recognized exception to the American Rule which has been established by Tennessee courts.

There are very few recognized exceptions which fall into category three (3) above. Very few. One of those exceptions is where someone has deliberately used a power of attorney to benefit himself or herself. That exception to the American Rule was recently employed by the Court of Appeals of Tennessee in the case of Ellis v. Duggan (2021).

In the Ellis case, a niece had used a power of attorney granted to her by her aunt to pay about $175,000 for a house which was titled in the niece’s name. The large majority of the funds for the purchase were taken from an annuity, the beneficiaries of which were three grandsons of the aunt. The niece was not a beneficiary of the annuity.

The heirs who sued the niece for breach of fiduciary duty for misusing the power of attorney prevailed at trial, but the trial court did not grant their request that they be awarded the attorneys’ fees they had incurred. The trial court refused to make an award of attorneys’ fees, reasoning that such an award was not permissible under the American Rule because there was no “basis in case law” for such an award.

Determining Whether Someone Is, or Is Not, an LLC Member Under Tennessee Law

Published on: September 22, 2021 | by J. Ross Pepper

In most cases, members of Tennessee limited liability companies will ensure, at the time of the formation of the LLC, that there is properly signed documentation which establishes which persons are members and their respective membership interest percentages. Most often, this is done in an operating agreement. It is not unusual, however, given the pace of many business deals, that the LLC members, or those purporting to be members, fail to clarify, in writing, who are members and/or the percentage interest of each of the members.

The Tennessee Revised Limited Liability Company Act (the “LLC Act”) provides the framework and procedures for the formation of a Tennessee LLC. It also provides key provisions that are applicable, by default, where the members have failed to agree on certain terms regarding the LLC’s governance or their rights as members. (For example, the LLC Act provides for the voting rights of members, sets forth the fiduciary duties of members, provides for members to have the right to review LLC records, and provides for the percentage of profits to which members are entitled). The LLC Act, however, gives no guidance whatsoever as to how to determine which persons are members of an LLC or how to determine their ownership percentages where those matters have not been agreed to in a writing, such as an operating agreement.

Given that the LLC Act is not helpful in sorting out who an LLC’s members are in situations where the identity of the members has not been agreed to in a writing, Tennessee case law provides the only authoritative guidance. (Case law from other states could well be persuasive). In Tennessee, as of this post, there are only two cases in which Tennessee courts have addressed this issue.

In the first of those cases, Parigin v. Mills (Tenn. Ct. App. 2017), the court determined that the party at issue was not a member. In the second case, Heatherly v. Off the Wagon Tours, LLC (Tenn. Ct. App. 2021), the court determined that the party at issue was a member. Here are the facts of the two cases.

Parigin v.Mills: Continue reading

Foreign Corporations and LLCs: Registering to do Business and Use of Tennessee Courts

Published on: June 15, 2021 | by J. Ross Pepper

A “foreign” corporation or “foreign” limited liability company (“LLC”) is one that is organized under the laws of a state other than Tennessee. A foreign corporation or foreign LLC does not have to obtain a certificate of authority from the Tennessee Secretary of State (i.e., register to do business) to engage in certain types of business activities within Tennessee: For other types of business activities, a foreign corporation or foreign LLC must obtain a certificate of authority.

Significantly, foreign corporations and foreign LLCs which were required to register to do business in Tennessee, but did not, cannot use Tennessee courts until they have registered. See, T.C.A §48-25-102 and T.C.A §48-246-601. Federal courts in Tennessee have held that the same statutes apply to lawsuits in Tennessee federal courts. The rule in these statutes applies only when an unregistered foreign corporation or LLC asserts a claim in a Tennessee court. It does not apply to prevent another party from bringing a lawsuit against an unregistered foreign corporation or LLC in a state or federal court located in Tennessee.

Any time a lawsuit is filed in a Tennessee court by a foreign corporation or LLC, at the outset, the lawyer for the defendant, or defendants, should check to determine if the foreign entity obtained a certificate of authority from the Tennessee Secretary of State. This can be done on-line via the Tennessee Secretary of State’s website and takes just a few minutes. If the foreign entity was required to obtain a certificate of authority, but did not, defense counsel should file a motion to dismiss or to stay the action. In my experience, courts always elect to stay the proceedings to give the foreign entity a chance to register. (In one case our firm had in federal court, the action was stayed for several months while the plaintiff foreign LLC went through the steps to obtain its certificate of authority.)

Sometimes, a motion to stay a proceeding because the foreign entity did not register in Tennessee will end the proceeding because of the expense of obtaining a certificate of authority. Under Tennessee law, the penalties for doing business in Tennessee without registering are steep. When a foreign corporation has transacted business in Tennessee without a certificate of authority, to obtain a certificate of authority, it must pay triple the amount of fees, penalties, and taxes and interest on the same, for all the years it transacted business in Tennessee without being registered. See, T.C.A. §48-25-102. A foreign LLC which was required to register to do business in Tennessee, but did not, “shall be fined and shall pay the secretary of state three (3) times the otherwise required filing fee for each year or part thereof” during which it transacted business in Tennessee.

Agreement to Agree on Price in the Future Makes Agreement Unenforceable

Published on: May 19, 2021 | by J. Ross Pepper

In a recent case, the Court of Appeals of Tennessee concluded that an option agreement for the purchase of 12 acres of land in the Wedgewood-Houston area of Nashville (“Property”) was nothing more than an unenforceable “agreement to agree” since the parties did not agree to a price for the Property, but only agreed to negotiate about price after the optionee exercised its option. (As a matter of full disclosure, Pepper Law represented the prevailing party, the defendant, Freeman Investment, LLC (“Freeman”)).

The plaintiff in the case, LVH, LLC (“LVH”), and Freeman signed an Option Agreement. The Option Agreement gave LVH a period of time to conduct due diligence to determine if the Property was suitable for development. The Option Agreement contained some language, which, standing alone and without reference to any of the other language in it, could be used to calculate a definite purchase price. The most critical paragraph in the Option Agreement with respect to the issues in the case was paragraph 2 which provided:

Option Price. To be mutually agreed upon by Buyer and Seller within thirty (30) days following the expiration of the Option Period, at a price of $20,000 per residential unit (upon project completion) that can reasonably be developed on the property ….

Another paragraph provided that the earnest money paid by LVH “shall either be refunded to [LVH] in the event [LVH] terminates this agreement or [LVH] and [Freeman] cannot agree to an Option Price or partnership terms.”

Important Recent Tennessee Case on Contract Interpretation and the Parol Evidence Rule

Published on: March 8, 2021 | by J. Ross Pepper

In early 2019, the Supreme Court of Tennessee issued an opinion that, without exaggeration, can be said to be one of the most important Tennessee cases, if not the most important Tennessee case, to contemporary commercial litigation lawyers on the subjects of contract interpretation and the parol evidence rule. The opinion was in the case of Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc.

In the case, the Court undertook the arduous task of analyzing, discussing and reconciling over a hundred years of Tennessee case law on the subjects at issue, much of which case law is inconsistent on critical points. While the opinion, to a large extent, struck a middle ground which still leaves open the ability of parties with contravening positions to pull something from it which supports the position of each, it provides much more clarity than the case law that came before it. It also anchored Tennessee law in a place that is closer to the middle, and not at the extreme, of the two theories of contract interpretation with which it dealt — the contextual approach and the textual approach.

As explained in the Individual Healthcare Specialists case, under the contextual approach to contract interpretation, a court may look beyond the four corners of the written contract to determine the parties’ intent, even when the language in the parties’ contract is unambiguous. The Court juxtaposed that approach to contract interpretation applying the textual approach which prohibits a court from considering evidence other than the parties’ written agreement in many circumstances and certainly in a circumstance where the parties’ writing is unambiguous.

All of the facts and rulings related to the subjects of this post, contract interpretation and the parol evidence rule, do not have to be discussed to understand the outcome and implications of the Individual Healthcare Specialists case. In the case, the plaintiff, an insurance agency which sold BlueCross BlueShield (“BCBS”) policies for a commission, sued BCBS alleging that it had been underpaid. The language of the main agreement between the Plaintiff and BCBS, which was entered into in 1999, unambiguously permitted BCBS the right to change, unilaterally, the commission rates to be paid to the Plaintiff.

The Tennessee Uniform Trade Secrets Act: Proving that the Information is Not Available Through Other Means

Published on: February 8, 2021 | by J. Ross Pepper

Under the Tennessee Uniform Trade Secrets Act (“TUTSA”), a party alleging a violation of that Act must first prove that the information at issue is a trade secret. To prove that information is a trade secret under TUTSA, a plaintiff must prove, among other things, that the information is not “readily ascertainable by proper means by other persons [besides the defendant].” Sometimes, courts describe this as an obligation of the plaintiff to prove that the information is not “publicly available.” (This requirement is closely related to the requirement that a plaintiff must prove that it took reasonable efforts under the circumstances to maintain the secrecy of the information.)

Anecdotally, plaintiffs frequently file lawsuits alleging that their trade secrets were misappropriated, but courts determine that what the plaintiffs claimed were trade secrets were not because, either the information was publicly available or the plaintiff, itself, disclosed the information to the defendant or others without requiring that the defendant or others maintain the confidentiality of the information and not use it.

Here are summaries of a few select cases where courts have decided that information does not qualify as a trade secret because it was available through other means.

Care Services Mgmt., LLC v. Premier Mobile Dentistry of Va. (M.D. Tenn. 2020): The plaintiff provided to healthcare providers assistance with payment of claims and reimbursement. The defendant had been employed by plaintiff as a bill collector and later as a supervisor of bill collectors. The plaintiff claimed that forms, or templates, for documents that related to providing and receiving dental treatment were trade secrets which the defendant had misappropriated. Those documents included transmittal letters, emails, spreadsheets, invoices, dental progress notes, memos and the like. The court disagreed finding that the documents were regularly shared with patients, nursing homes, state agencies and others.
Wright Medical Tech., Inc. v. Grisoni (Tenn. Ct. App. 2001): In this case, the defendant was a highly educated and experienced chemical engineer who, while employed by the plaintiff, had worked on developing a calcium sulfate bone void filler medical product. After his employment was terminated, he began working on a similar product. In finding that the defendant former employee had not violated TUTSA, the court relied on the fact that the former employee was able to point it to public sources which contained information about calcium sulfate bone void fillers and that the plaintiff, his former employer, had published brochures and user guides describing the product it was developing.
Ecimos, LLC v. Carrier Corp. (6^th Cir. 2020): In this case, the court stated that, in determining whether information is a trade secret, the “most important” factor “is whether the information has been publicly disclosed or is easily acquired or duplicated by others.” The court ruled in this case that the plaintiff’s assembled hardware did not constitute a trade secret because the plaintiff had put the product on the market and sold it to third parties.