All About Non-Compete Agreements in Tennessee

What is a non-competition agreement?

Non-compete Agreements are contracts between an employer and an employee in which the employee agrees not to enter into or start a similar profession or trade in competition with the employer after the employment period is over. Non-compete clauses may also restrict employees from working for competitors or from soliciting the employer’s customers and clients for a certain period of time following the termination of employment.
In establishing essentially a contractual relationship between the employee and the employer, these agreements are meant to prevent unfair competition in which former employees who possess otherwise confidential and sensitive business information use that information unfairly against their former employer . They are considered to essentially provide a reasonable period of time for an employer to build on its success without the threat of a former employee unfairly competing for the business that the employer has worked to acquire.
Non-compete Agreements are uniformly disfavored by Courts for the potential for unwarranted restraint of trade. However, if properly drawn to fit the requirements of Tennessee law and to protect the business interests of the employer, non-compete agreements can be enforced.

The Law on Non-Competes in Tennessee

The legal landscape of non-compete agreements in Tennessee is defined by certain state statutes, common law principles, and recent court decisions. In Tennessee, non-compete agreements can be enforceable as long as they are reasonable under the circumstances and meet specific legal standards.
Tennessee law provides that a non-compete agreement is enforceable only to the extent necessary to protect the legitimate business interest of the employer. Additionally, a non-compete agreement must be reasonable in geographic scope, including by being no broader than necessary to protect the employer’s interests. See Tenn. Code Ann. §§ 50-1-506(1), (4); 50-5-102(b). In making this determination, the court must consider (1) whether the agreement is, on its face, reasonable; (2) the time period for which enforcement is sought; (3) the territorial scope of the restriction; and (4) the appropriateness of any other restraint in the agreement. See Advisory Comm. Comments, Tenn. Code Ann § 50-1-506(a).
A key departure of Tennessee from some other states is the fact Tennessee courts do not have the power to "blue pencil" a non-compete agreement and then hold it enforceable as modified. Tennessee courts have consistently held that a judge cannot partially enforce a non-compete agreement that restricts an employee beyond the agreement’s intended reach. See Advanced Micro Devices, Inc. v. Intel Corp., 172 S.W.3d 832, 841 (Tenn. 2005); see also Service Corp. Int’l v. Garver, 998 S.W.2d 24, 31 (Tenn. Ct. App. 1998). In such instances, the non-compete is deemed invalid and unenforceable in its entirety. However, some courts in Tennessee have rejected the notion that a court has no authority to modify the duration of the restriction in a non-compete agreement. See Gray v. Servicemaster Co., 353 F. Supp. 65, 67 (E.D. Tenn. 1972) (holding that the "court may have the right to reduce the time period set forth in the contract to one which the court determines to be reasonable").
In Tennessee, as is the case in many states, an employee is protected by a covenant not to compete for the time reasonably required for the former employer to re-train the employee. See Service Corp. Int’l, 998 S.W.2d at 30.
The Tennessee Supreme Court explained that:
Courts do not have the power to make a bad bargain into a good one. Doing so for one party is inequitable because the other party is forced to give on the contract terms to which the parties agreed. For example, if a covenant prohibits the employee from working for a competitor in the United States for two years after leaving, the court has no discretion to reduce the restraint to something less than the two years agreed upon. Only the parties can be allowed to amend the contract. . . . Depriving the covenanter of the benefit of the bargain constitutes a windfall for the covenantor who has breached the contract.
Id.
Further complicating the enforcement of non-competes is the doctrine of res judicata, which prevents a party from relitigation issues that have already been decided by a competent court. In Tennessee, where the former employer was represented by counsel when the employee left the company, the former employer could have brought the non-compete issue in the first action and received a ruling thereon, or settled the action, and the first judgment entered was res judicata as to the second lawsuit where the same issues were again raised although they were settled. See Reybrouck v. Reybrouck, 936 S.W.2d 670 (Tenn. App. 1996).

Enforceability Factors

To be enforceable, a non-compete agreement in the State of Tennessee must be deemed reasonable by complying with the following three factors: The extent of the restraint on the employee’s ability to work for competitors and the time and place limits must be only as restrictive as necessary to protect the employee’s former employer’s business interests. Non-compete agreements must be limited in time, area and scope to protect the employer’s legitimate business interests. In the case of noncompete agreements that are too restrictive in terms of time or scope of the prohibited activity, they may be invalidated. According to T.C.A. §63 1 19(1), the post-employment restrictions within a covenant not to compete must be "no greater than both necessary to protect the business interest [of the employer] and reasonably practicable."
Time is a key constraint in every non-compete agreement. The Tennessee Supreme Court has held that a one year restriction has been found to be reasonable. It is generally accepted that the shorter the time period contained in the covenant not to compete, the more likely a Tennessee court will be to validate it. Courts have found that a non-compete agreement for two years is not enforceable. Time restrictions must be strictly adhered to.
The geographic restriction is the area where the non-compete provision applies. Some restrictions contain prohibitive clauses that extend across state lines, which may not be enforced. The geographic limitation must be based on the locality in which the employee had been working. For example, if the employee worked in Memphis, the restricted area cannot be larger than Memphis. This restriction favors the employers of high-level employees over low-level employees because the risk of publishing trade secrets in a small area is higher in the higher level position.

Recent Tennessee Court Decisions

In recent years, Tennessee courts have issued several rulings affecting the enforceability of non-compete agreements. In 2011, the Tennessee Court of Appeals considered a non-compete agreement signed by an insurance agent that did not end when the agent left the company. Denying enforcement, the court pointed out that while non-competes are generally a valid restraint of trade, the temporal and geographic scope must not be unreasonably broad. Debra Smith Ann Carney v. Crum & Forster Specialty Insurance Company, C.A. No. W2010-01842-COA-R9-CV, (Tenn. Ct. App. Oct. 20, 2011). As a general rule, non-competes running for more than one year or restricting movement over more than five counties or in more than one state have been held to be unenforceable.
While Tennessee courts have enforced non-competes against physicians and orthodontists, a 2015 decision reiterated that non-competes cannot operate to protect an employer beyond the time considered "reasonable." In Nashville Spine and Joint Institute v. Santopietro, M2015-01514-COA-R3-CV, 2016 WL 6593808 (Tenn. Ct. App. Nov. 7, 2016), the Tennessee Court of Appeals remanded the case for reformation of the agreement to include only those provisions that would be enforceable under the Court’s interpretation of the law.
In Gilbert v. Gilbert, No. M2016-01914-COA-R3-CV (Tenn. Ct. App. Dec. 16, 2016), the Court of Appeals held that a ten-year duration was not reasonable. In 2017, federal court in Tennessee refused to enforce a non-compete where the time period and the geographic scope substantially overreached and the employer lacked a legitimate business reason for requiring the non-compete. McGee v. Highmark Blue Shield of Tennessee, No. 3:17-cv-0151, 2017 WL 2362023 (E.D. Tenn. May 31, 2017).

Considerations for Employees

Employees in Tennessee are not required by law to sign a non-compete agreement. A Tennessee employee presented with a non-compete should be aware that the terms contained within a non-compete can be successfully negotiated. A prospective employee should never sign a non-compete without contacting an attorney to attempt to modify the non-compete provisions.
What Should an Employee Consider with a Non-Compete Agreement? If the employee does not attempt to negotiate any proposed modification, an employer could use the terms of the non-compete against the employee as soon as the employee is terminated. A non-compete signed at the conclusion of employment is not valid, unless it has consideration (some payment/benefit) attached to it. An employee under no circumstances should sign a proposed non-compete from an employer at the time of termination. The employee should insist upon a proper separation agreement that includes certain payments.
The type of a non-compete agreement an employee is asked to sign depends upon the type of job to be performed, and the business of the employer. For example, the non-compete terms for an employee performing surgical procedures will be different than a sales representative for a manufacturer. Realistically, a sales representative might be asked to sign a non-compete not to work for a competitor for 2 to 5 years , while the surgeon may be limited to a number of months.
If an employee is presented with a non-compete, there are certain factors that the employee should consider. Employees should consider the duration or time period of the non-compete, geographical location and lastly, the type of work the non-compete provision restricts. For example, if a non-compete restricts the ability to work for a competitor in Tennessee, Georgia, Kentucky and Virginia, the employee may deem that restrictive. On the other hand, if the employee is only restricted from working for a competitor in Mississippi, and it only restricts the employee for 1 year, then the employee may be less inclined to go through attempting to negotiate restrictions.
An employee should also be careful to read non-solicitation provisions of a non-compete properly before signing. Much confusion surrounds the term non-solicitation. The term means that the employee can’t contact customers or clients of the employer to bring business to that person’s new employer. The employee will however be permitted to work for the competitor, but can’t contact anyone requesting that person do business with the employee at the new employer.
The issue of non-competition agreements is often misunderstood by employees. A Tennessee employee under no circumstances should sign a non-compete without understanding the impact on his or her rights and their future employment opportunities.

Negotiating and Drafting a Legal Non-Compete

In order for a non-compete to be enforceable in Tennessee, the document must meet specific requirements. First, the non-compete must be signed by the employee and must contain a clear restraint on the employee’s ability to subsequently earn a livelihood. Prior to the 2015 amendment of T.C.A. § 50-1-201 (signed July 1, 2015), a non-compete agreement could be set aside if it contained any language that would indicate that the non-compete was not intended to be enforceable. Employers should now include language in non-compete agreements that…provide that if any of the provisions of the agreement are found to be unenforceable in any respect, the remaining provisions shall be construed as if the unenforceable provision had been written to conform to the requirements of applicable law." This way, if a provision in a non-compete is found to be unreasonably broad, the Court can modify the provision so that the overall intent of the parties is honored, and the most narrowly drafted scope of the agreement is modified.
Additionally, a non-compete should "define with particularity" the scope of the restraints contained within the document. This is important for both the employee and the employer, for different reasons. First, an employee needs to be informed of the length of the restraint. Secondly, an employer need to be informed of how long non-competition will be enforced once the employment relationship ends. A non-compete that is too broad in scope is unenforceable.
Tennessee courts have found that if a non-compete provision is unenforceable, but the remaining parts of the contract are enforceable, the entire non-compete does not have to be voided. However, Tennessee courts will only consider the non-compete as "partially unenforceable" if there is a clear separation of the offending non-compete area, or provision. Courts will not divide a non-compete provision by simply severing one part of the non-compete in order to uphold the entire agreement. Instead, Tennessee courts have found that the employer has the burden of ensuring that the provisions of the contract do not conflict with the law. If there is any potential ambiguity, or broadly stated language that is potentially unenforceable, a court is going to maintain the burden on the employer and accord all doubts against the employer and liberally in favor of the restraint.

Alternatives to Non-Competition Agreements

As mentioned above, non-compete agreements are not the only protection that employers can get from employees to try to limit the competitive harm that they can do to their business. And they can constitute a serious burden on employees and are often very hard for employers to enforce. So what other protections can businesses get?
One available alternative is to use a non-solicitation agreement, which prohibits an employee from soliciting the business of customers to whom he or she was introduced while employed, and may also prohibit recruiting or hiring other employees in the same company. These agreements may be a good alternative for salespeople, as their job duties commonly involve closeness and contact with customer accounts. However, if the employee does not actually have customer contact duties, a non-solicitation agreement may be more difficult to enforce because it is not focused enough on preventing competition and inappropriate activities.
Another type of alternative is to use a confidentiality agreement . While non-compete agreements seek to prevent employees from working for competitors, confidentiality agreements simply seek to keep good information about a business private and secret from everyone. Some examples of this kind of confidential information include trade secrets, customer lists, sales and marketing plans, and pricing. But if the confidential information is not also a trade secret (i.e., something of value that is kept secret), confidentiality agreements will not be as effective. Courts tend to look at the entire employment situation, and if they feel that a particular employee is not a threat of revealing confidential information, these agreements are more likely to be rejected.
Other types of agreements that may also be considered by employers include nonsolicitation and non-poaching agreements with other employers. Nonsolicitation agreements generally prohibit the solicitation of an employee of one business by the other business. Nonsolicitation agreements can also be used between two businesses to prevent them from hiring the other’s employees. However, there are limitations on these kinds of agreements, such as a one-year time limit on agreements not to solicit.