Better Think Twice About Enforcing A Non-Compete

Over the last couple of years, there has been an increase in employees striking back against employers trying to enforce non-compete agreements.  In those cases, the employee argues that his former employer has interfered with his new job or business relationships.

For example, an employee in Rutherford County, Tennessee sued his former employer for getting him fired from his new job.  In Harper v. Chemtrade Logistics, Inc.[1], Harper sued Chemtrade Logistics, Inc. after USALCO, Harper’s current employer and a Chemtrade competitor, terminated him.

According to Harper’s complaint, Chemtrade claimed it had a valid non-compete agreement with Harper and threatened to sue USALCO unless it terminated him.  As a result, Harper alleged, he is no longer able to work in industrial chemicals, the industry in which he has been employed for the last two decades.

Harper’s lawsuit raises a difficult issue for employers who attempt to enforce their non-compete agreements:  Can the former employer who alerts the new employer of its non-compete agreement be liable when the new employer terminates the employee?  As a general rule, and without commenting on the claims made in Harper, the answer is it depends on the facts.  In 1994, the Tennessee Supreme Court said in Forrester v. Stockstill[2] that a person who intentionally interferes with another’s employment, without privilege or justification, may be liable.  It does not matter whether the employee is at-will or under contract.

Though Forrester does not address the exact issue raised in Harper’s suit, employees in other states have sued former employers for “intentional interference with employment,” the legal principle stated in Forrester, when employers attempted to enforce their non-compete agreements.  For example, an employee in New York sued her former employer after her new employer fired her.  In Gentile v. Olan[3] the employee alleged her former employer interfered with her employment when it threatened to sue her new employer over the employee’s non-solicitation agreement. The court in Gentile allowed the case to proceed to trial so the jury could determine if the former employer was liable for its actions.

Apart from the factual issue of whether Chemtrade did what Harper alleges, the key legal issues in the Harper case include whether Chemtrade’s alleged conduct was intentional or malicious, and whether it was privileged or justified.  Based on Harper’s allegations, a key factor will be whether Chemtrade had a valid non-compete agreement with Harper.

Even if the court decides Chemtrade’s non-compete agreement is unenforceable, the court could find Chemtrade is not liable because it was justified in attempting to enforce the contract.  The Tennessee Supreme Court has said “the question of [a non-compete agreement’s] reasonableness must be decided on an ad hoc basis.”[4]  This means that in some cases, “an employer is justified in litigating the question of whether or not [the employee] had breached the non-competition agreements . . . .”  In those cases, “it cannot be said that the agreements . . . are illegal and unenforceable, per se,”[5] and employers may be justified in trying to enforce them.

Though non-compete agreements are generally enforceable in Tennessee, the Harper suit shows that employers can be put on the defensive by employees who believe their livelihood is at risk.  Employers can be better prepared for such attacks by drafting defensible non-compete agreements on the front end.

 

[1] Rutherford County Chancery Court Docket No. 14CV1409 (Sept. 29, 2014).

[2] 869 S.W.2d 328, 330 (Tenn. 1994).

[3] 2013 WL 1880771 (S.D.N.Y. May 6, 2013).

[4] Allright Auto Parks, Inc. v. Berry, 409 S.W.2d 361 (1966).

[5] Riggs v. Royal Beauty Supply, Inc., 879 S.W.2d 848, 852 (Tenn.Ct.App. 1994).

Continued Employment is Enough for a Severance Agreement

Here’s one where the tables were turned. Former employees often argue that a non-compete agreement is unenforceable because there was inadequate “consideration.” Consideration is the exchange parties to a contract make, what one side gives to the other that makes the contract binding. Consideration can be in the form of a promise for a promise, money for services or goods or some other thing of value the parties exchange.

When a former employee says there was inadequate consideration, he is saying he did not receive anything of value in exchange for his agreement to not compete with his former employer. In Tennessee, the employee almost always loses that argument. In Tennessee, as in many other jurisdictions, the fact that the employer continued to employ the employee is sufficient consideration or value to the employee to enforce the non-compete agreement.

It turns out that continued employment can also be used against the employer. In a recent case, the Tennessee Ct. of Appeals held that the fact the employee continued to work for the employer was sufficient consideration, or value to employer, to enforce a severance agreement.

The employee Hensley v. Cocke Farmer’s Cooperative had worked for his employer for 28 years when, in 2010, when he signed a severance agreement. The severance agreement was effective until August 2024 and provided the employer agreed would pay the equivalent of the employee’s current salary and monthly health insurance premiums from the date of termination until August 2024. The only exception was if the employee was terminated as a result of death, merger, disability or “for cause,” which meant criminal acts related to the company or shareholders which led to a conviction.

Several months after the employee signed the severance agreement, the employer’s board terminated him “without cause.” Facing responsibility for several hundred thousand dollars in severance benefits, the employer refused to pay.

After finding that the severance agreement was clear, definite, unambiguous, and not difficult to understand, the court looked at whether there was adequate consideration supporting the agreement.

Up to this point, there had been no Tennessee case addressing what constitutes a sufficient exchange of value between an employer and employee to support a severance agreement. But, the court found that severance agreements were analogous to non-compete agreements, and Tennessee law is clear that continued employment is sufficient consideration to enforce the non-compete. The twist is that it is the employee’s agreement to continue working for the employer, not the employer’s agreement to continue employing the employee, that supports enforcing a severance agreement.

Because the employee in Hensley agreed to continue working for the employer, the employer was liable for $380,236.21 in accrued severance benefits and $6,125 per month for the employee’s health insurance premiums.

It is clear that the employer experienced buyer’s remorse, believing it had made a bad deal with the employee. However, as the court stated, “contract law in Tennessee plainly reflects the public policy allowing competent parties to strike their own bargains… Accordingly, the courts do not concern themselves with the wisdom and folly of a contract, and will not relieve a party of its contractual obligations simply because the contract later proves to be burdensome or unwise.”

While this rule does not always hold to be true, as there are many instances where Tennessee courts will modify or refuse enforce a contract, in this case, the court chose to enforce the severance agreement as written.

Attorneys who practice in the field of commercial contracts and employment related matters would have predicted this result. Sophisticated parties are presumed to be competent enough negotiate their own contracts. What’s interesting about this case is the continued-employment argument, which is usually used against the employee in a non-compete context, was used against the employer in the severance agreement context.

Seek Advice In Drafting Trade Secrets And Confidentiality Agreements

In an article recently posted at mondaq.com, Richard Stobbe provides several excellent examples of why employers should consult with their counsel when drafting trade secrets and confidentiality agreements, instead of copying cookie-cutter examples found on the internet.

In his article, Keeping Secrets: Trade Secrets and Confidentiality Agreements, Stobbe notes that many “off-the-shelf” agreements are drafted with terms that do not apply to the employer’s business or the specific transaction, or apply another state’s laws.  Also, many form agreements define key terms, such as “confidential information,” which an employer may not be aware of or understand.  The failure to strictly comply with these defined terms may render the agreement unenforceable.

The issues raised in Stobbe’s article are especially relevant for employers in Tennessee where agreements restricting trade are generally disfavored and strictly construed against the employer.  Rather than rely on form agreements, employers should consult with counsel to insure their non-compete, trade secrets, and confidentiality agreements comply with their state’s laws.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Concerns Over Economic Growth Leads Some States to Limit Non-Compete Agreements

The Wall Street Journal recently reported a more than 60% rise in non-compete litigation over the past decade.[1]  The article notes that while non-compete agreements were once largely aimed at top executives, they are now “’reaching wider and deeper within organizations’ to include sales representatives, engineers and people involved in research and innovation.”

The article observes that though non-compete agreements allow employers to protect valuable assets and significant investments in their workforce, such agreements also have a chilling effect.  The threat of litigation makes it less likely that employees will change jobs, start their own businesses or join a startup or small firm.

According to Alan Hyde, a professor at Rutgers University School of Law, “while employers may benefit from enforcing the agreements, there is little evidence of any social or economic advantage:  ‘You have slower growth, fewer startups, fewer patents and the loss of brains to jurisdictions that don’t enforce the agreements.’”  For many startups, non-compete agreements often limit the recruiting process due to the potential cost of litigation and the expense of paying a non-productive employee until the agreement expires.

Olav Sorenson, a Yale University management professor, found non-compete agreements appeared to impede innovation.  States that did not enforce non-compete agreements saw more venture capital on the formation of startups, biotech spinoffs and job growth.

As result of the negative economic impact, some states have enacted or are considering laws which limit non-compete agreements.  For example, California voids many non-compete agreements.  New Hampshire voids non-compete agreements which are not provided before or when a job offer is made, or when the current job position changes.  Massachusetts is set to hold hearings on a bill that would limit non-compete agreements to six months.  And New Jersey and Minnesota have introduced legislation that would limit or void non-compete agreements.

Georgia, on the other hand, recently went the other way by enacting legislation in 2011 (OCGA §13-8-50, et seq.) that actually made it easier for employers to enforce non-compete legislation.  The findings of the Georgia legislature run counter to the conclusions of the experts quoted in the WSJ article – the lawmakers determined that Georgia’s prior body of law that greatly favored employees actually impeded efforts to attract new businesses to the state and retain existing ones.

Though Tennessee has not enacted legislation limiting non-compete agreements for economic reasons, the economic impact influences the balance between the need to protect an employer’s legitimate business interest and the desire for free trade.  In Tennessee, the restrictions of a non-compete agreement must be no greater than is necessary to protect the employer’s business interests.  If the restrictions are too great, a court can void or rewrite the agreement.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.


[1] Ruth Simon and Angus Loten, Litigation Over Noncompete Clauses is Rising, Wall St. J., Aug. 15, 2013, at B1.

Mass-Mailing To Public Employees Did Not Violate Non-Solicitation Agreement

A Florida court recently held a former employee’s “mass-mailing” to her former employer’s customers did not violate her non-solicitation agreement.  In Variable Annuity Life Insurance Co. v. Laeng, Docket No. 8:12-cv-2280-T-33MAP (M.D. Fla. Feb. 11, 2013), the employer, VALIC, marketed financial services to tax exempt organizations.  As a condition of her employment, the employee, Laeng, executed a “Registered Representative Agreement” under which the she promised to not use or disclose VALIC’s trade secrets and confidential and proprietary information at any time.  Laeng also agreed to not solicit VALIC’s customers for one year after leaving her employment.  However, Laeng was not prevented from competing with VALIC.

After leaving VALIC, Laeng began working at LPL Financial, VALIC’s direct competitor.  Laeng sent a mass-mail solicitation to employees of two local school districts.  The mass-mailing included VALIC’s customers to whom Laeng was assigned.

VALIC filed suit and a motion for a preliminary injunction alleging Laeng violated her agreements to not disclose VALIC’s confidential information, including its customer lists, and to not solicit VALIC’s customers.  VALIC asserted Laeng’s actions resulted in a loss of more than $629,113.32.

The court denied VALIC’s motion for a preliminary injunction on the grounds there was not a substantial likelihood VALIC would succeed on the merits of its case.  Other than its suspicions, VALIC presented no evidence that Laeng took or used any confidential information. Significantly, the court found that even though Laeng’s mass-mailing included VALIC’s customers, the customer information was not unique to VALIC.  Rather, the customers were public employees of local school districts whose identities were publicly available upon request.  The court found Laeng’s mass-mailing was achievable without the use of VALIC’s confidential customer information.

The court did not discuss Laeng’s non-solicitation agreement which, on its face, would prevent Laeng from soliciting VALIC’s customers regardless of how the customer information was obtained.  Rather, the court focused on the fact that the customer information was publicly available.  Hence, the court’s ruling could be read to support the position that a former employee does not violate her non-solicitation agreement when the employer’s customer information is not confidential.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Live Events Agency Sues Former Employees And Independent Contractor For Breach Of Non-Solicitation Agreements

On March 18, 2013, TBA Global, LLC, a live events market and communications agency, sued LEO Events, LLC and several of its owners for breach of non-solicitation agreements and misappropriation of TBA’s trade secrets and confidential information.  TBA claims LEO’s owners are using confidential information they gained while working for TBA to solicit TBA’s clients, including Walmart and Exxon.  A copy of TBA’s complaint can be found here.

According to TBA’s complaint, LEO was created by two former TBA senior vice presidents and a former TBA independent contractor to directly compete with TBA.  TBA also contends LEO’s owners are using information and skills they gained from TBA, including customer information and relationships and specialized training, to solicit TBA’s customers.

Since forming LEO, TBA alleges, LEO’s owners have actively solicited TBA’s clients and/or prospective clients for the purpose of developing business relationships for themselves and LEO.  TBA contends, however, that LEO’s owners are bound by two-year non-solicitation agreements which prohibit them from directly or indirectly communicating with TBA’s clients or pursuing business relationships with them.  Further, the agreements prohibit LEO’s owners from utilizing TBA’s trade secrets and confidential information to compete with TBA.

TBA has also petitioned the court for a temporary restraining order and preliminary injunction to prohibit LEO and its owners from violating their non-solicitation agreements.  A copy of the TBA’s motion can be found here.  The court denied TBA’s motion for a temporary restraining order and set TBA’s preliminary injunction motion for a hearing.

We will follow-up on this post as the TBA suit unfolds.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Engineers Convicted for Theft of Trade Secrets

Two engineers were recently convicted under federal law for stealing trade secrets from Goodyear.  (United States v. Howley and Roberts, 2013 WL 399345 (Feb. 4, 2013 6th Cir.).)  Charles Roberts and Sean Howley worked as engineers for Wyko Tire Technology, a Tennessee Company.  Wyko supplied Goodyear with parts for tire-assembly machines.  Wyko also had an agreement with HaoHua South China Rubber Company to supply tire-building parts related to the swabbing-down process.  Unfortunately for Wyko, it had never built the parts it promised to HaoHua.  Goodyear, it turned out, was using machines like the ones Wyko needed to make.

Around the time Wyko entered the agreement with HaoHua, Goodyear asked Wyko to send a technician to repair some of its tire-assembly machines at a plant in Topeka, Kansas.  Instead of sending a technician, Wyko sent Roberts and Howley.  While Roberts and Howley were left unescorted for a few minutes, Howley used his cell-phone camera to take seven photos of a swabbing-down device on one of Goodyear’s tire-assembly machines.  When Howley returned to Tennessee, he sent the photos from his personal e-mail account to his Wyko account.  He then forwarded the photos to Roberts, stating that the photos were “not all great, but I think that they might tell us enough.”

Roberts, in turn, sent the photos to other members of Wyko’s design team.  He stated Goodyear was “somewhat guarded” because they knew Wyko was “working with competitors.”  He acknowledged that Howley was able to take the photos when Goodyear “left us on our own for a while.”  When Wyko’s IT manager discovered Roberts’ e-mail and pictures, he alerted Goodyear of the potentially illicit photos.  Goodyear notified the FBI which ultimately led to Roberts and Howley’s conviction.

Under federal law, a person who steals a trade secret that is produced or placed in interstate or foreign commerce can be fined and imprisoned up to 10 years.  (18 U.S.C. § 1832.)  A primary contention in the Roberts and Howley trial was whether the swabbing-down device Howley photographed was a “trade secret” covered by federal law.  Under federal law, information is a “trade secret” only if its owner has taken “reasonable measures” to keep the secret and the “information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.  (18 U.S.C. § 1839(3).)

Roberts and Howley’s convictions were supported in large part by Goodyear’s efforts to protect the secrecy of its tire-assembly machine’s design, including the swabbing-down device.  These included:

  1. protecting its Topeka, Kansas facility with a fence;
  2. requiring visitors to pass through a security checkpoint;
  3. requiring visitors to obtain advance permission before visiting the facility;
  4. requiring visitors to sign confidentiality agreements and agree not to take photographs during their visit; and
  5. requiring its suppliers, including Wyko, to keep Goodyear’s proprietary information secret.

The Court also found information regarding Goodyear’s swabbing down device was economically valuable because it was not “readily ascertainable through proper means” by the public, and Robert and Howley’s conduct shows the information they stole was important.

As shown by the convictions of Roberts and Howley, a company should take reasonable measures to protect its proprietary information.  The Court noted in Howley and Roberts the “’reasonable measures’ requirement does not mean a company must keep its own employees and suppliers in the dark about machines they need to do their work.”  However, a company cannot claim information is a trade secret if it does not treat the information like a trade secret.

It should also be noted that the same statute used to convict Roberts and Howley also imposes a fine up to $5,000,000 against a company which steals trade secrets.  Had Wyko used the stolen trade secrets and not alerted the FBI, it could have faced the same criminal charges and suffered significant economic loss.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Analysis of a Winning Argument for Enforcing a Non-Compete Agreement at the Preliminary Injunction Stage

On December 18, 2012, the United States District Court for the Western District of Tennessee entered an Order granting an employer’s application for a preliminary injunction preventing its former employees from soliciting the employer’s customers. The Order is an excellent example of issues employers should focus on when arguing for the
enforcement of non-compete agreements at the preliminary injunction stage.

In Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc., et al., Docket No. 2:12-cv-02476, the employer claimed its former employees violated their non-compete agreements by diverting the employer’s customers to its direct competitors. The employer sought a preliminary injunction prohibiting the employees from breaching their non-compete agreements pending the resolution of the case at trial.

In order to prevail on its petition for a preliminary injunction, the employer had to prove: (1) it had a strong likelihood of proving the non-compete agreement should be enforced; (2) it would suffer irreparable harm if the non-compete agreement was not enforced pending trial; (3) third parties would not be harmed by enforcement of the non-compete agreement; and (4) the public interest would be served by enforcing the non-compete agreement pending trial.

In this case, the employer proved the final three factors by showing (1) it suffered irreparable harm when it lost customer goodwill because customer goodwill is difficult to calculate; (2) consumers of medical devices would not suffer because they could continue to purchase products from the plaintiff; and (3) there is a public interest in enforcing contracts as written.

As to the first factor, the employer showed there is a strong likelihood it would prevail in enforcing the non-compete agreement. First, the agreement protects the employer’s legitimate business interest by preventing the former employees from gaining an unfair advantage in future competition. Second, the agreement is reasonable because it resulted in little, if any hardship to the former employees and the public. Third, the agreement imposes time and territorial limits that are no greater than necessary to protect the employer’s legitimate business interest.

Employers seeking to enforce non-compete agreements should review this order. It provides a great example of how to argue a non-compete agreement at the preliminary injunction stage and applies the leading Tennessee non-compete cases in a ruling favorable to the employer.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

United Health Services Wins $6.9 Million Verdict in Non-Compete Claim Against Acadia Healthcare

On December 22, 2012, ModernHealthcare.com reported that United Health Services (“UHS”), based in King of Prussia, Pennsylvania, won a $6.89 million jury verdict against Acadia Healthcare (“Acadia”), a healthcare company based in Franklin, Tennessee.

According to the article, UHS filed suit in October 2011 in Denton County, Texas alleging five former executives breached their non-compete agreements and misappropriated UHS’ confidential information when they went to work for Acadia.  The five former executives were employed by Horizon Health Corp., a subsidiary of Psychiatric Solutions, which UHS acquired in 2010.  Acadia is a venture of Psychiatric Solutions’ former CEO.  UHS’ suit alleged the five former executives set up an Acadia subsidiary, Psychiatric Research Partners, which mirrored the operations of Horizon Health Corp.  The five former executives then pursued sales leads they acquired while at Horizon Health Corp. on behalf of Arcadia.

In addition to UHS’ charges against the five former executives, UHS also charged Acadia with misappropriating its confidential sales leads.

The Denton County, Texas jury returned a verdict in favor of UHS for $6.89 million in what was described as a case that was “litigated in a very heated manner.”

UHS’ president stated he hopes the jury’s verdict “sends a message about the appropriate conduct of business and commitment to ethics and integrity.”

It remains to be seen whether Acadia will appeal the verdict.

The complete modernhealthcare.com article can be viewed online here.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

How Public Interest May Limit Enforcement of a Non-Compete Agreement

Though non-compete agreements are generally disfavored in Tennessee as a restraint on trade, courts will enforce them if the employer has a legitimate business interest to protect and the time and territorial limits are reasonable.  Courts strictly construe non-compete agreements in favor of the employee and may revise the terms the agreement when necessary to balance the interests of the employee and employer.

Like other contracts, however, non-compete agreements which implicate important public policy issues are even more strictly construed and may be unenforceable.

In 2005, the Tennessee Supreme Court held non-compete agreements which restrict a physician’s ability to practice medicine are unenforceable.  The Court decision’s was based on a belief that having a greater number of physicians practicing in a community benefits the public by providing greater access to health care.  Also, increased competition for patients tends to improve the quality of care and keep costs affordable.  Further, a person has the right to choose his or her physician and to continue an on-going professional relationship with that physician.  Enforcing a non-compete agreement would impair or even deny the patient’s rights altogether.

Though the Tennessee Supreme Court’s 2005 decision was overturned by the Tennessee Legislature (see James Haltom’s discussion in his April 25, 2012 post discussing the most recent amendments to the physician non-compete law effective January 1, 2012), it is a good example of how the public interest in professional services may render a non-compete agreement unenforceable.  Other states continue to hold that a physician’s practice may not be limited by a non-compete agreement.

Another area in which courts have long held non-compete agreements are unenforceable is legal services.  In 1991 the Tennessee Supreme Court held a law firm’s deferred compensation plan which was contingent on the departing attorney not practicing law was a non-compete agreement.  In holding the non-compete agreement was unenforceable, the Tennessee Supreme Court stated that, “[t]he practice of law is a profession, not a business, that clients are not merchandise, and that lawyers are not tradesmen.”

As in the Tennessee Supreme Court’s 2005 related to physicians, the Tennessee Supreme Court in 1991 found that non-compete agreements restricting an attorney’s ability to practice law also harms the public good.  These cases demonstrate that there are professional services which benefit the public at large and are viewed differently than other business transactions.

The cases in which a non-compete agreement is unenforceable because it harms the public good are few.  The focus is primarily on whether the terms of the non-compete agreement are reasonable.  However, in drafting non-compete agreements, employers should keep in mind that in some instances the post-employment restrictions placed on a former employee could be construed as implicating important public policy issues which may render the non-compete agreement unenforceable.

Please contact any member of Burr & Forman’s Non-Compete and Trade Secrets team members with any questions you may have regarding non-compete and trade secrets issues.