New Frivolous Lawsuit Statute May Chill Claims for Breach of Non-Compete Agreements

On May 21, 2012, Governor Haslam signed into law HB 3124, a bill amending Tennessee Code Annotated § 20-12-119.  The new law, effective July 1, 2012, requires the court in a civil case to penalize a plaintiff whose claim is dismissed as meritless.

Prior to the new law, a court had discretion in civil cases to adjudge costs between litigants.  Except when allowed by statute or a contract, the award of costs would not include the prevailing party’s attorney fees.  Now, the court must award costs and attorney fees to a defendant if the plaintiff’s case is dismissed as frivolous.  The award includes court costs, attorney fees, and court reporter fees.  The plaintiff’s liability is capped at $10,000.

Though viewed as part of Tennessee’s efforts at tort reform, the amendment to Section 20-12-119 could have an adverse effect on employers who attempt to enforce a contractual non-compete agreement.  An employer could be liable to a former employee for costs, including attorney fees, if its suit to enforce a non-compete agreement is dismissed as meritless.

Such was the case under South Carolina’s Frivolous Civil Proceedings Act (the “FCPA”) in Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012).  In that case, the employer instituted arbitration proceedings against former employees before the Financial Industry Regulatory Authority.  The employer claimed that the former employees conspired with a rival broker to open a competing office using the former employer’s trade secrets and solicited the employer’s customers in violation of a non-compete agreement.

After more than a month of proceedings, the arbitration panel dismissed all of the employer’s claims and awarded the former employees $1.1 million in attorney fees under the FCPA.  The Fourth Circuit Court of Appeals upheld the federal district court’s refusal to overturn the arbitration panel’s award of attorney fees under the FCPA.

BURR POINT:  Though the amendment to section 20-12-119 is not as severe as South Carolina’s FCPA, with liability capped at $10,000 and other limitations, employers will need to ensure they have good grounds before bringing an action against former employees to enforce a non-compete agreement.  If the claim is dismissed as meritless, the employer could be liable to the former employee for up to $10,000.

For more information, if you have any questions about non-compete agreements, or if you have an unfair competition issue, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.