Though disfavored in Tennessee, non-compete agreements can be enforced if an employer has a legitimate business interest to be protected and the time and geographical limitations are reasonable.
Non-compete agreements are not analyzed in the abstract, but in the context of the specific circumstances under which they are to be enforced. The question is whether the employer has a legitimate business interest to be protected by the non-compete agreement. Tennessee courts hold that there is no “legitimate interest in protection from competition, only from unfair competition.” An employer must show special circumstances over and above ordinary competition creating an unfair advantage for the former employee without the non-compete agreement.
Hence, only if a court first finds the non-compete agreement protects the employer from unfair competition by a former employee, will it determine whether the non-compete agreement is reasonable. The time and geographic limitations of the non-compete agreement must not be greater than necessary to protect the employer’s interest against unfair competition.
A non-compete agreement may lack a geographic limit which, in some cases, is fatal to the agreement.
However, Tennessee courts have held a requirement prohibiting former employees from soliciting the employer’s customers and this can substitute for a geographic limitation.
In the most recent case examining this issue, the non-compete agreement lacked a geographic limitation, but prohibited the former employee from soliciting the same type of business for one year from any of the employer’s current customers, customers with whom the employee did business on behalf of the employer, and prospective customers with respect to whom the employee acquired confidential information from the employer. The employee argued that the agreement’s lack of any geographic limitation rendered it unenforceable.
The court held because the non-compete agreement prohibited the former employee from soliciting the same business from the employer’s customers, the agreement was enforceable even without a geographic limitation. The court reasoned that as the specificity of the class of persons with whom contact is prohibited increases, the need for a geographic limitation decreases. Additionally, the restriction on who the former employee may contact, rather than where the former employee may work, gives the former employee greater freedom to practice her profession in the same area as her former employer.
A non-compete agreement which omits a geographic limitation, but prohibits soliciting the same business from the employer’s customers, satisfies the threshold requirement of protecting the employer’s legitimate interest against unfair competition without imposing an undue restraint on trade. The risk, however, of not having a geographic limitation is that the former employee may directly compete for the employer’s potential customers which fall outside of the parameters of the agreement.
In some instances, the former employee could use specialized training received from the employer to compete for those potential customers. Therefore, careful consideration should be given when substituting a restriction against solicitation for a geographic limitation.
For more information on non-compete agreements and their state requirements contact Burr Forman for more insights on the enforceability of non-compete clauses.