Tennessee’s “Rule of Reasonableness” Allows Courts to Modify Non-Compete Agreements

October 18, 2012 by

On August 22, 2012, we reported on the Veit v. Event Logistics, Inc., a case pending in the Davidson County Chancery Court, Docket No. 12-945, in which an employee challenged her employer’s non-compete agreement.  The agreement prohibited the employee for a period of two years from (1) engaging in activities competing with the employer within a 50 mile radius of employer’s office in Nashville; (2) soliciting the employer’s customers with whom the employee had contact while employed by the employer; and (3) soliciting any of employer’s employees to terminate his/her employment.

At the temporary injunction stage of the litigation, the Court did not completely enforce or reject the non-compete agreement.  Rather, the Court modified the agreement to allow the employee to engage in certain activities so she could make a living while offering some level of protection for the employer.  In particular, the Court allowed the employee to engage in the same activities she did with the employer (with a monetary cap), but prohibited her from engaging in those activities with the employer’s clients.

The Court’s modification of the non-compete agreement in Veit is a good example of the “Rule of Reasonableness” Tennessee courts apply to non-compete agreements.  Generally, there are four approaches courts around the country will take in enforcing or rejecting a non-compete agreement.

  1. The court will not enforce the non-compete agreement because non-compete agreements are void as a matter of law.
  2. The court will enforce the non-compete agreement as written.
  3. The court will “blue-pencil” the non-compete.  This means the court will only strike offending provisions from the non-compete agreement, but will not add new provisions or otherwise modify the non-compete agreement.  If the “blue-pencil” approach leaves the non-compete agreement incomprehensible or cannot eliminate the offending provision, the court will reject the agreement all together.
  4. The court will equitably reform the non-compete agreement which can result in rewriting the agreement.  This approach balances between the goals of encouraging a free market place and preventing unfair competition.

Recognizing that the “all or nothing” approach of either enforcing or rejecting a non-compete agreement in its entirety and the “blue-pencil” approach led to undesirable results, Tennessee courts adopted the Rule of Reasonableness (“ROR”).  Under the ROR, Tennessee courts may rewrite the non-compete agreement to balance between the employer and employee’s competing interests.  The ROR is consistent with and is an extension of the rule that the terms of the non-compete agreement, including time and geographical limitations, must be reasonable.  The restrictions of the non-compete agreement must be no greater than necessary to protect the employer’s legitimate business interest.  (For a further discussion on the “reasonableness” requirements, see our May 9, 2012 blog post.)

Applying the ROR, the Court in Veit modified the non-compete agreement to allow the employee to make a living while protecting them employer’s interest in its customer base.  Though Tennessee Courts have the power to modify non-compete agreements, employers should carefully draft their agreements to avoid costly and uncertain litigation.  Though the ROR seeks to strike a balance between the employer and employee’s competing interests, a modified non-compete agreement could result in significant harm 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.

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A Short Primer on Tennessee’s Trade Secrets Law

September 26, 2012 by

In recent postings, we have discussed cases involving claims that a former employee wrongfully used the employer’s confidential information and trade secrets.  In TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., Davidson County Chancery Court, Docket No. 12-746-III, the employer alleged that its former employee used confidential information concerning wrestling talent to gain an unfair competitive advantage.  In Veit v. Event Logistics, Inc., Davidson County Chancery Court Docket No. 12-945-III, the former employee sued her former employer to determine whether her skills as an events coordinator and the identity of customers of event planning services were trade secrets under a separation agreement.

These cases are based on the principle that an employee has a general duty to not disclose confidential information or trade secrets belonging to her former employer.  In many cases, this general duty is memorialized by a written agreement which may include a non-compete agreement, though a contract is not required to protect trade secrets.  If the former employee violates her general duty and contractual obligations, the former employer may seek damages against her.

In Tennessee, the protection of trade secrets has been codified in the Uniform Trade Secrets Act (“UTSA”) found at Tenn. Code Ann. §§ 47-25-1701 et seq.  Under the UTSA, an employer may sue a former employee for the misappropriation and disclosure of trade secrets.

A “trade secret” is information in any form which gives a business a competitive advantage over other businesses which do not have that information.  Trade secrets include technical and nontechnical information, financial data, patterns, compilations, programs, devices, methods, techniques, processes, or plans that have economic value due to the fact that they are secret.  Confidential information is often treated as trade secrets.  One of the best known examples of a trade secret is the formula for Coke.  In TNA Entertainment, LLC, the trade secret at issue was contractual information related to wrestling talent.  In Veit, the trade secrets at issue were event coordinating skills and customer information.

An employee violates the UTSA when he discloses his employer’s trade secrets which he acquired by improper means (theft, bribery, or misrepresentation) or in violation of his duty to maintain its secrecy.  A new employer may also violate the UTSA if it uses the former employer’s trade secret which was improperly acquired or disclosed by the former employee.  Such an allegation was made in TNA Entertainment, LLC.

The UTSA gives an employer broad remedies if its former employee and the new employer acquires and uses its trade secrets.  These include injunctive relief, a court order requiring the return of and prohibiting the use of the former employer’s trade secrets.  In some cases, the court may award the former employer its actual damages and damages for unjust enrichment received by the defendants.  Punitive damages up to twice the award for actual damages and unjust enrichment along with attorney fees may be awarded in cases of willful and malicious misappropriation of trade secrets.

Tennessee law recognizes the need for fair competition in the marketplace.  However, it also recognizes and prohibits unfair competition arising out of the wrongful acquisition and use of trade secrets.  If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

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Former Events Coordinator Challenges Non-Compete Agreement

August 22, 2012 by

A former employee of Event Logistics, Inc. recently filed suit in the Davidson County Chancery Court challenging her employer’s non-compete agreement signed two years after her employment began.  In Veit v. Event Logistics, Inc., Davidson County Chancery Court Docket No. 12-945-III, Falon Marie Veit (“Veit”) alleges her employer, Event Logistics, Inc. (“ELI”), asked her to sign a “Non-Competition, Non-Solicitation, and Confidentiality Agreement” (the “Agreement”) on November 28, 2007 after she was promoted to a vice president position.  After completing a high profile event for the 2012 Iroquois Steeplechase, Veit resigned her employment with ELI on May 15, 2012.

The Agreement prohibits Veit for a period of two years from (1) engaging in activities competing with ELI within a 50 mile radius of ELI’s office in Nashville; (2) soliciting ELI’s customers with whom Veit had contact while employed by ELI; and (3) soliciting any of ELI’s employees to terminate his/her employment with ELI.

In her Complaint, Veit asks the Court to determine that the Agreement is not enforceable and that she is free to resume her activities as an events coordinator with clients with whom she worked while employed by ELI.  Veit argues ELI is not at risk of unfair competition because (1) event planning does not involve technical skills learned through specialized training provided by ELI; and (2) potential consumers of event planning services are not confidential or proprietary to ELI, but are individuals and commercial businesses that may need such services at any time and any location.

Veit also argues there is no adequate consideration supporting the Agreement.  Veit alleges she signed the Agreement because she was promised she would become an owner of ELI.  She ended her relation with ELI when it became apparent ELI would not give her an ownership interest in the company.

The Court recently denied Veit’s Motion for a temporary injunction enjoining the enforcement of the Agreement.  The Court found there were significant disputes as to whether ELI invested in Veit’s training, whether Veit had access to confidential and proprietary information, and whether Veit had developed into the “face of the company” with respect to ELI’s customers.  However, the Court temporarily modified the Agreement to allow Veit to engage in certain limited event coordinating activities so she could make a living.

This will be an interesting case to watch. Veit’s challenge to ELI’s non-compete agreement goes to the heart of balancing between the desire for free trade and prohibiting a former employee from unfairly competing against her employer.  It also demonstrates the Court’s authority to modify or “blue pencil” a non-compete agreement to achieve this balance.

Watch for updates on Veit v. Events Logistics, Inc. in the near future.

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