You are an employee of a company. As a condition of your employment, you sign a contract in which you agree not to compete with your employer if you leave. In the course of your employment, you acquire knowledge and skills regarding your employer’s business. But, things don’t go so well, and you decide to leave. And, despite the contract (or “covenant”) not to compete, you want to start your own company, engaging in the same line of business, and bringing with you the knowledge and skills you developed while working for your employer. Can you do so, or are you barred? Like so many things in the law, the answer is, “It depends.”
Here’s what employees (and employers) should be aware of, at least in general terms.
As a matter of public policy, non-compete agreements are disfavored in the law because they constitute restraints of trade and limit the ability of individuals to earn a living. Accordingly, courts construe such agreements strictly and in favor of employees.
Nevertheless, non-compete agreements are enforceable if they are found to be “reasonable under the circumstances.” O.K., so what does that mean? Well, the Tennessee courts say that a covenant not to compete:
is reasonable if an employee or independent contractor would otherwise be able to exercise an unfair advantage in future competition with his employer, and if [it is] no broader in duration or as to the territory [it] embrace[s] than is reasonably necessary to secure the protection of the business or good will of the employer.
To enforce a non-compete agreement, the employer must prove the presence of:
special facts above and beyond ordinary competition, [which] might include specialized training received from the employer, access to confidential information such as business secrets, confidential pricing information and confidential customer lists, and situations where the employer’s customers tend to associate the business with the employee because of repeated contacts with him.
The courts tell us, further, that:
Factors to be considered in determining the reasonableness of non-compete agreements include: the consideration supporting the agreements; the threatened danger to the employer in the absence of such an agreement; the economic hardship imposed on the employee by such a covenant; and whether or not such a covenant should be inimical to public interest.
These considerations are amorphous, and different factual circumstances will yield varying results. For example, in one recent case, a medical group was able to enforce a covenant not to compete against an employee-physician. The court found that the employer had a protectable business interest in the former employee’s continued employment, considering that the employee had no prior training or experience in his specialty at the time he signed the non-compete agreement, the employer had provided him with substantial training to earn his certifications, the employee was virtually the only doctor with his specialty in the area, and through the employer’s training, the employee had developed relationships with other area physicians.
But, in another case, a commercial dealer in doors and associated hardware was unsuccessful in attempting to enforce a non-compete agreement against a former employee, the court holding, among other things, that the training and experience the employee had received was general to the trade and not specific to the employer’s business methods.
Ultimately, the enforce-ability of non-compete agreements will turn on a case-by-case analysis.
If you are an employer seeking to create an enforceable non-compete clause, keep the following considerations in mind:
- If you think you have a protectable business interest, e.g., a trade secret or confidential customer list, say so in the agreement, so that the employee and, if need be a court, will know the justification for the non-compete;
- Keep the duration of the non-compete as short as possible. The shorter the duration, the more likely a court will be to find it reasonable;
- Keep the geographic scope of the non-compete as limited possible. The smaller the restricted area, the more likely a court will be to find it reasonable.
- Consider the possibility of paying the employee “extra” compensation in consideration for her agreement to the non-compete covenant, which may also contribute to a finding of enforceability.