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

by Burr & Forman
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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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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