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.
The court will not enforce the non-compete agreement because non-compete agreements are void as a matter of law.
The court will enforce the non-compete agreement as written.
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.
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.