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

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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.

 

Published In: Civil Remedies Updates, General Business Updates, Labor & Employment Updates

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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