Tennessee Court of Appeals Finds that Former Employee Breached Non-Compete Agreement Through Actions of His Subordinates

by Butler Snow LLP
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In November 2017, the Tennessee Court of Appeals upheld a Nashville trial court’s determination that a former employee violated his noncompete agreement by managing employees who solicited competing business in the restricted territory.  See ADP, LLC v. Manchir, 2017 WL 5185458 (Tenn. Ct. App. Nov. 8, 2017).

Facts

Eric Manchir worked as a sales manager for ADP, LLC (“ADP”), which is in the business of human resources and business outsourcing.  Manchir’s territory included parts of the Nashville area, Knoxville, Chattanooga, and Birmingham.  As part of a stock option agreement, Manchir agreed that, for a period of one year after his employment was terminated, he wouldn’t “directly or indirectly” work for a competitor within the territory he serviced for ADP.  He also agreed not to “directly or indirectly” solicit ADP’s clients and potential clients during that one-year period.

Manchir resigned to accept a regional sales director position with Paycor, Inc. (“Paycor”), an ADP competitor.  Part of Paycor’s services that Manchir managed overlapped with ADP’s services.  Portions of Manchir’s territory in Tennessee and Alabama also overlapped with Manchir’s assigned territory with ADP.  After Manchir resigned, ADP lost a number of accounts from Manchir’s former territory to Paycor.

ADP sued Manchir for breaching his agreement.  Manchir responded that the agreement was unenforceable.  He also claimed that he wasn’t in breach it because he, personally, did not solicit competing business in the overlapping territory; instead, he merely managed sales representatives who may have done so.  ADP, however, developed evidence that Manchir trained and managed sales representatives who were competing in overlapping territories and that Manchir received commissions on their sales to former ADP customers.

Chancellor Ellen Lyle determined that Manchir was in breach of the contract.  Although she found that the prohibition against soliciting prospective clients is overbroad and unenforceable, she entered an injunction preventing Manchir from continuing to manage competing activities in the overlapping territories.  Manchir appealed.

Ruling

 The Tennessee Court of Appeals upheld the trial court’s decision.  First, the court determined that ADP had a legitimate business interest to support the restrictions, because all of Manchir’s customer contacts with ADP were developed as a consequence of his employment with ADP.  According to the court, this relationship with its customers has been the “lifeblood of ADP’s business.”

The court also found that the agreement did not impose an undue hardship on Manchir.  He wasn’t prevented from earning a livelihood, but was only prevented from competing with ADP in a limited area.  Plus, it was Manchir who chose to quit his job at ADP.

Most importantly, the Court of Appeals agreed with the trial court that Manchir’s activities were in breach of the agreement.  The court rejected Manchir’s argument that “so long as he is not in direct contact with ADP customers,” Manchir could “direct, train, and supervise his team [at Paycor] to compete against ADP and solicit ADP customers.”  The court stressed that the agreement prevents “indirect competition” and that “such an interpretation as Manchir’s effectively would hollow out the Agreement.”

Lessons Learned

Although the Tennessee Court of Appeals applied New Jersey law, which governed Manchir’s noncompete agreement, the court’s decision is insightful because New Jersey law appears to be very similar to Tennessee law in all pertinent respects.  Manchir could not use someone else to do something that he was prohibited from doing himself.  Yet, Manchir oversaw a sales team that was doing precisely what Manchir couldn’t do himself, and he even financially benefitted from his subordinates’ efforts.

This decision also illustrates the importance of ensuring that noncompete agreements have appropriate restrictive language.  By including the phrase “directly or indirectly” in the agreement’s restrictive provisions, ADP was able to ensure that Manchir didn’t circumvent the intent of the restrictions.  Businesses should consult with legal counsel in drafting and updating noncompete provisions to ensure that they are enforceable and that they are crafted in a manner designed to fully protect the company’s business interests.

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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