By J. Gregory Grisham
Traditionally, Congress has been the dominate force in the creation of labor and employment law. The exception is in the area of non-compete law. For many years, states, including Tennessee, through legislative activity and judicial rulings have developed their own unique body of non-compete law without federal interference.
Recent state developments
Arkansas, Alabama, and Georgia recently enacted statutes governing non-competes that generally promote their enforceability where there is a protectable employer interest and the restrictions are reasonable. By contrast, Illinois recently enacted a statute making non-competes unenforceable against low-wage workers. Other states such as Utah have enacted legislation limiting the duration of non-competes and adding procedural hurdles. There appears to be a clear national trend toward enforcement of non-competes where appropriate as well as a countervailing trend toward limiting the duration of non-competes as well as their application to lower wage/skill employees.
A federal view of state non-compete law
In the fall of 2016, the Obama White House and Treasury Department each issued reports critical of non-competes. “[T]he White House issued a ‘Call to Action’ and a report entitled Non-Compete Reform: A Policy Maker’s Guide to State Policies, expressing concern about overuse of non-compete agreements,” particularly with respect to low-wage, low-skill workers and summarizing recent “reform efforts.”
Tennessee non-compete law- “ordinary” vs. “unfair competition”
Against this backdrop of recent state legislative activity and the federal critique of non-competes, it is prudent to examine current Tennessee non-compete law. Unlike some states, Tennessee has not enacted a general statute governing the enforcement of non-competes (although there is a specific statute governing non-competes for certain health-care providers — Tenn. Code Ann. §63-1-148). The general rules that govern non-competes in Tennessee have changed little over the years. Although non-compete agreements are disfavored, Tennessee courts will enforce a non-compete in situations where there is consideration supporting the agreement, where the employer has a protectable interest, and where the non-compete contains reasonable post-employment restrictions. In short, protectable employer interests have been recognized as the provision of specialized training, customer relationships, and confidential information. Tennessee courts scrutinize non-competes to ensure that the employer is not attempting to prevent “ordinary competition.” While not a recent decision, the Tennessee Court of Appeals in Vantage Technology, LLC v. Cross, 17 S.W.3d 637, 644 (Tenn. Ct. App. 1999) succinctly set forth the protectable interest requirement:
Considerations in determining whether an employee would have such an unfair advantage include (1) whether the employer provided the employee with specialized training; (2) whether the employee is given access to trade or business secrets or other confidential information; and (3) whether the employer’s customers tend to associate the employer’s business with the employee due to the employee’s repeated contacts with the customers on behalf of the employer. Id. These considerations may operate individually or in tandem to give rise to a properly protectable business interest. [Citations omitted].
Recent Tennessee decisions
Two recent decisions from the Tennessee Court of Appeals illustrate the continued importance of protectable employer interests in the enforcement of non-competes.
In Davis v. Johnstone Group, Inc., 2016 Tenn. App. LEXIS 181 (Tenn. Ct. App. 2016) the defendant Davis was a real estate appraiser who signed non-compete agreements with his employer Johnstone Group, Inc. (“JGI”). Davis was initially hired to become a trainee and paid for his own classroom training, a requirement for licensure as a certified general real estate appraiser. Davis then acquired 3,000 hours of practical appraisal experience under the supervision of JGI’s owner who was a licensed certified general real estate appraiser. Davis signed a second non-compete after he became a licensed certified general real estate appraiser in 2005. Davis worked for JGI until 2015 when he resigned to go to work for a competitor. After JGI filed a lawsuit, the trial court declined to enforce the non-compete finding that JGI had no protectable interest to justify the non-compete. The Court of Appeals agreed, noting that the training Davis received was generally the same training he would have received at any other appraisal office, citing Tennessee law that “general knowledge and skill appertain exclusively to the employee, even if acquired by expensive training, and thus does not constitute a protectable interest of the employer.” Id. at *17 (quoting Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471,473 (Tenn. 1984)). The Court also noted the critical distinction between “general skills and knowledge of the trade and information that is particular to the employer’s business.” (quoting Selox, Inc. v. Ford, 675 S.W.2d 474, 476 (Tenn. Ct. App. 1984)). The Court of Appeals further agreed with the trial court’s findings that Davis did not have a special relationship with JGI customers, and that there was no JGI exclusive customer list that Davis could use in his new employment. In short, JGI failed to establish that Davis would enjoy an unfair competitive advantage and the non-compete was ruled unenforceable.
Similarly, in Hinson v. O’Rourke, 2015 Tenn. App. LEXIS 685 (Tenn. Ct. App. 2015), the Tennessee Court of Appeals affirmed the trial court’s order denying, among other things, enforcement of a non-compete based on the lack of a protectable employer interest. The employer Hinson was the sole proprietor of “Trivia Time,” which through “trained staff” conducted live entertainment events such as trivia and bingo at various venues. All trained staff, called “DJs,” were required to sign non-competes prior to their training, which consisted of “one-on-one meetings and on-the-job training.” Hinson provided the defendant O’Rourke with a “written script” to be read during trivia games as well as oral information on “how to keep score, microphone training, use of music, methods used with the audience to heighten entertainment, and handling enforcement of the rules.” O’Rourke left Trivia Time after working two years and started his own competing business that provided live entertainment to prior clients of Trivia Time. The Court of Appeals agreed with the trial court’s finding that most of the information and training provided to O’Rourke “[were] general DJ skills and knowledge of this industry and other audience interactive industries.” Moreover, even Hinson conceded that training material for “trivia hosting” was available to the public online and that the audience could easily ascertain some of the information provided to O’Rourke through repeated demonstrations. The Court of Appeals further found that there was no evidence to support a finding that O’Rourke was the “face of the business” to the audiences he appeared before while working at Trivia Time.
While non-compete law continues to evolve in the various states through legislative activity and case law, Tennessee continues to apply well-established common law rules to evaluate non-compete enforceability. The Court of Appeals’ opinions in the Davis and O’Rourke cases serve as a reminder to employers of their threshold burden to demonstrate one or more protectable interests to justify a post-employment restriction and that “ordinary competition” by former employees based on their general skill and knowledge of the trade cannot be restricted.