Getting a Handle on Tennessee Non-Compete Laws

What are Non-Compete Agreements?

Non-Compete agreements are contracts entered into between the employer and the employee in order to prevent the employee from competing against the employer or soliciting customers, clients and employees after the employment relationship ends.
In addition to prohibiting the employee from directly competing with the employer, Non-Compete agreements often prohibit the employee from soliciting customers, clients, vendors and employees, or hiring employees of their employer once the relationship ends. The term and geographic scope of the non-compete will vary wildly depending on the circumstances and needs of the parties .
The agreement will typically contain a number of other restrictive covenants that apply both during the term of the employment and after the end of the relationship. These restrictive covenants may include that the employee not disclose confidential information, proprietary information, trade secrets, or other confidential or proprietary information.
There can be a mixture of these provisions in a single agreement where there may be restrictive covenants during the term of employment and after the end of the relationship.

Tennessee Laws on Non-Compete Agreements

Tennessee allows employment contracts to contain enforceable non-compete agreements. However, such agreements can be very difficult to enforce in Tennessee. In illness situations, courts are much more lenient as regards the enforcement of non-competition clauses. But if non-competition clauses are not properly drafted or if they contain certain other deficiencies they may be totally unenforceable in Tennessee.
In Tennessee, non-competition agreements are disfavored; courts will apply the following common law rule: To be enforceable, a non-competition provision must not be broader than is necessary for the protection of the employer’s business. The court must strongly consider the fundamental requirements of reasonableness and necessity, in conjunction with the traditional freedom to contract, in determining both whether to enforce and to what extent to enforce a covenant not to compete. To that end, a "simple" solution to the unenforceability of a non-competition clause is for the parties to negotiate a settlement where the former employee pays money to the former employer so that the former employer agrees to terminate the employee’s non-competition agreement. Some states will not enforce a non-competition agreement and will be unlikely to do anything at all. A separate form of remedy employed by some states for non-competition agreements, to refuse to enforce the agreement, will not occur in Tennessee. Unlike some states, Tennessee courts will not enforce a non-competition agreement if the movement of an individual falls within a statutory safe harbor. For example, if the individual moves on from a company and a statutory safe harbor applies, the company cannot enforce the non-competition clause. A Tennessee statute, T.C.A. 63-6-219, governs non-competition clauses in the medical context. In Tennessee, the general rule is that if a physician moves even across the street, the non-competition clause is completely unenforceable; it does not matter if the clause is limited to two miles from a physician’s office, the clause is totally unenforceable.

Are Tennessee Non-Compete Agreements Enforceable?

Non-Compete Agreements subject to Tennessee law will generally be enforceable only if they are no longer than is necessary to protect the legitimate business interest of the entity seeking enforcement, are reasonable in geographic scope, and are not oppressive with respect to the public. Applicability of these criteria and the reasonableness of time limitations, geographic scope, and other factors are evaluated on a case-by-case basis by the chancellor and based on the totality of the circumstances.
Tennessee codified its non-compete statute, Tennessee Code Ann. § 50-1-201, in 2005. The statute provides that:
Any covenant not to compete that is executed after June 24, 2002, and is unless otherwise indicated, shall be construed to contain and is limited to the extent by the following:

(1) It is for a period of time no greater than five (5) years;
(2) The geographical area is no greater than a one hundred (100) mile radius from an individual’s principal place of work, or from a departing employee’s principal place of work, or activities of the individual’s employer from which the individual received compensation; provided, however, that the restrictions set forth in subdivisions (d)(1) and (2) are not required to be stated in any such covenants;
(3) No such covenant shall require an employee or individual who holds an ownership interest in a business entity to refrain from carrying on or engaging in business activities after termination of the business entity, except for a period not to exceed twenty-four (24) months;
(4) No such covenant shall impose restrictions that are greater than are necessary to protect an employer’s legitimate business interests; and
(5) No such covenant shall impose restrictions against an employee or individual who holds an ownership interest in a business entity from soliciting or hiring employees of, or soliciting or interfering with the business relationships of, a former employer or other business entity with which the employee or individual had material contact within the two (2) year preceding cessation of employment or relationship with the former employer or business entity.

Tennessee Code Ann. § 50-1-202 sets out the legitimate business interests that can give rise to a non-compete provision:
For purposes of this part, a legitimate business interest is the protection of an employer’s legal rights or business assets, including the following:

(1) Trade secrets as defined in § 47-25-1702;
(2) Confidential information, which is (a) a material, technical or business information, customer or patient lists and relationships, practices, cost data, pricing strategies, research and marketing plans, as well as including, but not limited to, the identity of one or more of an employer’s customers, internal policies, practices, procedures, purposes, strategies and other information or materials, within the knowledge or control of an employee, agent or independent contractor that is proprietary to the employer and considered confidential, such as (b) data, formulas, prototypes, computer software programs, algorithms, program interfaces, net lists, special codes, processes, procedures, know-how, or revenue and financial data, product sourcing materials or information in any form related to one (1) or more of the employer’s products, services, current or anticipated research or development, production or manufacturing, marketing, purchasing, advertising, buying, selling, licensing, leasing, engineering, design, merchandising, development, expansion, planning, growth, or similar processes or information that is a trade secret or confidential or proprietary to the employer; and
(3) Customer or patient relationships, including (a) the relationships and identities of customers or patients, such as licensee, licensee, vendor, distributor, supplier, client, referral, associate or other client or patient relationships, and (b) information relating to, including, but not limited to, their needs, wants, purchasing requirements, purchasing habits, product or service preferences, nature of their relationships with the employer, and other information, usage, statistics, preferences and purchasing criteria such as: (c) demographics; (d) age; (e) location; (f) activity level; (g) gender; (h) preferences; (i) income; (j) marital status; (k) source of customers or patients; (l) the ways and means by which the customers or patients enter into relationships with the employer, make purchases or use the employer’s products or services; (m) formal and informal engagement with or by the employer, such as (n) meetings, activities, community relations, entertainment, special events, presentations, participation events, award recognition, sponsorship opportunities, contests, sweepstakes, discounts, fairs, shows, expos and trade shows; and (o) other information, regardless of form, digitally stored or maintained, and other data and statistics regarding the customers or patients of the employer.

Recent Developments and Trends in Tennessee Non-Compete Agreements

In recent years, there have been developments in the legislative and judicial arenas regarding the enforceability of non-compete agreements in Tennessee. In 2017, public and private employers were reacting to legislative changes from 2016 which limited the Supreme Court of the State’s common law authority for the granting an injunction for the exclusive purpose of keeping a former employee from competing for a year.
There has also been some recent development in the courts. In 2017, the Court of Appeals ruled in Griffin v. Hurd that a covenant restricting competition for three years and over 200 miles from two cities was overbroad, finding that it barred the doctor’s practice throughout the United States. Instead, the Appellate Court of the Eastern District of Tennessee held that the non-compete covenant could not exceed five counties, which encompassed Nashville and surrounding areas.
The Attorney General recently provided guidance that the Covenants not to Compete Act, Tenn. Code Ann. §§ 50-1-201 – 204, does not authorize a court to rule on the validity of a non-compete agreement if the employer fails to make a reasonable effort to engage the employee to discuss his or her own non-compete agreement. This opinion was based somewhat on the holding of Younts v. Sullivan County. In Younts, the Tennessee Court of Appeal noted , "[a]t least after the 1999 amendment to the statute, the Act requires the employer to provide an employee with a copy of a covenant related to the employee’s employment and setting out the Class of persons with which the employee is prohibited from competing."
We have seen some legislation in this session of Tennessee’s General Assembly dealing with non-compete agreements. There is S.B.2 which was sponsored by Senator Ketron and its companion bill H.B. 272 in the House. It was originally titled the "Free Market Protection Act of 2017." It would provide businesses with a means to determine whether their non-compete agreements will be enforceable with respect to a prospective employee. It would have permitted a Tennessee business to request a determination from the Department of Labor regarding the enforceability of the proposed agreement. In 2016, there were two bills in the General Assembly aiming to curb several perceived abuses of non-compete agreements; both bills fell short of passing. However, there are also recent efforts to push through Department of Labor legislation eliminating the requirement for the Department of Labor Commissioner to review covenants in which employees make only $50,000.00 a year (or $100,000.00 for doctors). These efforts indicate a trend or a more business-friendly approach to non-compete legislation.

Disputes and Legal Actions

Tennessee non-compete laws can encompass a broad range of legal challenges and disputes. These disputes can take many forms, but often center around two core issues: the reasonableness of the temporal and geographic scope of the contract, and whether the employer has a legitimate business interest in restraining the employee. The common thread that often runs through these disputes is whether the restraint imposed is greater than necessary to protect the business.
FFT, LLC and Glover, 2012 WL 2849180 (Tenn. Ct. App. July 11, 2012) provides a recent example of this sort of dispute. Glover was the owner of FFT, a factory automation engineering firm based in Nashville. Glover started FFT in 2009. His non-compete agreement with Great_co., the prospective purchaser of FFT, barred him from soliciting or doing business with any former customer of FFT for a time period of twenty-four (24) months. The non-compete also had a geographic scope which went well beyond Tennessee, covering the entirety of the United States.
Great_co, was forced to sue Glover to enforce the non-compete when he began to solicit FFT’s customers after the sale. Great_co claimed that Glover’s activities cost FFT $11 million in commercial opportunities. Unfortunately for Great_co, the court disagreed, and the non-compete was eventually ruled to be unenforceable, particularly as to the geographic scope, which was extended far beyond Tennessee. The court found that the ten mile radius was more than sufficient to protect Great_co.’s legitimate business interests, while the twenty-four month period and United States-wide geographical scope were not. The agreement could not be saved by a blue pencil strike even if the temporal scope were extended to eighteen months, because such an extension would still be unreasonably long, and Tennessee courts do not have the power to rewrite the terms of the agreement.
FFT is just one of a number of ways that Tennessee non-compete laws can be tested in Court. FFT is representative, however, of the way that courts have to balance the state’s public policy concerns on both sides of this issue. For example, although non-competes restrict an employee’s freedom of movement, allowing employers to have them also protects their proprietary information.

Alternatives to Non-Compete Agreements

Tennessee businesses often rely on non-compete clauses ("Covenants Not to Compete") in their employee contracts to safeguard competitive information and bolster client retention. However, due to the stringent requirements for upholding such agreements, Tennessee businesses seeking to protect their legitimate business interests and reduce client losses have a variety of alternative strategies that they can consider. Such alternative strategies may include:
Non-Solicitation Agreements. A non-solicitation agreement prohibits an employee from contacting a former employer’s clients and soliciting business from the clients. It may also prevent one company from soliciting employees from another company after the employee leaves. Non-solicitation agreements typically require that a specified amount of time after the employee leaves, the employee must not solicit the former employer’s clients for business. The time period covered by a non-solicitation agreement is usually shorter than the time period covered by a non-compete agreement.
Non-Recruitment Agreements. A non-recruitment agreement prohibits a former employee from attempting to hire away employees or executives from a former employer . Non-recruitment agreements are often combined with non-solicitation agreements, since it is common to prohibit a former employee from soliciting individuals from a former employer. Non-recruitment agreements typically apply to a specific division, geography, and/or pay scale. For example, a non-recruitment agreement might prohibit a former middle-management employee from recruiting current employees from the same department in a different business.
Confidentiality Agreements. A confidentiality agreement requires that an employee hold secret information confidential. It might be called a nondisclosure agreement (NDA) and prohibit an employee from using confidential information for a specified time after employment ends. It may also prohibit an employee from divulging confidential information to persons or entities outside the company. Confidentiality agreements are a good alternative to non-compete agreements in those situations where it is important to prevent former employee’s disclosure of confidential information. They are also useful in businesses where a customer’s information is confidential or proprietary.
Non-Disparagement Agreements. A non-disparagement agreement prohibits a former employee from disparaging a former employer, its brand, and its management. A non-disparagement agreement is often used in combination with a confidentiality clause.