Is a Non-Compete Agreement Enforceable?
*This is a transcript of the Facebook Live video from 3-16-18 Click here to watch the video.
It depends on a lot of factors. Frequently, on the business side, people say, “Well I hear these things aren’t worth the paper they’re written on, why even have them?” And my response is, from a company standpoint, these agreements are very valuable because they exist and it’s something that a employee has to consider when they’re thinking about leaving to go start their own business or to go work for someone else. They have this non-compete and in the latter instance where they’re going to work for another company, they have to tell company B, “Hey, I have this non-compete.” And sometimes company B says, “Look, I don’t want to hire a lawsuit so I’m going to go hire somebody else who doesn’t have a non-compete.” Or if I’m someone who’s thinking about starting my own business, I have to take into consideration the fact that I may be restricted in some way in starting that business.
So it can be a very valuable tool for businesses. And if you’re a business and you want to have one, you need to be very careful in how you draft them. And if you’re an employee going into a new employment relationship and that company presents you with a non-compete, you can’t just blow it off and say, “Oh, I’ll sign this, it’s not enforceable.” They are enforceable. However, both in Tennessee and in many other states, non-compete agreements, the court can alter them by changing provisions to make them fair if the overall agreement is not fair.
So, what are the considerations the court is going to look to to determine whether or not one of these agreements is enforceable? First thing they’re going to look at is what is the compelling business interest that the company has in enforcing the agreement? And if they can’t articulate one, if they can’t say, “Well having this person go work for themselves or go to work for someone else will give them a competitive advantage because of their previous relationship with me,” that’s going to be a very difficult enforcement action because one of the elements is the company has to prove that there’s a compelling business interest. Frequently drafters will put into those agreements all the parties agree that there’s a compelling business interest. Frequently judges say, “I understand it. That’s great. Well articulate what that business interest is for me, I want to hear it.” And no matter what the agreement says, the judge will refuse to enforce it if the company can’t come up with what that compelling business interest is.
That compelling business interest could be relationships, in other words, “This person has a relationship with all of my customers that they have developed on my nickel. I’ve been paying them to develop these relationships and it’s not fair for them to leverage those relationships.” It may be training or other proprietary or confidential information that the employee is given and say, “This person has access to all this training that I paid for and I don’t want them going out and competing against me,” for that reason. So that’s a consideration.
Another consideration is why did the employee leave? If the employee left on their own to go pursue competition, courts going to look at that more severely than if the employee was fired for poor performance or as a reduction in force or for no reason at all. And in those circumstances generally, it’s been my experience, the judges will require more of the employer, the former employer, almost saying, “Well, if they’re such a bad employee, why do you care if they go compete against you?” Conversely, judges don’t like it when someone tries to take a bunch of information or a bunch of relationships that they built up and go out and submarine the former employer in the face of a non-compete. So why the employee left is usually a big bone of contention.
Also the duration, is this six months non-compete? Is it a year? Is it two years, five years? I’ve never seen one for longer than five years. I have seen agreements for five years. They’re rarely enforced for five years. It’s usually somewhere in the two to three year area. And frequently judges are saying, “Well there’s really not much reason for it to go more than a year.” Again, it depends on what the compelling business interests are. And oftentimes the economic or financial conditions that might justify a non-compete or a non-solicitation exist for a year or two, but really after three or four years those considerations don’t exist anymore. It may be a pricing structure or market conditions that were being taken advantage of that change or marketing plans change or business plans change, and so it’s very hard to justify enforcing these for more than a year or two. Although it can be done. And that goes back to the employer understanding what the compelling business interests at stake are. And so in an enforcement situation we look at that very, very heavily.
Also courts are going to be persuaded by how much damage the former employer can do to the employer. Is it material to the existence of company A to have this agreement enforced? So there are lots and lots of variables that depend.
And finally, I’ll talk about geographic scope. And sometimes geographic scope is very, very important. Sometimes there are licensing requirements. The employee might need to have a license in Tennessee to provide a certain service and so practicing in Tennessee versus Arkansas versus Mississippi or other states, that might be material. Sometimes it’s, “Well what’s the applicable market?” And sometimes the market can be a very small geographic area because expert witnesses will say, “Well most of the customers of this company only come from two miles away or come from just the country in which it’s located.” Sometimes, like the Tennessee Walking Horse business, the geographic scope is worldwide because there’s a limited number of people who are in that market and they’re located all over the world. So sometimes geography is very, very important and sometimes it’s not important at all. So that’s another factor to consider. And just as the courts can with other terms, the courts can also readjust that geographic scope if it’s equitable to do that.