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Covenants Not To Compete

In Tennessee, circumstances of separation from employment can be a factor in the enforcement of a covenant not to compete.

Tennessee law concerning the enforcement of covenants not to compete, also known as non-compete agreements, is complex and has many angles. This blog post touches on only one of those angles: the circumstances under which an employee left employment as a factor in the enforcement of a covenant not to compete.

Simply stated, Tennessee law provides that the circumstances of separation from employment can indeed be a factor for courts to consider in deciding whether or not to enforce a covenant not to compete. An older case, Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471, 472 (Tenn. 1984), provides that covenants not to compete, which are in restraint of a completely free and open labor market, are "disfavored" in the eyes of Tennessee law. Although the Hasty case was decided in 1984, is still good law. In another case from 1984, Central Adjustment Bureau v. Ingram, 678 S.W.2d 28 (Tenn. 1984), the court stated in part:

Another factor affecting reasonableness is the circumstances under which an employee leaves. Although an at-will employee can be discharged for any reason without breach of the contract, a discharge which is arbitrary, capricious or in bad faith clearly has a bearing on whether a court of equity should enforce a non-competition covenant. [Citing authorities.]

Central Adjustment Bureau, 678 S.W.2d at 35; see also Hamilton-Ryker Group, LLC v. Keymon, 2010 WL 323057 (Tenn.Ct.App)(employee was offered another position but opted to leave the company, took company information, worked surreptitiously for a competitor, used her husband's business to bill the client, and drew unemployment benefits in the process); Dabora v. Kline, 884 S.W.2d 475, 479 (Tenn.App. 1994)(noting employee left her job voluntarily).

It would be a mistake to suggest that the circumstances of an employee's separation from employment are the sole factor that goes into a court's decision to enforce or not enforce a covenant not to compete, or to grant or not grant a restraining order or injunction prohibiting an employee from engaging in competing employment. There are many other factors that go into a court's decision, and listing them all is beyond the scope of this post. However, an employee who is discharged will tend to have a stronger argument, at least as it regards this particular factor, than one who left voluntarily and now seeks to compete with his or her former employer, perhaps using customer lists or other information, or business relationships, obtained at the expense of the former employer.

Again, covenants not to compete are in restraint of a completely free marketplace, which is why they tend to be scrutinized closely by the courts to ensure that they are reasonable under the circumstances. An employee who is involuntarily discharged, particularly one who is discharged for relatively innocent conduct, is likely to fare better in such proceedings than one who planned his or her exit from employment and now seeks to compete with the former employer.

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